Opportunity Zones and Opportunity Funds in the Eugene/Springfield Area

There's a lot of buzz around "Opportunity Zones" (OZ) and "Qualified Opportunity Funds" (QOF), but most investors and homeowners in the Eugene and Springfield area have no idea how much of an impact an OZ can have on the future value of an asset purchased now and held for 10 years or more. 

First time I've heard of OZs and QOFs, what are they? 

Following the bipartisan (crazy that bi-partisan leadership existed, I know) Tax Cuts and Jobs Act of 2017, State Governors were asked to provide their list of Opportunity Zones that should be designated for improvement. These zones needed to fit certain criteria that I won't get into here, with some notable exceptions like Portland's Pearl District Opportunity Zone.

This Act was designed to benefit long-term (buy and hold) investors and impoverished communities, while creating a mechanism by which all investors could eventually pool funds in order to commit to the long-term potential of a community identified as an OZ.

How does it work?

It sounds very complicated, but it's actually a simple process. It applies to ALL property types, not just commercial.

Here goes: 

  1. Sell something that will trigger capital gains tax in the current year (stocks, bonds, you name it).
  2. Find a QOF or create an LLC partnership or Corporation, make it an Opportunity Fund. 
  3. Take 90% of the deferred capital gains $ that you've moved to your LLC or Corporation bank account, and invest it directly into properties located within a OZ, through said OF. 
  4. Drop below the 90% Opportunity Zone property investment threshold and it's no longer recognized as a QOF. That would be bad so maintain at least 90% of investments in an OZ. 
  5. File IRS Form 8896
  6. Hurry up and WAIT 10 years.

When can I sell properties held in the name of my QOF?

Wait 5 years, 7 years, or 10 years. It's up to you. The goal here is not to sell quickly, this is a long-term investment. 

The City of Eugene's website has an Opportunity Zone page that provides some excellent visual examples of how the program works.

Essentially it works like this:

  • Wait 5 years, received a 10% reduction in Capital Gains on the INITIAL BASIS for capital gains deferred.
  • Wait 7 years, receive an additional 5% reduction on the INITIAL BASIS for capital gains deferred for a 15% increase in your initial basis.
  • Wait 10 years, receive the full 15% increase in INITIAL BASIS AND PAY ZERO IN CAPITAL GAINS for the difference between your new 15% stepped-up basis and the sale price at the time that you finally sell it. Patient? Good, you're going to win at this game.

Does it get more complicated?

Sure. Stock in Opportunity Funds can be sold, shares can be issued, all sorts of complicated financial maneuvers can be hatched up..so if you intend on investing in a QOF be sure to do your homework and hire a pro to assist you. 

Who stands to benefit? 

  • Luxury (dream home) buyers looking to build a dream home, but who need to purchase bare land first. If that land sits in in an Opportunity Zone, the improvement of adding a home to bare land counts as "improvements" that will later qualify the Opportunity Fund for ZERO capital gains after 10 years. It's not uncommon to purchase acreage within Lane County for $300-500k, add a $500-800k home to it and net $1.5-2M with capital gains upon sale (unless setup through a QOF)
  • Real estate rental investors pay capital gains, starting with the first dollar of appreciation above basis. This is where the Opportunity Zones shine because there are so many opportunities to improve a property, while attracting higher rents to subsidize the investment. This requires some deep analytics skills and having the right team in place. Note that this INCLUDES properties that are already owned. The properties just need to meet the "standard of improvement" test and be held as an asset fully owned by an Opportunity Fund.  
  • General investors looking to invest in real estate, but not directly. Buying shares in a Qualified Opportunity Fund should eventually become easier, as funds expand in size and the barrier to creating a fund reduces over time. The IRS rules are still a bit fuzzy with regards to moving money in and out of a fund, but that should become clearer over time. 
  • Multi-family and single-family home builders. This group may already "get it" and doesn't need more help or information to leverage their knowledge and experience to reduce long-term capital gains. This may lead to mixed funds where the builder holds a stake through the QOF, even after the purchase. 
  • Tear-down buyers wanting to remove an old manufactured home and replace it with a single family owner-occupied or rental unit(s). There is no better time to buy up reduced price land properties via a QOF, investing to improve it, and reaping the rewards in 7+ years. 

Is there a catch? 

Yes, in fact quite a few complicated rules and hurdles. First of all, most people have no idea how to create an Opportunity Fund and manage it well. There are other important requirements as well:  

  • The investor must actively invest further capital to "substantially improve" the property. 
  • All projects need to be "shovel-ready" within 18 months. If permits or building resources cannot be brought together in time, this puts the QOF opportunity at risk. 

For more information about Eugene's OZs, contact Allie Camp for more details.

To search for all properties (of all types) within Opportunity Zones located in Lane County, visit the predefined Opportunity Zone property search results pages listed below: