There’s opportunity in the air for South Florida investors.

More than 8,700 U.S. census tracts have been designated as Qualified Opportunity Zones since the real estate investment program was signed into law as part of the Tax Cuts and Jobs Act of 2017.

The law aims to incentivize private investments in economically distressed communities by offering significant tax deferral opportunities to investors.

Florida is home to 427 Opportunity Zones, including 68 in Miami-Dade, 30 in Broward and 35 in Palm Beach counties. Relatively unknown, the program is likely to receive more attention following the signing of an executive order by President Trump on Dec. 7 that steers federal resources to Opportunity Zone areas in a bid to create more incentives for investment.

Tax deferment benefits 

The law allows investors to postpone taxes on profits from the sale of any asset until 2026, as long as those gains are reinvested into an Opportunity Zone Fund.

To qualify for the tax break, those gains must be transferred into a fund within 180 days of receiving them. But the money can’t be held in funds indefinitely – 90 percent of the fund’s assets must be invested into an Opportunity Zone. That could include purchasing a building, land for development, or buying shares of an existing business.

“Investors have to do something with the funds, they can’t just sit on the money,” said Brad A. Molotsky, a real estate lawyer at Duane Morris LLP. “The goal is for investors to buy an existing property, improve it and adapt it, or build on vacant land, to create more value in the neighborhood.”

The longer the buyer keeps their investment, the more taxes they can defer. If an investor keeps his or her money in an Opportunity Zone for five years, taxes on the deferred gain are reduced by 10 percent. After seven years, taxes drop an additional 5 percent. But if an investor keeps that Opportunity Zone holding for a least 10 years and then sells at a profit, the capital gains from that sale would be tax-free.

The U.S. Treasury Department anticipates at least $100 billion in private capital will pour into low-income neighbor

hoods as a result of the program.

Developers flock to OZs

There are more than 100,000 Opportunity Zone properties across Miami-Dade, Broward and Palm Beach counties, according to Reonomy, a real estate data website. That offers a plethora of investment possibilities for interested buyers.

Carlos Rodriguez Jr., COO of Palm Beach-based Driftwood Acquisitions & Development LP, said his firm has received a significant number of questions about the Opportunity Zone program since its inception.

“Most [of the questions] are general as people wrap their minds around the benefits and limitations of the program,” he said. “It’s a hot topic in commercial real estate, but it’s still new and unfamiliar to many people.”

Nationally, developers are rushing to dump money into Opportunity Zone sites. Sales of properties in those areas increased 80 percent in the first three quarters of 2018, the Wall Street Journal reported in October, citing data from Real Capital Analytics.

Rodriguez said Driftwood, a hotel development and acquisition company, already controls one project within an Opportunity Zone in Fort Lauderdale and plans to invest more than $8 million into it. Driftwood is also eyeing another tract in a zone outside of Florida.

“Given our unique setup as developers, managers, and direct-to-investor fundraisers, we have been keenly interested in this program since the beginning of the year,” Rodriguez said.

The program’s tax breaks, however, only apply to investments made after 2017. Land owners who purchased property in qualified areas before that time would need to sell a majority of their assets to an Opportunity Zone Fund, retaining a maximum 20 percent of the property’s ownership, to eventually receive tax benefits from the program.

Regulations not finalized

Although Opportunity Zone investments could, in theory, drive economic development in distressed neighborhoods, Miami attorney Ronald Fieldstone said there is no requirement in the law’s proposed regulations that says investments need to have a positive social impact on those communities. The U.S. Treasury Department has not yet released its final guidelines on the program.

“They’re called ‘Opportunity Zones’ because they’re supposed to bring opportunities to residents as well as investors,” said Fieldson, a partner at law firm Saul Ewing Arnstein & Lehr. “The question is, how do we make sure current residents also benefit from re-gentrification?”

Certain businesses, such as liquor stores, country clubs, massage parlors and race tracks, are not eligible for Opportunity Zone tax deferral benefits. But there are no regulations mandating that investors put money toward affordable housing, retail shops, grocery stores, warehouses or other businesses that could increase land value, as well as improve conditions for residents and bring jobs to the community.

“The program is fantastic in the sense that it rewards people for taking a risk and investing in areas they otherwise wouldn’t have,” Fieldstone said. “The key to its success is making economically sound investments and getting residents involved in the process of transforming their neighborhood.”

BY THE NUMBERS

$100 billion

Amount of private capital the U.S. Treasury Department predicts will flow into Opportunity Zones

8,700

U.S. Census tracts designated as OZs

427

Number of OZs in Florida

10%

Reduction of capital gains tax for investors who hold OZ property for 5 years

15%

Reduction of capital gains tax for investors who hold OZ property for 7 years

$0 

Any gain realized on an OZ investment held for 10+ years is tax-free

2026

All taxes on OZ capital gains due