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Opportunity Zones, the new US domestic emerging market space!

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By Allen Love


I have been immersed into the world of "opportunity zone investing" for the past 4 months. I am the son of a celebrated civil rights activist who was a man that spent over 30 years as an executive working in Social Services. I accumulated 1000s of hours of conversation concerning poverty, gentrification, healthcare disparities, disenfranchisement and community development while learning from my Father. Lessons that I have successfully applied to my civic responsibilities as an adult. There is a saying my Father would often repeat that was given to him by his mother. He would tell me that, “Poverty” was a state of mind”.

My father went on to explain that he never felt poor growing up in rural York County, SC until he started grade school with the kids from town. In his neck of the woods, his family had more than others. They had a tractor, a pulpwood truck, land, livestock, a piece of a car and almost a dozen of children strong enough to handle most labor responsibilities. They were blessed with the essentials: land, shelter, fresh water, food and lots of love. He did not miss the so-called luxuries of the town-life because he did not know they existed. Indoor plumbing, televisions, central heat and air, were amenities that were standard in homes of the Town Folk. Out on the farm a luxury was a team of mules.

When my father returned home from school with his new awareness of such amenities and the notion that they were indeed "POOR", my grandmother was there to enlighten him. Poverty is indeed a state of mind. It is a subjective assessment of core values pertaining to needs versus wants. However, "Opportunity" is a real element of economic empowerment and this is what has attracted me to the legislation that has created over 8700 opportunity zones based on census track data of disenfranchised communities. I am a firm believer that the economic empowerment of the most disenfranchised communities floats all boats.

I have gone through the new Opportunity Zone legislation with a fine-tooth comb. I wholeheartedly believe in the "Spirit" of the legislation and the concessions and "safe harbors" created to protect the communities that are targeted for reinvestment. It is still a lot to learn and interpretation is tedious. I suggest getting a legal opinion from an accredited firm for gray areas.

For those of you unfamiliar with Opportunity Zones, I will break it down for you in layman's terms. As part of the Tax Cuts and Jobs Act of 2017, funds invested in low-income opportunity zones may qualify for capital gains tax advantages. The legislation tackles 2 major problems: the freeing up of unrealized capital gains and the need for private investment into disenfranchised communities.

Unrealized capital gains occur when investors hold on to assets that have appreciated to avoid the hefty capital gains tax due the following year if the appreciation is realized as profit. It has been estimated that US investors and Corporations are holding on to trillions of dollars of unrealized capital gains. A large portion of this gain is in the form of Silicon Valley tech stocks. By reinvesting capital gains into qualified opportunity zone funds; investors can qualify for a tax deferral on the original gain up until December 31st, 2026 unless the investment is sold or exchanged before that date. They also can qualify up to a 15% basis buy-down on their original gain with a 5-year holding period offering a 10% basis buy-down and a 7-year holding period offering an additional 5% basis buy-down.

However, the real kicker is when an investor holds the investment until the 10-year mark. After 10 years investing in a qualified opportunity zone fund, the investment is able to increase its basis to the current fair market value on the date it is sold or exchanged. This means there is essentially no new capital gains tax owed on the investment growth. This is a major reason why I am thrilled about the potential of this legislation. The recent inverted yield curve of the 2-year short term bonds vs 10-year long term bonds has investment funds eyeballing Opportunity Zones. Funds are looking to move capital into zones as soon as possible.

Private equity investment into disenfranchised communities is nothing new, domestic or abroad. Emerging Markets in undeveloped and underdeveloped countries have been a "hot" sector for ETFs, Hedge Funds and multiple investment instruments. Emerging Markets can offer dependable investment returns but also must deal with unpredictable political and legislative risks. What this legislation has essentially acknowledged is, while the United States of America is the wealthiest nation on the planet; there are emerging communities that are ripe for development or redevelopment inside our own Nation. Communities that may offer less risk and better returns than those abroad.

The investment world and the IRS have finally come to a consensus. The IRS can now collect some of the unrealized capital gains they need to fill their coffers and developers now have access to funds to rebuild communities; creating opportunities for public-private partnerships. Instead of investing in small projects, funds are loaded and poised to invest into large grids of opportunity zones. Imagine the rehabilitation of entire towns. The major Corporate Tax Cuts of 2017 has hurt the LIHTC (Low Income Housing Tax Credits) space making it more difficult to build such housing. Opportunity Zone Funds can be positioned to help fill this void of capital. By building new affordable housing and centers of commerce, funds are creating opportunities that will also address many of the social isms affecting our great Nation.

At first glance, the Opportunity Zone tax incentive resembles the traditional 1031-B exchange. It is indeed similar, but the 10-year kicker offered by a qualified fund can really change the game. It offers a considerable advantage to the standard 1031-B exchange for certain investors. Instead of buying up cheap land and investing in projects designed for the “Quick Flip; developers are looking for opportunities such as: affordable housing, senior care/living, workforce housing, retail space and other urban investments that offer jobs and increased tax revenue. Even in the rural space, funds are now moving capital into agricultural projects. Modernized vertical growing facilities and renewable energy projects are the new bubble. The funds are looking for long term investments. If utilized properly, the working class and middle class stand the most to gain.

I left the wealth management world to continue my father’s ambition of bringing public and private economic initiatives to the same TABLE. This I believe to be my purpose in life. I want to be a voice of accountability and to help control the social narrative in order to protect the “Spirit” of the legislation. We must ensure the funds are invested “into” these opportunity zones and not merely “through” these zones like they have in the past. The most important investment is into the PEOPLE. The measure of the US wealth is not just assets but also the earning potential of its citizens. Potential that requires thriving communities and a divestment of corporate profit and private equity into these areas.

There is much to gain on both sides of the aisle. I have a vested interest in the African American communities that qualify as opportunity zones. Over 1.1 Trillion dollars passes through the African-American community with little to no reinvestment each year. It is said that a dollar lasts less than 6 hours in African American communities; as compared to 30 days in Asian communities, 20 days in Jewish communities and 17 days in White communities. This socio-economic calamity is due to the lack of OPPORTUNITIES. Once thriving communities that consisted of retail centers, grocery stores, schools, manufacturing, churches, restaurants, and entertainment districts; have now been gentrified into non-existence. Black families in rural communities that are land rich can’t compete in the new corporate agricultural space and now find themselves in a financial pickle as their heirs have no interest in the Farm and growing no longer pays the bills.

White Americans in Appalachia and struggling manufacturing communities are not fairing any better. Poverty knows no color but green. Opportunities that have fled these areas that once offered livable wages are now being incentivized to return. States and municipalities can advertise their fertile opportunity zones and offer additional tax credits, grants and financial incentives to attract major opportunities.

As we should continue to strive toward a “One Community” concept not divided by race, creed or color; we must not ignore the history of racism and classism in America and seek to redistribute a fair share of America’s wealth into the communities that have been the most affected.

America is indeed great. I applaud those such as: Senator Tim Scott and Senator Cory Booker for their bipartisan approach at making this legislation a reality. However, there is cause for concern as we approach an election year. There will no doubt be politics involved to muddy the water. Human greed and jealousy are always a factor. My plan is to get in front of such controversy and educate the masses to the best of my ability. I have been busy meeting with fund managers and developers, connecting them to community leaders and elected officials. Even though this is Federal Legislation; a bottom up grassroots approach is required to make sure funds and developers stay in compliance.

Thank you for your patience while reading my thoughts on this subject. I have been blessed to meet and learn from leaders at all levels of this legislation. If anyone has additional questions or would like to discuss opportunities and locations of zones, please feel free to contact me. I am also available for consulting and speaking engagements.

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