Private Equity Best Practices: Opportunity Zones: A Path to Economic Revitalization – Part 1

Opportunity Zones: A Path to Economic Revitalization – Part 1

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What are Opportunity Zones?

Opportunity Zones have emerged as a powerful tool for economic development and community revitalization in the United States. With the goal of spurring investment in distressed areas, these designated zones provide tax incentives to investors while promoting job creation and economic growth in low-income communities. In this comprehensive guide, we will explore the fundamentals of Opportunity Zones, their benefits, and the potential impact they can have on local economies.

Understanding Opportunity Zones

Opportunity Zones were established under the Tax Cuts and Jobs Act of 2017, serving as a catalyst for private sector investments in economically disadvantaged areas. These zones, totaling over 8,700 across the country, have been nominated by each state and U.S. territory based on their designation as low-income census tracts. The U.S. Treasury has recognized these areas as targets for attracting new investments through preferential tax treatment.

The Internal Revenue Service (IRS) and the Community Development Financial Institutions Fund (CDFI) oversee the Opportunity Zone program. They offer valuable resources to help investors understand the designation process and navigate the establishment of Opportunity Zone funds. By directing capital towards these zones, investors can make a positive impact on local communities while benefiting from significant tax advantages.

The Benefits of Investing in Opportunity Zones

Investors who choose to participate in Opportunity Zones can enjoy a number of tax benefits:

Temporary Deferral of Taxes: Through the Opportunity Zone program, investors can defer taxes on previously earned capital gains. By reinvesting these gains into a Qualified Opportunity Fund (QOF), the tax liability is postponed until the investment is sold or disposed of.

Basis Step-up: Investors who hold their capital gains in a QOF for a minimum of five years receive a 10% increase in their basis on the original investment. If the investment is held for at least seven years, the basis increases by an additional 5%. This step-up in basis can result in even greater tax savings.

Permanent Exclusion of Taxable Income: Perhaps the most compelling benefit, investors who hold their investments in a QOF for at least ten years pay no taxes on any capital gains generated through their investment. This is a long-term investment strategy that can not only provide substantial tax advantages, it can really help maximize returns.

Investing in Opportunity Zones

To take advantage of the tax benefits associated with Opportunity Zones, investors must invest their capital gains into a Qualified Opportunity Fund. These funds, organized as partnerships or corporations, are specifically designed to invest in Opportunity Zone properties and businesses. By self-certifying and filing the necessary forms with the IRS, these funds can ensure compliance with program requirements.

Opportunity Zones offer a diverse range of potential investments, including commercial and industrial real estate, affordable housing projects, infrastructure development, and both existing and start-up businesses. However, it’s important to note that real estate investments must meet specific criteria, such as substantial improvements, to qualify for the program.

Benevolent Capital

At Benevolent Capital we have carved a niche for our investors by seamlessly blending traditional family values with cutting-edge investment strategies. Our approach is characterized by a thoughtful fusion of innovation and prudence, ensuring that every investment aligns with the long-term vision and legacy goals of our clients.

As principals we co-invest our own money in every deal we participate in, we do not charge our investors management fees, investors receive a 100% preferred gross return on their investment. After the 100% return (a 2X) the investor will receive a 70% net return with a 30% promote to the GP. This arrangement makes Benevolent Capital a trusted partner in safeguarding and growing wealth for our investors.

Benevolent Capital includes a world-class group of partners, associates and investors, and our portfolio now spans catalytic investments in venture capital, private equity, real estate development and a diverse collection of global professional soccer franchises. Our wide range of experience from managing successful companies, to completing management buyouts, acquisitions, and a wide variety of debt and equity investments totaling over $4 billion enables us to truly partner with the entrepreneurs and management teams of our portfolio companies and provide hands-on support and guidance towards realizing their full potential. Benevolent Capital has a proven track record of successful investments. Notably, our $200k investment in seed capital for Enzymatics, a biotech firm later ultimately acquired by Invitae (NASDAQ: NVTA), has yielded over $30MM in total returns for Benevolent Capital’s investors.

What sets us apart is not just our financial acumen but also our dedication to fostering meaningful relationships. Going beyond conventional investment practices, we prioritize open communication and transparency that allows us to build trust with our stakeholders, as principals we co-invest our own money in every deal we participate in making Benevolent Capital a trusted partner in safeguarding and growing wealth for our investors.

In an ever-evolving financial landscape, our expertise, coupled with Benevolent Capital’s commitment to hybrid family office investments, paints a picture of success, where financial prosperity meets enduring values.

About the Author

Brett M. Johnson, founder and CEO of Benevolent Capital, founder and partner of Fortuitous Partners, and co-founder and chairman of Rhode Island FC. He has a bachelor’s degree from Brown University and a Masters of Business Administration from the Presidential/Key Executive program at Pepperdine University. Brett is also a graduate from the Harvard Business School’s President’s Leadership Program in 2014. An active member of the Young Presidents Organization.

Disclaimer: The information provided in this article is for informational purposes only and should not be construed as financial or investment advice. Always consult with a qualified financial advisor or wealth manager before making any investment decisions.