The clock is ticking on a major benefit of the Opportunity Zone program.

On December 31, 2019, the 15 percent capital gain tax discount benefit under the Opportunity Zone regulations expires as the seven-year timeframe necessary to receive such 15 percent capital gain tax discount benefit by the year 2026 becomes unattainable.

This will leave the remaining benefits of the Opportunity Zone program for tax payers at a 10 percent capital gain tax discount benefit on the taxes to be paid in 2026 on capital gains invested into Qualified Opportunity Zone Funds (QOZF) and an exemption on any new gain realized from the investment on the capital gain initially invested after 10 years.

While the loss of the five percent capital gain tax discount benefit may seem small in comparison to the overall benefits, it still it a third of the upfront deferral benefit, and it has taxpayer investors on the hunt for QOZFs with viable projects in Opportunity Zones.

Pinnacle Partners and developer Nitze-Stagen broke ground last week for Seattle's first Opportunity Zone development called Canton Lofts, a $30 million apartment building in the historic Pioneer Square.

SEATTLE—Pinnacle Partners, which is an Opportunity Zone investment firm, and developer Nitze-Stagen broke ground last week on Seattle’s first Opportunity Zone development. The $30 million apartment building located in the historic Pioneer Square is called Canton Lofts. The development will feature 80 units with transit accessibility and provide affordable one-bedroom studios.

The Opportunity Zones program was marketed as a way to help poor communities by offering major capital-gains tax breaks for investors to park their cash in 8,000 designated low-income census tracts.

Instead, critics have labelled it a “tax scam,” “the latest example of urban renewal” and “a bonanza for the rich.”

Early reports have highlighted the program’s success in building opulent hotels and luxurious apartment towers, often in already-expensive areas — including some financed by associates of President Donald Trump, who signed the program into law in 2017.

Real estate developers are breaking ground on Canton Lofts in Seattle on Oct. 15, an apartment building in Pioneer Square targeting middle-class singles and couples

The 80 or so future residents will move into a neighborhood in transition. Emblems of the past and harbingers of the future fill the blocks that extend from Seattle’s International District to the former site of the Alaskan Way Viaduct — a soon-to-be redeveloped waterfront.

Opportunity zones are the hottest new investment opportunity in America. Now it seems as if everyone with capital gains to shield is trying to invest in them.

Established by the 2017 Tax Cuts and Jobs Act in an effort to incentivize investment in economically struggling areas throughout the United States, opportunity zones offer investors access to significant tax benefits, including the ability to defer their capital gains from taxable income through reinvestment. More critically, investments in opportunity zones that are held for at least ten years are exempt from income tax.

The Puget Sound Business Journal recently held a Thought Leader Forum on the topic of Opportunity Zones and the benefits they can provide to investors in our region. The Thought Leader panel was composed of Jeff Feinstein, Partner, Pinnacle Partners; Rod Fujita, CPA and principal, tax practice director of real estate services for Bader Martin, PS; Joe McCarthy, Partner, Stoel Rives; and Eugenie Rivers, counsel, Cairncross & Hempelmann. Emily Parkhurst, Market President and Publisher for the Puget Sound Business Journal, led the discussion.

Parkhurst: Let’s start out by outlining how this program works, and what people need to know before they jump in. Who wants to start off?

Fujita: The Opportunity Zones (OZ) program was created by the Tax Cuts and Jobs Act of 2017 (TCJA), which was designed to spur economic development and job creation in distressed communities by providing tax benefits to investors. Investors must adhere to various requirements put in place by the statute and proposed regulations, including who is eligible to benefit from the OZ tax incentives, what gains are eligible for deferral, when investments in Qualified Opportunity Funds (QOF) must be made, timeline of the tax benefits, operational requirements of the fund, and exit strategies.

Nitze-Stagen recently purchased The Canton Lofts for $5.275M from Spectrum Development Solutions. The firm is now working with Spectrum Development Solutions to develop the multifamily workforce residential project. The six-story building will be available to those making 80% of the area median income without the use of public subsidy. 

The project will use the new opportunity zone program as a long-term, civic-focused financing tool. Canton Lofts will be the first project in Pioneer Square aided by the new opportunity zone program.

The fully entitled site is at 224 South Washington St. The building, which includes 2,400 SF of retail space, will be Nitze-Stagen’s first workforce housing project and the company hopes to replicate it.