Opportunity zones are designated geographic areas that have been identified as low-income census tracts. These census tracts were nominated by governors and certified by the U.S. Department of the Treasury. To be eligible, the census track needed to have 1) a median family income of less than 80% of the surrounding area or 2) an average poverty rate of 20% or more. There are currently 8,700 opportunity zones in both rural and urban areas throughout the country, with OZs in every state and territory. It is estimated that over 35 million people reside in the designated OZs. In the past decade, the majority of the designated OZ’s have seen sluggish economic progress and an overall decline in population.

Pennington worked expeditiously to learn about the program in order to determine whether it could be beneficial for our families. We concluded that the tax benefits and social impacts of the program were just too attractive to ignore. We partnered with a small team of experienced real estate professionals to form PTM Partners and we raised a $98M qualified opportunity zone fund (QOZF) in 2019 to build a portfolio of commercial properties on the east coast of the U.S. One of the firm’s operating partner families had a sizeable capital gain, a portion of which was invested as the fund’s anchor partner. In addition to co-founding PTM Partners, Pennington created three separate entities in 2019 for one of our operating partner families, one to purchase a building and two to create and fund new qualified OZ businesses.

We continue to believe that the favorable aspects of the OZ Program will provide substantial opportunities to create a social impact while generating attractive risk-adjusted, after-tax returns. We intend to maintain a thought leadership position for the benefit of our partner families and the communities that we are investing in.

Benefits of the Opportunity Zone Program

The OZ Program was established to provide tax incentives for long-term investments in designated economically distressed communities. The program’s goal is to create jobs and drive economic growth in some of the country’s poorest areas by incentivizing investors to redirect capital there, rewarding investors with a variety of tax benefits if certain conditions are met. Opportunity zones have the potential to spur economic growth and advance communities across the country while boosting returns for investors through unprecedented tax incentives. The key components to these incentives, which include tax deferral/abatement and tax-free post investment appreciation on certain qualifying investments, are highlighted below:

• The short- or long-term capital gain triggered from the sale of any capital asset is deferred if the capital gains are reinvested into a QOZF within a certain period

• A 10% step-up in basis for capital gains reinvested in QOZFs if invested by December 31, 2021

• A permanent exclusion from taxable income on capital gains from the sale or exchange of a QOZF investment held for at least 10 years

  • By founding or investing in an operating business that is a C-corporation, one may be able to take advantage of section 1202 (Qualified Small Business Stock) of the tax code and may only have to hold an investment for a minimum of 5 years

• This permanent exclusion also applies to recapture of depreciation accumulated over the life of the investment for real estate investments

How Does it Work?

A business owner sells his or her company for $100mm, where he or she has a $10mm basis. The business owner invests $20mm in several Opportunity Zone Fund’s in a combination of real estate investments and operating businesses. The capital gain in this example was $18mm that would be deferred until 2026. If the OZ investment is held for at least five years at the end of 2026, capital gains tax liability is for only $16.2 million (10% step up in basis). If the OZ investment is sold for $40 million, generating another $20 million gain, the new gain would be tax-free if sold after a holding period of at least 10 years. The program’s eligibility is inclusive of any type of capital gain including…