Opportunity zone strategy, what do you think?

Question

For those of you that have been looking at investing in Opportunity Zones, take a look at this idea.

I know that if you buy a property for $500,000, where the land is worth $100,000, and the improvements are worth $400,000, you are expected to spend another $400,000 to "improve" the property. All of this money comes from capital gains of course. But what if you were to buy an empty lot in an OZ, build a house, then rent it for 10 years to take advantage of all of the tax benefits. For the small investor, this seems like a much easier way to take advantage of an OZ. What do you think?

(BTW Biggerpockets, we have a forum for 1031 exchanges, maybe we should have one for Opportunity Zones. Just an idea.)

Christopher Goldie · Answer

@Matthew Ryan I may fit into that lone wolf category. Working on a 4 mil deal in an OZ that also qualifies for New Market Tax Credits. I have one potential private investor that is specifically looking for OZ investments, but I'm a little stumped on exactly how to create a fund to make it work. Any advice?

Bobby Stener · Answer

@Andrew Faukner I am under the impression from a reliable source that you can put “virgin” money into an opportunity fund and not use capital gain income.  Can you share some more on this?  I am actively looking to invest virgin money in oz

Matthew Ryan · Answer

@William Chu - Take off a zero and you have the size of our fund. It can be challenging, yes, to work in the mid-market space ($1-$20million), especially on the lower end of that spectrum, but don't believe it can't be done. Syndicators like myself are always open to other operators or lone wolfs who may have a good deal but don't know how to get it funded. Sometimes that small deals have the best margins because that's where no one is looking.

William Chu · Answer

@Andrew Faukner

I think it’s not for small investors. They’re looking for wealthy individuals to invest in. Raise funds as $100mm or more. OZ is a big project like a water facility, housing community. If it is going down to individual empty lot like 5000 sq ft lot will benefit small investors. Maybe I am wrong I didn’t read through all the information.

Colin L. · Answer

@Andrew Faukner getting a single family build to pencil out as a rental will be tough in CA, maybe if you include an ADU it works better.  I think you have he right idea, OZ’s are a good fit for development projects, although at bigger scales than SFH.

Andrew Faukner · Answer

Just the general fees, like Matthew Ryan mentioned above, $20,000 in permit fees for a 1,300 sq.ft. structure in Sacramento. At my place at Tahoe I have a well. To switch over to city water, neighbors have told me they paid about $15,000 in fees. If cities want these changes, they must reduce fees.

Jason Williams · Answer

I will look into it thank you. You also mentioned some prohibitive fees that are assessed in Tahoe. What fees are those?

Andrew Faukner · Answer

Hi Jason, OZ is an Opportunity Zone. The federal government has approved part of South Lake Tahoe as being in an Opportunity Zone. The short definition is that if you have capital gains from the sale of stocks or properties you can invest in an OZ, and avoid paying any capital gains taxes for about 7 years. At 7 years you would have to pay the taxes on the original capital gains minus 15%. Now here comes the good part, if you sell that property after 10 years, you don't have to pay taxes on any capital gains that you may have made on that property. AND if I understand it correctly, any rent you charged on that property during the 10 years would be tax free. This could result in a huge tax savings. One purpose of the OZ's is to create more housing in areas like South Lake Tahoe.

The downside for some people, is that the money has to come capital gains made by the sale of stocks or property. The money can not come from ordinary income, like that person earning a huge salary in the bay area. The purpose of the OZ's is to encourage investment in housing and businesses to improve these areas. I believe that because of the fees charged by South Lake Tahoe, this money for housing may go elsewhere.

The state of California has a new website up talking about the OZ's: https://opzones.ca.gov/  You can find a map of the OZ's in California under their "toolkit". I hope this helps.

Jason Williams · Answer

What does OZ mean?

Andrew Faukner · Answer

Matthew Ryan All good thoughts. I went to a workshop recently at South Lake Tahoe, and I tried to tell people there that if they want to see development in their OZ, there needs to be concessions from the city/county in fees if they want to make this work. I think part of the problem is that people in the city and county offices don't know anything about OZ's, and if that is the case, the OZ will not benefit the city/county. They will have missed an opportunity for growth in their OZ. What a shame.