With over $6 trillion in unrealized capital gains in the United States, the potential market for reinvestment in real estate is absolutely massive. That has given rise, quite literally, to a new world of opportunities for those looking to invest in commercial real estate.
Opportunity (Zones) Knocking
In trying to take advantage of this incredibly large sum of unrealized capital, the U.S. Congress introduced the Opportunity Zones program in the Tax Cuts and Jobs Act of 2017.
Opportunity Zones can be found in every state in the nation, as well as the District of Columbia (DC) and Puerto Rico. While the program is in place to benefit low-income communities across the country, it also stands to bring substantially greater earnings to long-term commercial real estate investors.
In this article, we’re going to discuss how to find your ideal opportunity in any Opportunity Zone nationwide. Along the way, we’ll discuss what Opportunity Zones are, how they work, why they are valuable to invest in, and how you can search and find target properties within them by using Reonomy.
We’ll be looking at the following:
- What are Opportunity Zones? →
- What are Opportunity Funds? →
- How to Invest in an Opportunity Zone →
- The Benefits of Investing in Opportunity Zones →
- How to Find Properties in Opportunity Zones Using Reonomy →
What are Opportunity Zones?
Opportunity Zones (OZs) are part of a developmental program that promotes the long-term investment in and development of low-income urban and rural real estate across the United States.
Each OZ is a selected census tract that has “high need as well as high potential” for revitalization.
OZ eligibility requires a census tract to have a poverty rate of 20%, yet the average poverty rate of the actual 8,762 designated Opportunity Zones is much higher, sitting at 31%. At the same time, these zones already contain 24 million jobs and 1.6 million places of business, thus signaling potential for growth. (Source: EIG)
The program incentivizes reinvestment in distressed communities by giving investors substantial tax breaks on their capital gains. The tax breaks are based on how long an investment is held with a qualified Opportunity Fund.
What are Opportunity Funds?
An Opportunity Fund (OF) is an investment vehicle for those that would like to invest in Opportunity Zone assets.
For a partnership, corporation, or LLC to qualify as an Opportunity Fund, they must intend to hold 90% of their total assets within Qualified Opportunity Zones. They can simply self-certify by filling out an application and attaching it to their federal income tax return for the year at-hand.
With all of that in mind, let’s dive in a bit deeper and look at what it actually takes to invest in an Opportunity Zone, and what the ensuing tax benefits look like.
How to Invest in an Opportunity Zone
The basic requirements of investing in an Opportunity Zone are as follows:
- Anyone that would like to invest in a Qualified Opportunity Zone (QOZ) must do so by reinvesting existing, realized capital gains.
- To be eligible for tax breaks, they must invest those capital gains through a Qualified Opportunity Fund (QOF).
- They must reinvest their capital gains in a QOF within 180 days of the realized exchange date of those gains.
Once capital gains are reinvested in an Opportunity Fund, investors qualify for a temporary tax deferral on their realized, reinvested gains. Taxes can be deferred until the sale date of their OZ asset, or until December 31, 2026, whichever comes first.
From there, increasingly large tax breaks are earned at three distinct milestones. Investors hit those milestones based on how many years they’ve held their asset in an Opportunity Zone.
The Benefits of Investing in Opportunity Zones
Plain and simply, the longer someone holds an investment in an Opportunity Fund, the larger their tax break becomes.
The first tax break comes when an investor has held their asset for at least 5 years. A larger tax break comes when they’ve held that asset for 7 years. The largest possible tax break comes when they’ve held that asset for at least 10 years.
If someone decides to sell their OZ asset after 5 years, 10% of their original deferred gain is excluded from taxation. If they sell after 7 years, 15% of their original deferred gain is excluded from taxation.
More explicitly, since the taxes of their original gains are being deferred until 2026, the basis of their original investment can be increased, or stepped-up, when their taxable income is eventually determined. The cost basis of the original investment is increased, theoretically decreasing their taxable capital gains.
If they hold the asset for 10 years, they qualify for “permanent exclusion from taxable income” on their Opportunity Zone gains, not the original deferred gains, as those can only be deferred until 2026, as previously mentioned.
Simply put, when selling at 5 or 7 years, an investor receives a tax break on their original capital gains (i.e. the gains that they reinvested in an Opportunity Zone). At 10 years, however, the tax breaks are applied to the capital that’s been gained from the Opportunity Zone investment itself.
What does this mean for Commercial Real Estate?
All of these tax breaks present a huge new opportunity for those looking to invest in commercial real estate throughout the United States.
The current issue with investing in commercial real estate in Opportunity Zones, however, is the difficulty in actually finding target properties within them. While it’s clear that there are, in fact, opportunities to be had within QOZs, it’s not often clear where those opportunities lie on a property-level basis.
By using Reonomy’s in-depth property search platform, opportunities can be identified in and outside of Opportunity Zones very quickly and easily.
Below, we’ll show you how to search for commercial properties within Opportunity Zones using Reonomy.
How to Find Properties In Opportunity Zones Using Reonomy
As we mentioned earlier, there are 8,762 Opportunity Zones in the United States, and each one of those locations are census tracts.
Census tracts are based on total population, not density, which means the sizes, shapes, and layouts of each and every Opportunity Zone can differ from the next. It also means that properties in these locations are very hard to search for—unless you’re using the right tools.
With Reonomy, you can search and gather multiple layers of property and owner data on both on and off-market properties, anywhere in the United States—rural, urban, metropolitan, or otherwise.
Reonomy will be rolling out more in-depth Opportunity Zone integrations in the near future, but as of now, a map search serves as the best way to get ahead of the curve in identifying opportunities in OZs.
You can use a Reonomy map search to find target properties within custom areas of any size, and any location, including any of the 8,762 Opportunity Zones in the country.
Before diving into your Reonomy map search, however, it’s helpful to check out the Economic Innovation Group (EIG) Opportunity Zone map.
Using EIG’s Opportunity Zone map is an extremely helpful way to view your target QOZ, if you’re unsure of its exact shape and layout. By using this map, you can also see the county and census tract number of the OZ, as well as other stats like population, households in poverty, total jobs, and total businesses.
So then, let’s say you’re looking to invest in an Opportunity Zone in the San Francisco Bay Area—perhaps near the already-growing city of Oakland.
To find an Opportunity Zone in the area, you can search EIG’s map with various levels of geographic specifications. You can search by state, city, county, zip code, or street. Once you do so, you’ll be given a map layout of the area, with all Opportunity Zones highlighted in a translucent brownish red.
When searching a particular area, you can click the brownish red area, and the map will highlight the Opp Zone you’ve clicked (as multiple Opportunity Zones often sit right next to one another.
For example, you search and you come across the Alameda County Opportunity Zone of census tract number 06001402500. Using EIG (above), you can see that the area spans from Adeline St to Market St horizontally, and from 14th St down to Interstate 880.
You can now use this layout to fuel your Reonomy map area search.
Return to Reonomy, and scroll the map to the Oakland area. If you’d like, you can search for any of the involved streets to hone in more quickly to your Opportunity Zone.
Once you’ve identified the necessary location, you can utilize Reonomy’s Draw and other map area search tools to search within a very confined area, which in this case, is a small plot of land in between Adeline, Market, and 14th St in Oakland, CA.
To search specifically within the Opportunity Zone at-hand, you can use the Draw feature, which can be accessed by clicking the button present on the map, as shown above.
From there, you can click and drag anywhere on the map to draw lines in any shape whatsoever. Each time you click, you’ll drop another breaking point in your line, which can be used as a corner or turn.
Below, see exactly how you can draw a box around the aforementioned Alameda County Opportunity Zone:
Once you’ve drawn your map shape, on the left-hand side of the screen, you’ll see a list of the commercial properties that lie only within that area. In this OZ, for example, there are 95 commercial properties in total.
At that point, you can begin to filter your list of properties by asset type, building and lot characteristics, sales history, debt history, ownership, and on.
Opportunity Zone Map Search by Asset Type
To filter your Opportunity Zone Map search by specific property types, simply click the “Asset Type” tab of the Reonomy search page. Here, you can add filters for industrial, multi-family, and a bevy of other commercial property types.
Below, see how you can add a “Multifamily” asset class filter to your search, for example.
Opportunity Zone Map Search by Building and Lot Characteristics
To filter your map search by a property’s building and lot characteristics, visit the “Building & Lot” tab of the search page. Here you can filter to identify properties by building size (in square footage or number of units), lot size (in square footage or acres), year built, property renovations, and more.
Opportunity Zone Map Search by Sales History
You can also filter your search by the sales history of a property. In the “Sales” tab, you can add filters for most recent sale date and most recent sale amount.
To identify properties that are more likely to sell, you can use the “Most recent sale date” filter, and weed out the properties that have been sold within last seven years or so.
Opportunity Zone Map Search by Debt History
It is also possible to filter your search based on a properties specific debt history. Within the “Debt” tab, you can add filters for most recent mortgage amount, mortgage origination and maturity dates, as well as most recent mortgage lender.
Opportunity Zone Map Search by Owner Name
If you know the name of a property owner within a designated Opportunity Zone, but are unsure how many properties they may have, you can also search by owner name or entity.
In the “Ownership” tab of Reonomy’s search page, enter the name of your desired owner in the “Owner name” search bar and see all of the properties they own within your target Opportunity Zone.
How to Save Your Map Search
It’s important to mention that you don’t have to draw your custom map search every time you use Reonomy. By saving your search, you can return to your Opportunity Zone again and again, each time with the most up-to-date property and owner data.
In the filter dropdown box of Reonomy’s search page, you’ll see a “Save” button near the top-right corner.
You can add a custom name to your search, and in the future, every time you enter Reonomy’s web platform, you’ll have the option of quickly returning to your Opportunity Zone map search.
How to Find the Owner of a Property
Once you have identified a target property within your Opportunity Zone, you can then see who the owner of that property is.
By simply clicking into an individual property profile page from your list of results, you can visit the “Ownership” tab to see who the reported owner of that property is.
To do so, first click into the profile page of an individual property from your list of results:
Once you’ve entered the profile page, you can visit the “Ownership” tab to see who the reported owner of the property is. Then, by clicking “Get Contact Information,” you can see the people associated with the owning entity of the property, along with their phone numbers, email address, and mailing address.
You can also export a list of properties and property owners in bulk, in case you find multiple properties in an Opportunity Zone that you’d like to pursue, and want to use Reonomy as your leads list builder.
All-in-all, Opportunity Zones present very substantial benefits to those who invest in them for the long haul, making it important to begin your property search sooner rather than later, as these areas are likely to become saturated.
With the help of EIG and Reonomy, however, identifying the perfect opportunity in any Opportunity Zone is just a few clicks away.