While reading the news and trying to find useful information to the Monmouth and Ocean County business community, occasionally, there will be a term that keeps popping up. Recently that term has been opportunity zones, and I’m going to take the time today to explain what these zones are, where these zones are, and why it could matter to current and future business owners in the garden state.
Opportunity zones are part of President Trump’s Tax Cuts and Jobs Act that encourage investment in financially-distressed areas across the country through favorable tax advantages. States petition the Dept. of the Treasury to designate particular areas using census data.
There is no shortage of areas in the country that qualify, as this shockingly thorough list will show you. I understand that you’re probably more interested in the New Jersey OZs; don’t worry, they’re at the end of this article, so keep reading.
Once an area has been designated an OZ by the Treasury Department, investors can apply to have their business plan approved as a qualified opportunity fund. Keep reading in the next section below that explains that.
Twenty census tracts have been designated OZs in Monmouth and Ocean Counties alone. This indicates no shortage of opportunities for business owners and investors on the Jersey Shore to help historically disenfranchised communities while making a greater profit than they would in well-to-do neighborhoods. Combined with the NJ Urban Enterprise Zone (UEZ) program, something more familiar to the NJ business community, business owners stand to substantially improve their ROI when charting the next leg of their business journey.
Again, for those who like visualizing data, here’s an interactive map for UEZ zones in the Garden State. For those unfamiliar with the benefits of the UEZ program, here’s everything you would want to know.
Investors create a qualified opportunity fund through Form 8996 with the IRS; this creates a partnership or corporation to invest in the OZ. The fund is required to hold at least 90% of its assets in that qualifying OZ area, either through real estate or business equity.
Businesses that provide services like construction (or any work conducted at various locations) are not required to complete 90% of their work within the OZ; they just have to have 90% of their assets registered in the OZ.
The purpose of the 90% rule is just to ensure that businesses are not dividing their assets and creating a satellite office that allows them to continue as they have been for years while capitalizing on a measly satellite office that provides them tremendous tax advantages.
Opportunity funds can be created and utilized when a business owner sells an asset and reinvests the capital gains acquired in that fund. If the fund proceeds to hold onto that property/business for more than ten years, the taxes on those capital gains are waived.
Beyond the direct tax incentives provided by the government, investors should consider that the operating costs, the cost of the new asset(s) acquired, and staffing costs might all be favorable numbers.
This should be something that all business owners should consider, as many businesses currently operating in non-OZs could provide the same service to the same customers by simply relocating their shop one town over or even within the same city.
Here’s an excellent (although no longer applicable example). For many years, Atlantic Glass Co. operated on White Street in Red Bank, NJ. As I discovered while writing this article, it was sold in 2018, but let’s pretend it’s still running for the purpose of my demonstration.
White Street is not within the OZ that covers areas of Red Bank, but Shrewsbury Avenue and West Bergen Place are. Atlantic Glass could have simply relocated to a new location within minutes of their old location, retained their entire customer base and workforce, and seen tremendous tax benefits from the capital gains earned from the sale.
Granted, I know this is an extremely oversimplified example, but it highlights that there are real opportunities provided by the OZ legislation that business owners should, at the very least, look into!
Opportunity funds will have their business plans evaluated to determine if the outcome is likely to benefit the opportunity zone in which they will be located. With this in mind, high-end luxury services and products are less likely to have their applications approved.
To give clear examples; investments that wouldn’t qualify for this program are golf courses and country clubs. While these businesses might substantially improve the tax revenue of the hosting municipality or city, there’s a very low likelihood the residents in the area would get any positive residual effect.
On the contrary, there’s a high likelihood that approval of these types of businesses would result in exclusive gentrification that has been such a highly-discussed topic in recent years. The OZ program is seeking to create inclusive investments that actually benefit the people in these designated areas.
This is not to say that every investment must only be utilized by the people living on the street where it’s located. There are businesses that help low-income communities by providing high-paying jobs and skills to locals that will work there. The main efforts of this program were to avoid incentive programs in our nation’s past that promoted things like casinos, luxury high-rises, and other businesses targeted at the upper classes that failed to produce value for their communities.
Regardless of how much you think a particular community would benefit from the services or products your business provides, it’s absolutely worth looking into this.
A master list of opportunity zones in New Jersey is available on this list provided by the New Jersey Redevelopment Authority. There’s also an interactive map that allows users to see opportunity zones, active projects, and other metrics for those who operate better visually.
Using the map may seem a little excessive when a simple list can provide the same information, but visualizing where things are, along with the ability to quickly see where various types of infrastructure and businesses are located in relation to opportunity zones, can substantially improve the planning and underwriting stage of any business expansion. Allowing planners to get a sense of the area and the possibilities it may hold.
I cannot stress strongly enough; this program is a once-in-a-lifetime incentive for businesses to turn unthinkable profits while also creating lasting change for communities in which that’s been a very tall order for many years.
Even if there’s no chance to capitalize on this opportunity currently, the zones have been designated until 2028, so keep an open mind for what future opportunities might be perfect for an OZ.