Advertisement

Opportunity Zones in Central Florida: A game of know-how and what-ifs

The program was created as part of President Trump’s 2017 tax cut plan

A years-in-the-making deal with South Korean technology giant LG was born in the hope that a blighted region along East U.S. 192 in Osceola County could one day attract the kind of private investment that went behind South Korea’s nearly $4 billion 250-acre LG Sciencepark in Magok.

Several trips between Florida and Seoul had to take place before the executive vice president of LG Technology Center of America, Yoon Won Suh, signed a memorandum of understanding to develop a digital master plan for NeoCity in April.

Advertisement

Talks of finalizing a $500 million deal with LG to develop a smart city within NeoCity is another monumental fruit of that labor.

County leaders said the LG deal will help lure other global players and could jump-start development of NeoCity, which has an anticipated 50-year timeline for build out.

Rendering of NeoCity core in Osceola County as envisioned by $500 million deal with LG.
Rendering of NeoCity core in Osceola County as envisioned by $500 million deal with LG. (Perkins+Will)

What’s not often talked about is the fact that NeoCity, a 500-acre tech district on what was once little more than a sod farm, also sits within a qualified opportunity zone — potentially offering investors what Forbes calls one of the greatest tax-avoidance opportunities in American history.

“You would think there would be more chatter about it,” Jeff Jones, the county’s director of strategic services, told GrowthSpotter. “That being said, there is interest. We do get phone calls. It’s just the way it feels, as if it’s still in the prep stages.”

Industry insiders in Central Florida would agree.

Since the program was created as part of President Trump’s 2017 tax plan, called the Tax Cuts and Jobs Act or TCJA, much of the activity regarding opportunity zones is still in a preliminary phase, more focused on how to start funds and raise capital as oppose to actually structuring development plans or buying property.

“I think [interest in opportunity zones] will pick up,” Jones said. “I imagine the interest in NeoCity, once it’s further along, will be intense.”

How does this work?

For investors to reap the full benefits, they would have to use recently realized capital gains (profits from investments like the stock market, real estate and other venture) and put them into a qualified opportunity zone fund.

The fund, which can include capital gains from multiple investors and invest in multiple projects, can then offer investors a trifecta of attractive tax breaks, so long as it can prove it has been consistently active in the redevelopment and maintenance of the project.

The longer a fund holds on to the project, the more tax obligations it will be able to erase.

For instance, a five-year investment will grant a fund the opportunity to defer 10 percent of capital gain taxes on the original asset, while a seven-year investment means 15 percent of the capital gains won’t be taxed.

On top of that, an opportunity fund that holds onto the replacement asset for at least 10 years will allow an investor to avoid paying capital gain taxes altogether on that particular sale.

According to an analysis by accounting firm Novogradac, the incentives could increase an investors returns by 70 percent.

Those sweet tax deferrals

“Anytime I hear tax-free or tax deferrals my ears perk up,” Greg Bond, a developer that recently established a fund that will develop a new assisted living facility in Eustis, said.

Advertisement

The $26 million project is set to rise at 801 Northshore Dr., along the shores or Lake Eustis. Once complete, the three-story facility will feature 97 beds, 24 of which will be dedicated to memory-care assistance.

A conceptual rendering of the planned assisted living facility at 801 Northshore Drive
A conceptual rendering of the planned assisted living facility at 801 Northshore Drive (Greg Bond)

Bond said he became interested in the program early on after one of his investment partners pointed out that the Eustis property qualified for the tax benefits.

From there, Bond said, he wanted to become an expert. He attended one of the first conferences set up in Las Vegas to learn more.

“One of the biggest hurdles was understanding the rules and finding legal counsel,” Bond said. “I heard of a lot of attorneys arguing over specifics. They would say I’m interpreting the rules as this, and the other would have a separate opinion.

"Either one of them could be right, that’s why we needed more clarification.”

The latest draft of updated regulations was released earlier this year.

“It gives a little more structure to the program in what you can and can’t do,” Bond said. It was enough for Bond to progress on his very first opportunity zone fund for a project in Lake Eustis, though the process was not without its complexities, he said.

An aerial view of the land assembled on Lake Eustis
An aerial view of the land assembled on Lake Eustis (Greg Bond)

"We actually ended up going through quite a bit of a process,” Bond said. He learned it would be cheaper to do a new-build instead of original plans to restore the building on site.

He then had to wrangle in more land to develop what he envisioned, some of which fell outside of the opportunity zone boundaries. But Bond said he learned of a way to still qualify for the tax benefits.

Since establishing the fund, Bond and partnering investors have 31 months to build the facility and receive a Certificate of Occupancy. He said after launching the first fund he’s strictly focusing on projects within opportunity zones and is actively pursuing launching a second fund for another project.

A general timing rule

Like Bond, developers need to be comfortable with the many deadlines involved in entering into an opportunity zone program.

In general, investors have a 180-day period on the day capital gains are recognized to invest in a qualified opportunity fund. That capital gain is then deferred until Dec. 31, 2026 or until the fund is sold.

Investors also must finalize their deals by the end of this year in order to take advantage of the 15 percent deferral on capital gains that’s activated after a seven-year investment.

Tom Ablum, a managing director of the nationwide $250 million Capital Gains Opportunity Fund, said that’s “small potatoes” to larger funds that are waiting to enter into the program.

Though deadlines may prompt those looking for a 15 percent deferral before the year-end, it may also have hindered some funds from launching before then.

The new regulations brought about another rule that limits a taxpayer’s 180-day investment period until the last day of their tax year — specifically for Section 1231 gains, which primarily covers gains on real estate assets, Ablum said.

“Come the holidays there’s going to be a lot of activity,” Ablum joked.

He said his fund doesn’t look at developments less that $50 million, and though he personally likes the fundamentals in Central Florida, like the designated zones in the I-4 corridor and in Winter Haven, he said signing on deep-pocket investors into lesser known markets is a tough sell.

Advertisement

“People want to invest in major markets,” Ablum said. “We’re not going to do some project in Timbuktu.”

He said markets in Orlando, Tampa and St. Petersburg are more “on the map” of bigger funds.

Ablum said he likes to look at potential markets through the lens of how it would survive another recession. “Markets in Orlando are not going to feel its as much as Winter Haven is.”

He adds that Orlando has made major strides in job growth, and underlines how “secure jobs and infrastructure” will be able to keep certain markets from falling under if another recession hits.

“We must have had at least $15 million to $20 million go away because they just couldn’t stomach the ten-year hold,” Ablum said. “It’s daunting to them.”

OZs shine in Orlando

Sherry Gutch, business development division manager of the City of Orlando, said she receives phones calls daily from developers interested in entering into an opportunity zone program in the city.

“We’re a hot market,” Gutch said. To get a handle of the inquiries, the city created marketing material for each of its designated zones.

“From a city perspective, we asked how can we get these investors and their projects up out of the ground as quickly and efficiently as possible,” Gutch said.

So the city branded each district, created a website showcasing the districts and hosted numerous conferences about said designated opportunity zones in Orlando. Gutch has also been asked to speak at panels regarding the subject matter.

“What’s unique in what we’ve done is we’ve branded districts and their unique selling points,” Gutch said.

A slide showing the potential build-out of the Fashion Square Mall redevelopment created by the City of Orlando to help lure investors to its Colonialtown South and Executive Airport designated opportunity zones areas just south of where the mall is begin redeveloped.
A slide showing the potential build-out of the Fashion Square Mall redevelopment created by the City of Orlando to help lure investors to its Colonialtown South and Executive Airport designated opportunity zones areas just south of where the mall is begin redeveloped. (City of Orlando)

Orlando has a dozen of Florida’s 427 designated opportunity zones, which are focused on low-income census tracts.

In Central Florida, part of Altamonte Springs, Apopka, Kissimmee, Poinciana and Sanford also feature designated opportunity zones.

In Orlando, Gutch said some of the areas prime for redevelopment include Orlando’s SoDo District and the Packing District, each of which are benefiting from public investment by the city and from non-profits like Orlando Health and Dr. Phillips Charities.

Similarly, the idea behind the opportunity zone program was to craft a policy that uses tax incentives to help persuade wealthy investors to move their cash into struggling communities.

But calculating the program’s effectiveness is a struggle, Gutch said. Because the zones operate through a tax benefit, it’s not regulated by local governments, and therefore the city has no way to tell the economic impact of the program and if it’s indeed working.

“I think in the next three years we’ll be able to measure development activity,” Gutch said.

If the program works as intended, Gutch said the city will be able to look at property values in the designated areas, development patterns, demographics and average housing income to see if there has been progress.

An unfair balance of opportunity

One of the bigger criticisms of the program suggests only luxury projects are benefiting, and not the impoverished communities the program promised to help in the first place.

“What I haven’t seen yet is too much dialogue on social investing,” Roman Petra, attorney with Nelson Mullins who specializes in tax and real estate financing, said.

“A savvy investor is thinking: Where should we go if we’re talking about real estate growth," Petra said. “Not to say certain places don’t make sense, but that’s the criteria investors are thinking about.”

At the same time, prices for properties in opportunity zones are increasing.

A subdivision plan for Valencia Village, located at the intersection of Hwy 192 and Denn John Lane. The project serves as an entrance to NeoCity.
A subdivision plan for Valencia Village, located at the intersection of Hwy 192 and Denn John Lane. The project serves as an entrance to NeoCity. (IRONSHORE Property Group)

Brian Capo, founding partner of FL Retail Advisors, said that’s due in part to bigger projects underway before the opportunity zone provision in designated regions.

The 18-acre mixed-use Valencia Village project, for example, which will serve as the gateway to NeoCity, can strongly benefit.

Capo, who has worked closely with Valencia Village developer Cheryl Schoolfield of IRONSHORE Property Group, said the real estate firm can potentially triple its investment price on just two of the outparcels up front of the planned development.

He confirmed that prices for properties in opportunity zones can go up, so long as they’re bolstered by "great overlaying real estate that will improve or have long intrinsic value.”

"All an investor is looking at is return,” Capo said.

Have a tip about Central Florida development? Contact me at arabines@GrowthSpotter.com or (407) 420-5427, or tweet me at @amanda_rabines. Follow GrowthSpotter on Facebook, Twitter and LinkedIn.

Advertisement
Advertisement