CliftonLarsonAllen LLP has managed to secure $11 million in opportunity zone funding for a client building a multifamily development in South St. Paul, Minnesota.
The funding, announced last month, is part of the $350 million that the Top 10 Firm has helped its clients secure since 2019. The project, known as The Yards Phase I, will provide South St. Paul badly needed rental housing in the form of 154 market-rate apartment units. The $37 million project is expected to open in the third quarter of 2022. Leading the project is the Beard Group, a real estate development company that works with local governments on projects like this one.
Opportunity zones are part of the Tax Cuts and Jobs Act of 2017 and offer substantial tax breaks to real estate investors who build in economically disadvantaged communities, allowing them to defer paying taxes on the projects for years. Accounting firms like CLA can create a valuable niche in helping clients with such projects.
“CLA is providing a broad array of services to constituents involved in opportunity zone projects,” said Tony Hallada, managing principal of CLA Wealth Advisors. “For developers, these services could include compliance, consulting, project-level projections, capital raising, and tax and structuring advice. Investors may need education, tax advice and consulting, compliance support, due diligence, and investment opportunities for those seeking to invest into opportunity one projects.”
The opportunity zone program has come under criticism for fostering development mostly in areas that were already gentrifying and giving valuable tax breaks to well-heeled, politically connected investors. But CLA sees the projects helping low-income communities.
“Opportunity zones are helping revitalize communities and areas that were less likely to attract capital without the incentives that opportunity zones present,” said Hallada. “Some qualified opportunity zones are on the edge of areas that were undergoing gentrification, and some are in areas that are not. Most qualified opportunity zones are in areas that are not being gentrified. What is often missed, is that qualified opportunity zone legislation helps provide much-needed housing inventory. We have a housing shortage crisis in this country, and opportunity zone legislation has spurred money to flow into new ground-up apartment projects in areas that were not getting new product previously. This may be the biggest benefit of the opportunity zone legislation.”
He sees ways where the opportunity zone program can be improved, however. “The opportunity zone regulations have been updated and improved since they were first rolled out, but there is opportunity for additional improvement,” said Hallada. “Some qualified opportunity zone benefits deteriorate for investors after 2021 and that may impact demand for opportunity zone investments after this year. We would like to see the program extended and some of the tax benefits made permanent.”
He would prefer to have more certainty about the taxes that investors might eventually have to pay and for the program to be expanded to cover more types of housing projects. “Providing certainty regarding the tax that will come due in 2026 would prove beneficial to attracting investment to the program,” said Hallada. “With potential changes in long-term capital gains rates being discussed by the Biden administration, some potential investors are expressing hesitancy in investing in opportunity zone projects because they might be shifting long-term capital gains out of 2021, where they would be taxed at 20 percent to a future year, where they may be taxed at a significantly higher rate. Fixing the tax based on the year the gain arose would alleviate concerns regarding future changes in tax rates. In addition, we believe it would be helpful to add incentives for affordable housing projects that meet certain income criteria as these lower-income housing projects do not pencil out for an investor without some form of government assistance.”
Other wealth advisory firms besides CLA have also been helping clients with opportunity zones. Cresset Asset Management, a $5 billion wealth advisory firm that has one of the largest opportunity zone funds through its private investing arm, Cresset Partners, has made six investments in the fund so far and has a team of legal, tax and accounting experts who complement the real estate investment team.
“There’s still demand and interest,” said Nicholas Parrish, a partner and managing director at Cresset Partners. “It’s been a bit of an evolution. The program was new with the Tax Cuts and Jobs Act, but the regs that governed it really didn't come out until summer or fall of 2018, so the program is relatively new. For any new program like this, there’s an adoption curve. As people understand the mechanics, they get comfortable with the strategy. This in particular was an interesting and challenging one, given the complexity of the regulations. There are a lot of very nuanced requirements around the hold period and what qualifies. It took investors time to get comfortable with the idea of investing in these opportunity zones, and identify good investments that exist in these zones without having to sacrifice quality or take on undue and unnecessary risks.”
The pandemic slowed investment for a time last year, but there is fresh interest in opportunity zones this year, particularly with the uncertainty of tax changes in the Biden administration.
“The pandemic obviously changed some behaviors, but by and large people continue to see the efficacy of this program,” said Parrish. “It goes without saying that if you can take capital gains that you would otherwise have to pay to the government, find and identify good ways to deploy that, then ultimately defer, reduce or eliminate those gains, that’s attractive for a lot of people, particularly those that are sitting on top of sizable capital gains. Despite the pandemic, the fact that you have record high stock markets, strong private equity valuations and real estate valuations, there’s a lot of people that still have capital gains. There continues to be interest, and I think there’s a potential that interest will increase this year. There are some components of the legislation that roll off at the end of 2021. It’s a tax savings program. That’s going to become more relevant in a rising tax environment, which many of us believe is likely on the horizon. For all of those reasons, it continues to be of interest and capital continues to flow in. In many ways, we’re bullish that it will probably increase over the months and years.”
