What Are Opportunity Zones?
Opportunity zones were created in the 2017 Tax Cuts and Jobs Act to help economically distressed communities benefit from a capital gains tax incentive. The Governor from each state nominated economically distressed areas (census tracts) based on the following low-income requirements as defined by U.S. Internal Revenue Code Section 45D(e)
- Poverty Rate < 20%; or
Median family income of:
- No more than 80% of statewide median family income for census tracts within non-metropolitan areas.
- No more than 80% of the greater statewide median family income of the overall metropolitan median family income for census tracts within metropolitan areas.
- Census tract contiguous with low-income Opportunity Zone and
- Median family income of no more 135% median family income adjacent Qualified Opportunity Zone
How Do Opportunity Zones Work
You sell a building for $2 million with $1 million capital gain. $150K capital gains tax are due (15% tax rate).
You deposit $1 million capital gain into Qualified Opportunity Zone fund which is used to purchase real estate, partnership interest, or equity in an existing business inside Opportunity Zone Census Track. $150K capital gains tax is deferred.
Hold the asset inside the Qualified Opportunity Fund for 5 years cost basis is reduced by 10% capital gain tax is reduced by 15K; Hold for 7 years cost basis is reduced by 15% capital gain tax reduced by 22.5K
10 Year Sell
After 10 years asset is now sold for $2 million ($1 million capital gain); pay no capital gains tax on $1 million.
Total Tax Savings at 10 years $172.5k: $22.5k (savings from original $1 million capital gain) plus $150K (savings from $1 million capital gain of Qualified Opportunity Fund)
McAllen Opportunity Zones
- The City of McAllen has 4 designated Census Tracts eligible for Opportunity Fund investments
- Census tract 201.02
- Census tract 213.05
- Census tract 205.03
- Census tract 213.04
- Assets in and around Census tracts
- Infrastructure – highway access, rail, air, sea port, international bridges, overweight corridor, water, sewage, dual feed power, foreign trade zone
- Industrial Parks – 3 industrial parks inside McAllen opportunity zones with companies in aerospace, advanced manufacturing, automotive manufacturing, logistics, etc..
- Workforce – 2.5 million people in the region in both U.S. and Mexico with a median age of only 29 years old. South Texas College, UTRGV, Texas A&M offering technical trainings
Project 1 - Spec Building Example
- The City of McAllen is currently seeking $6 million investment for 120,000 sq. ft. industrial building
- The building will be leased out into industrial companies
- Current estimated lease terms
- Length 10 years
- Rate $0.40 per sq. ft.; triple net $0.13 per sq. ft.
- Annual cash flow $576,000
- Annualized ROI 9.6%
32% Avg. appreciation over 10 year period for real estate inside McAllen opportunity zone industrial parks
- Randomized sample of real estate values currently inside McAllen opportunity zone industrial parks comparing appraisal values in 2009 to 2019
Total Investor Benefits over 10 years
- Annual cash flow $576,000 times 10 years - $5.76 million
- Capital gains tax savings initial investment - $6 million times 15% - $900k
- Capital gains tax savings building appreciation - $1.92 million times 15% -$288k
- Total investor benefits - Total tax savings $1.188 million; Total cash flows $5.76 million