Could opportunity zones be the next big thing in commercial real estate investing?

Tucked away in the federal tax cuts and job acts of 2017, the Opportunity Zone program is designed to drive long-term investment into designated, “economically distressed” areas across the country.  However, due to the nature of the program,  it appears that real estate interests are poised to benefit most from its potentially lucrative tax incentives.

To qualify for these tax incentives, you must reinvest existing capital gains in a qualified Opportunity Zone fund within 180 days of the realized exchange date of the gains.  The Opportunity Zone program offers investors two benefits. First, investors can defer capital gains on a previous investment if the money is reinvested into an Opportunity Zone asset.  Second, increasingly larger tax breaks are earned based on how long the investment is held.   The first break comes at five years and the largest tax break comes when the asset has been held at least 10 years.

Investing in Wisconsin’s Opportunity Zones

Earlier this year,  The U.S. Treasury Department approved 120 Opportunity zones in rural, urban and tribal areas of Wisconsin, with 48 of the zones in the southeastern portion of the state and 34 in the City of Milwaukee.

Two large-scale commercial development projects in West Allis are in Opportunity Zones and the developers plan to use the incentive to market their projects to investors, says John Stibal, the city’s development director.  In a recent Milwaukee BizzTimes article,  Stibal said  the city of West Allis is “working with about a dozen projects that we expect to generate somewhere around $260 million in Opportunity Zone investments.”

Other southeastern Wisconsin communities with Opportunity Zones include West Milwaukee, South Milwaukee, Waukesha and Racine.  In Milwaukee, the zones include areas on the far northwest side, including the former Northridge Mall and a neighborhood just west of Mitchell International Airport.

Madison and many other Wisconsin municipalities have set up websites with more information on Opportunity Zones in their area, along with qualifying opportunity fund investment opportunities.   LaCrosse, for example, lists several opportunity zone projects seeking investors, including the Garden Terrace Project that consists of mixed-income housing and a community hub.

Wausau Economic Development Director Chris Schock says the program “opens doors for investors to be able to put money into public and private projects that otherwise might not be feasible from an investment perspective.”

Investing in qualified opportunity zone projects may not be ideal for the traditional real estate investor, according to Funrise CEO Bill Miller, who’s online investment platform was one of the first in the county to launch its own Opportunity Fund.   Like others who have launched funds targeting Opportunity Zone investments in recent months, Miller noted that the vehicle is geared toward “upwardly mobile” and “fairly liquid” individual investors with a long-term view.