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An Opportunity Zone is an economically-distressed community where new investments, under certain conditions, may be eligible for preferential tax treatment. Opportunity Zones are designated by the state and certified by the IRS. Roughly 8,700 areas in all 50 states have been designated.
An Opportunity Fund is a new investment vehicle created as part of the Tax Cuts and Jobs Act of 2017 to incentivize investment in targeted communities called Opportunity Zones. A Qualified Opportunity Fund is an investment vehicle that is set up as either a partnership or corporation for investing in eligible property that is located in a Qualified Opportunity Zone.
First, investors can defer tax on any prior gains invested in a Qualified Opportunity Fund (QOF) until the earlier of the date on which the investment in a QOF is sold or exchanged, or December 31, 2026. If the QOF investment is held for longer than 5 years, there is a 10% exclusion of the deferred gain. If held for more than 7 years, the 10% becomes 15%. Second, if the investor holds the investment in the Opportunity Fund for at least ten years, the investor is eligible for an increase in basis of the QOF investment equal to its fair market value on the date that the QOF investment is sold or exchanged.
A Qualified Opportunity Fund is an investment vehicle classified as a corporation or a partnership and that was formed for the purpose of investing in “qualified opportunity zone property.”
Opportunity Funds allow investors to defer federal taxes on any recent capitol gains until December 31, 2026, reduce that tax payment by up to 15%, and pay as little as zero taxes on potential profits from an Opportunity Fund if the investment is held for 10 years. By holding their shares in the Opportunity Fund for ten years, investors can achieve maximum benefits from their investments into the fund. It’s as easy as:
1. Defer Capital Gains
Any Capital Gains can be invested into an Opportunity Fund. By investing in an Opportunity Fund, the invested Capital Gains do not need to be recognized when the investment is sold or exchanged or until December 31, 2026.
2. Reduce Capital Gains
After holding an investment in the Opportunity Fund for seven years the Capital Gains tax on the original Capital Gains is reduced by 15%. This is the equivalent of having a 15% step-up in basis on the initial investment for seven years.
3. No Capital Gains tax on fund profits
After holding an investment in the Opportunity Fund for at least ten, an investor’s disposition of an investment in the Opportunity Fund does not result in any additional federal income taxes
The Opportunity Zone legislation was crafted with bipartisan support from both sides of the aisle, and communities across the United States now have the opportunity to receive major infusions of capital into some of their most distressed neighborhoods. If done correctly, this program will be a generational impetus for economic and social growth for the entire country.
One of the benefits of the program is that the capital invested has a long-term outlook, instead of traditional capital that is forced into projects with very short deal horizons. In addition to the longer-term viewpoint, recessions can create opportunities for land and construction cost pricing corrections, which ultimately benefit capital that has a longer hold period.
While California has yet to conform, this initial Fund 1 will still primarily be focused in California’s Bay Area, due to its high jobs-to-housing ratios, low office and industrial vacancies, and high barriers to entry, ultimately allowing for high return potential for investors when coupled with a qualified real estate investment team. In the event California does conform to the federal tax benefits of opportunity zones, the investment will only become that much more lucrative for the investors.
The Urban Catalyst team understands the unique processes, entitlement hurdles, and timing horizons for development in the Bay Area, and has strong relationships with city constituents and decision makers, making them exceptionally qualified to maneuver the development process.
We assembled a world-class team.
We are locals that live and breathe San Jose and the Bay Area.
We thrive in a fast-paced, values-driven culture. We collectively work to reach bottom line business goals in the fastest and most creative way. We respect and value diversity, the innovative spirit and integrity.
We believe transparency is the best way to be an efficient and ethical organization. This comes through in how we manage our team:
Erik Hayden, an accomplished real estate professional from San Jose, founded Urban Catalyst with a vision of starting an Opportunity Fund that would create a positive impact in his own community, as well as in Oakland and other Bay Area locations. By hiring local professionals, he formed a unique team with the expertise needed to successfully navigate Bay Area projects and transform multi-family, office, and industrial investment opportunities that advance social and environmental solutions into positive financial returns for investors.
We are a local fund made up of diverse individuals that care about our community and want to invest here, stay here, and be part of making a better Silicon Valley by creating positive social impact while generating strong financial returns.
Ultimately, our investments in key real estate infrastructure today will lead to a more diverse and prosperous community as we seek to catalyze the urban environment with long-term capital that seeks to make an impact.