CHICAGO OPPORTUNITY ZONES
WHAT IS AN OPPORTUNITY ZONE?
If you need help understanding an opportunity zone, our team at 33 Realty is here to help answer your questions. The concept of Opportunity Zones stems from the 2017 Tax Cuts and Jobs Act, which aimed to promote economic development and investment in underserved communities across the United States. The Act introduced the idea of Qualified Opportunity Zones, which are specific areas within a community that are economically distressed.
According to the IRS, these Opportunity Zones are defined as" census tracts with a poverty rate of at least 20 percent or where the median family income does not exceed 80 percent of statewide median income." The selection of these zones is subject to certain criteria, including a limit that no more than 25 percent of a state's low-income census tracts can be designated as Opportunity Zones.
To be designated as a Qualified Opportunity Zone, the area must be nominated by the state and certified by the US Treasury Department. This process ensures that only deserving areas with a genuine need for economic revitalization are part of the program. Once an area receives this designation, it becomes eligible for various tax benefits and incentives to attract investment and spur economic growth.
Chicago is a city with a diverse range of neighborhoods and economic conditions and has several Opportunity Zones spread across its various communities. These zones present unique opportunities for investors and developers to contribute to the revitalization and prosperity of Chicago's economically distressed areas while enjoying potential tax advantages.
Pros and Cons of Opportunity Zones
Pros of Opportunity Zones
- Tax Incentives: One of the primary advantages of Opportunity Zones is the range of tax benefits they offer to investors. For example, these incentives include temporary tax deferrals on capital gains, reductions in capital gains taxes, and the potential for tax-free growth of investments made within the zones.
- Economic Development: Opportunity Zones strive to stimulate economic growth and development in distressed communities. By attracting investment, these zones have the potential to create jobs, enhance infrastructure, and improve the overall quality of life for residents.
- Diverse Investment Opportunities: Opportunity Zones offer many investment options across various sectors, including real estate development, small business startups, and operating businesses. This diversity allows investors to choose projects that align with their interests and expertise.
- Community Revitalization: The main goal of Opportunity Zones is to revitalize struggling communities and uplift disadvantaged populations. By attracting investments, these zones have the potential to rejuvenate neighborhoods, increase property values, and spur local businesses, leading to an improvement in the community's well-being.
Cons of Opportunity Zones
- Displacement Concerns: One criticism of Opportunity Zones is the potential for gentrification and displacement of existing residents. As investments flow into these areas, there's a risk that low-income residents may be priced out of their homes or businesses, which results in the loss of community cohesion.
- Lack of Accountability: Critics argue that the Opportunity Zone program lacks sufficient oversight and accountability measures. Some are concerned that some investments don't align with the intended goals of community development and may instead focus on projects that primarily benefit investors without properly addressing the local community's needs.
- Investment risks associated with Opportunity Zones include:
— Uncertain Returns: Economic volatility and market uncertainties in distressed areas can make for uncertain returns on investments within Opportunity Zones.
— Project Viability: Some projects within Opportunity Zones may not be successful, and investors should assess the feasibility and consider factors such as market demand, competition, development costs, and implementation obstacles.
— Lack of Liquidity: Investments in Opportunity Zones usually require long-term commitments, which can limit liquidity options for investors who need short-term access to capital.
— Regulatory and Policy Risks: Changes in tax laws, regulations, or policies could affect the benefits and incentives associated with Opportunity Zones, which requires investors to stay informed about potential impacts.
— Market and Economic Factors: Broader market and economic trends, such as interest rate fluctuations, real estate market changes, or economic recessions, can influence the performance of investments within Opportunity Zones.
— Limited Diversification: Concentrating investments solely in Opportunity Zones could lack diversification, increasing exposure to localized risks and potentially limiting portfolio stability.
HOW TO INVEST IN AN OPPORTUNITY ZONE: OPPORTUNITY ZONE FUNDS
Opportunity zones are a hot topic in commercial real estate right now. If you're involved in real estate, you may have read headlines about real estate investors putting a qualified Opportunity Fund together or longtime property owners listing their real estate portfolios located within an Opportunity Zone.
All this buzz revolves around the enticing incentives the IRS has offered in order to encourage development in low-income areas. These incentives are designed for patient investors and each incentive is tied to the longevity of an investor's stake in a qualified Opportunity Fund.
WHAT ARE QUALIFIED OPPORTUNITY FUNDS?
Qualified Opportunity Funds (QOFs) are investment vehicles that are specifically created to invest in Qualified Opportunity Zones (QOZs). QOFs allow investors to pool their capital to invest in designated economically distressed areas with the goal of stimulating economic development.
Here are key points about Qualified Opportunity Funds:
- Purpose: The primary purpose of Qualified Opportunity Funds is to provide investors with a tax-advantaged vehicle to invest in Qualified Opportunity Zones. These funds are intended to drive long-term investments into these designated zones to promote economic growth, job creation, and community development.
- Structure: Qualified Opportunity Funds come in the form of various legal structures, such as partnerships, corporations, or LLCs. They're typically managed by fund managers who make investment decisions on behalf of the fund and its investors.
- Investment Eligibility: To qualify as a Qualified Opportunity Fund, an investment vehicle needs to invest at least 90% of its assets in Qualified Opportunity Zone Property. This property can include real estate, businesses, or infrastructure projects located within the designated Opportunity Zones.
- Investor Eligibility: Any taxpayer with capital gains from various sources, such as stocks, real estate, or business sales, can invest in a Qualified Opportunity Fund and potentially benefit from the associated tax advantages. There's no requirement for investors to reside in or have a connection to the Opportunity Zone where the fund invests.
- Compliance and Reporting: Qualified Opportunity Funds must meet certain reporting requirements to maintain their qualified status. They need to file IRS Form 8996 annually, providing information about the fund's assets, investments, and compliance with the Opportunity Zone regulations.
- Investment Flexibility: Qualified Opportunity Funds offer investors flexibility in choosing which Opportunity Zones to invest in and the type of projects or businesses to support. This allows investors to align their investment strategies with their specific interests, expertise, and risk profiles.
WHAT TYPES OF TAX BENEFITS ARE AVAILABLE WHEN INVESTING THROUGH A QUALIFIED OPPORTUNITY FUND?
There are three different types of tax incentives available for investing in low-income communities through a qualified Opportunity Fund. These incentives include temporary deferral, step-up in basis, and permanent exclusion.
- Temporary Deferral: Investors may have the option to temporarily defer inclusion in taxable income for capital gains reinvested into a qualified Opportunity Fund.
- Step-Up In Basis: Investors may be able to exclude up to 15% of the original gain from taxation through a step-up basis. In a step-up in basis, the basis is increased by 10% if the investment in the qualified Opportunity Fund is held by a taxpayer for at least 5 years and increased by an additional 5% if held for at least 7 years.
- Permanent Exclusion: Investors may qualify for a permanent exclusion from capital gains tax due to sale or exchange if the investment is held for a minimum of 10 years. The exclusion only applies to gains accrued after an investment in a qualified Opportunity Fund.
CHICAGO OPPORTUNITY ZONES
Of the more than 500 eligible census tracts, the City of Chicago recommended 133 to the State of Illinois for designation as Opportunity Zones. To identify potential Opportunity Zones, the City worked alongside Alderman to identify census tracts with the most need and opportunity for investors.
The Opportunity Zones in Chicago are located in both the South Side and West Side neighborhoods, as well as certain areas on the North Side and Near West Side. These zones cover a diverse range of neighborhoods with varying economic conditions and development potential.
Some of the neighborhoods in Chicago that have designated Opportunity Zones include Englewood, Bronzeville, Pullman, Austin, Garfield Park, and Back of the Yards, among others. These neighborhoods have historically faced economic challenges and are targeted for revitalization through the Opportunity Zone program.
To view a map of Chicago's proposed Opportunity Zones, click here.
WHERE CAN I GET MORE INFORMATION ABOUT OPPORTUNITY ZONES?
If you want to learn more, the government has published several websites intended to provide more information about Opportunity Zones and investing through qualified Opportunity Funds. Here's a list of government resources:
HOW IS 33 REALTY'S INVESTMENT BROKERAGE TEAM CAN HELP YOU?
To navigate the intricacies of investing in Chicago's Opportunity Zones, it's crucial to partner with experienced professionals. That's where 33 Realty comes in. As a reputable brokerage firm, our team at 33 Realty specializes in real estate investment and can provide expert guidance and support throughout the investment process. Our team understands the intricacies of Opportunity Zone investments and can help you identify suitable projects, conduct due diligence, and maximize the potential benefits.
Take the first step towards making a meaningful impact and seizing the potential of Chicago's Opportunity Zones by contacting us today.