Opportunity Zones [February 2019 Breakfast Recap]

Stack of three photos showing speakers, audience at February NAIOPWA breakfastWednesday’s meeting started with the passing of the gavel and official induction of Scott Mathews as the 2019 President of NAIOP Washington State. Scott is the Senior Director, Acquisitions & Residential Development, for Vulcan, Inc. Much gratitude was given to Tony Toppenberg of Turner Construction Company for his service this past year.

Next, there was a call to action regarding Washington State House Bill 1921, which would increase Washington’s Real Estate Excise Taxes (REET). You can download the informational report on the effect of similar tax measures here, and click here to contact your state representatives.

Tim Jones, a real estate lawyer and Senior Associate with JLL, introduced the panel on Opportunity Zones, which are designed to provide tax incentives to investors who fund businesses in underserved areas, and how local developers can capitalize on them. The speakers and their focus for the morning were:

  • Eric Kodesch, Tax Attorney, Lane Powell, laying groundwork of how the tax policy works;
  • Tim Shoultz, CEO, SMARTCAP, giving examples of how the funding works;
  • Marc Gearhart, Vice President, Development, Ryan Companies, giving examples of transactions;
  • Michael D’Onofrio, Managing Director, Engineered Tax Services, giving regional and national examples of Opportunity Zones in action.

How OZ Tax Policy Works
Eric Kodesch, Tax Attorney from Lane Powell, talked about the tax policy behind Opportunity Zones, specifically 1400Z-1 and 1400Z-2 referendums from December 2017, which are based on national low-income census tracts nominated by governors.

There are three major tax benefits (incentives) to sell appreciated property and invest in Opportunity Zones, which in a nutshell are*:

  1. Capital gains deferred until 2026
  2. Up to 15% of capital gain deferred until 2026 is eliminated
  3. No tax on gain from taxpayer’s future sale of the interest in the Qualified Opportunity Fund by December 31, 2047
*Please see the slides for the specifics on the benefits.


Eric rounded out his foundational points by defining some key terms, defining everything from a qualified opportunity fund to a qualified opportunity zone corporation, and explaining the structure for a transaction as well as structure for ownership.

How OZ Funding Works
SmartCap has focused on and studied Opportunity Zones for over a year and, as a Seattle-based private equity real estate investment firm, came to the table to explain more about how funding works. Tim Shoultz, SmartCap CEO, has already closed one Opportunity Zone offering and has another expected to close in the coming months.

South Seattle is ranked fifth in the nation for Opportunity Zones with 3.5% vacancy with no easing in site. However, there are a few key challenges and Tim saw the environmental concerns as one of the largest hurdles among three other factors: qualifying assets, higher land cost, and longer entitlement timelines.

SmartCap is developing in the Marysville/Arlington area with a project at 95,500 SF of Class A Industrial for the second quarter of this year. The company’s first project was a $10MM Equity Placement in the same area, a planning of 220,000 SF of Class A Industrial in a two-phase development with the first delivery in the second quarter of 2020. They launched the fund in December, and it was over-subscribed. In fact, they are looking at several new opportunities and planning the next fund in a couple of months.

SmartCap then shared their funding model and what four typical investors looked like for Wealth Management, Institutional, Private High-Net Worth, and Group Investments. Tim ended his portion of the panel with in-depth answers on concerns ranging from selling assets to qualify for the 10-year tax treatment to ways to partner if you own dirt to investor strategies and everything in between. He provided links to more resources on his slides as well, and, lucky for us, SmartCap will be starting a blog on their website soon that will feature information like this.

Examples of OZ Transactions
Marc from Ryan Companies presented their Opportunity Zone project at 65 S. Horton that closed on January 8 at 47,700 SF, identified for a multistory industrial development. Marc shared the two-investor structure in detail. He made the point that knowing the tax policy or tax rates in 10 years is uncertain so it’s best to make sure that your investment is sound, first and foremost. Marc pointed out three things that matter with the base and tax on your gain for Opportunity Zones by showing some sample and simple math on his slides, making the point that it is much like a ROTH IRA for real estate. I would encourage you to look at the slides to see Marc’s excellent explanation of how the math works.

Marc went on to talk about the benefits of investing in SODO, especially with it being number five out of 8,700 zones in the country. He drew an analogy of SODO being much like Portland’s Pearl District in the early 2000s, believing that the area will boom in the next 20 years and that a lot of tech companies will put their R&D in the area (and with the belief that all companies are becoming tech companies). Some of the disadvantages of the area include security, environment, and regrade/foundational issues.

Regional and National OZ Transactions
Mike with Engineered Tax Services gave a comprehensive view of Opportunity Zones across the nation. ETS is the largest licensed professional engineering firm with specialty tax expertise. Mike was able to give an overview of what an Opportunity Zone is, what the potential tax benefits are, and a snapshot of a 10-year process.

Mike talked about the substantial improvement that is required on a building basis and gave an example of cost segregation and 100% bonus depreciation, giving an example which shed some light on what could be removed and counted as a value to the property. He then talked about three distinct tax benefits to Opportunity Zones*:

  1. Temporary tax deferral of the initial capital gains.
  2. Capital gain reduction through a basis adjustment.
  3. Permanent gain exclusion on the appreciation of the interest.

*Please see the slides for the specifics on the benefits.

He gave an example of an Opportunity Zone investment in Portland with 100 market-rate multifamily units at the southwest waterfront. Other national examples were located everywhere from Florida to California and from Puerto Rico to Texas, and ranged in all sector types such as professional-sports anchored, mixed-use recreation; retail; hospitality; and multifamily.

And the info we’ve all been waiting for – be sure to check out the very informative (and detailed!) slides from the morning’s presentation, as well as the final attendance list, on the NAIOPWA app. Look for the paperclip icon (materials) for the 2019 February Breakfast. 

This article was written by NAIOP Washington State and Marcom Committee member Sarah D. Fischer, Burgess Design.

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