A tax incentive in real estate development is a great economic inducement; it decreases the equity required to develop property and helps contribute to the entirety of the community in which the property is located. Consider the newly created economic development tool, Federal-designated Opportunity Zones (“OZone”). This program uses garnered capital gains to reinvest into historically disinvested areas, while giving the developer the benefit of tax deferral and/or tax savings. For more information on Opportunity Zones, see our article here. But, what if there were a way to enhance the power of this tax incentive? Two tax incentives will always be better than one and the nature of the OZone program, with its flexible terms of eligible investments, makes it an appealing tool for this incentive to be twinned with another existing incentive, such as a Federal Historic Tax Credit (“HTC”).
Although each incentive isn’t powerful enough to fill a project’s entire capital stack, each program individually could cover a significant portion of the capital stack, improving the overall return for the investor. When paired together, it could make investing in historic preservation projects more economically feasible. Fortunately, just about any historic property has a reasonable chance of being located in a Qualified Opportunity Zone (“QOZ”). QOZ’s are low-income census tracts that are nominated by the governor of each state and U.S possession and are approved by the U.S. Treasury. A great example of the potential of pairing the two incentives can be found in Missouri. This state is making the most out of the twinned capability of the OZone Program with its own state Historic Tax Credit program. The Missouri Legislature recently passed and signed into law S.B. 773, which will reserve $30 million of the state’s annual historic preservation tax credit allocation for eligible projects in Opportunity Zones. We can expect the tax credit market for Historic properties in Missouri QOZ’s to strengthen significantly, and hopefully more states would follow.
The federal Historic Tax Credit program requires a taxpayer to remain in the ownership for a minimum of 5 years, due to the 5-year recapture period. This a highly attractive attribute in the case of OZones, because the capital gains that are invested for 5 years would result in a 10% tax reduction on a taxpayer’s capital gain, along with the 5 years of tax deferral. An additional 2 year holding period would result in a supplemental 5% tax reduction and 2 more years of temporal gains deferral. Most investors would find the additional 2 year stay in a historic tax credit investment, for an amassed 15% tax reduction, to be worthwhile. Further, in order to reap the full benefit of the OZone program, it would require an investment horizon of 10 years. This duration provides the largest benefit to the taxpayer, which is permanent exclusion of any tax on gains accrued during the 10-year investment.
Clocktower Tax Credits, LLC has expertise in assisting taxpayers with monetizing a number of different tax credits, specializing in the Historic, Brownfields, and Affordable Housing Tax Credit markets. Clocktower will be assisting developers in obtaining OZone funding, and helping OZone fund sponsors find profitable projects to invest in.
Please contact Tre Jones at (978) 793-9157 or TJones@ClocktowerTC.com with any questions that you may have regarding Opportunity Zones and Tax Credit monetization.