Tag Archive for: capital gains tax

There is a wave of investors who are currently selling their New York-based properties to invest in the South Florida area. Why?

Mainly because of the recent rent control law and its negative impact on returns on investments. It has been estimated, for example, apartment property values dropped 20%-30% as soon as the laws went into effect. Some investors are now mainly focused on getting their money out of New York and are looking to invest in properties that will produce better yields—specifically in non-regulated rent control markets, such as South Florida.

Why South Florida?

“There is zero incentive for New York multifamily investors to purchase a building and spend money on renovations if they can’t raise rents in these rent-controlled environments. Florida has always been a market with attractive yields. This is why most NY investors are choosing South Florida,” says Rafael Fermoselle, managing partner of Eleventrust Real Estate. “They either have their New York properties under contract to be sold, have already sold them, are in 1031 exchanges, or in some cases looking for diversification.”

Investors are selling their assets in New York and reinvesting in deals that yield more and ideally, are located under one roof. However, since Miami’s inventory is compressed with a lot of smaller multifamily properties and it’s difficult to find buildings with high unit counts under one roof, investors are turning to multifamily portfolios that are comprised of 4 – 8 buildings totaling 50-120 units. Although not all under one roof, investors are finding the 100+ units they are seeking with room to add value.

“Investors are working closely with Eleventrust because we have the inventory other brokerages don’t, plus, many of the deals they are transacting are happening off market, which many investors prefer,” explains Fermoselle.

Opportunity Zones

Opportunity Zones are another big reason why this new wave of investors are looking to South Florida. Miami, Fort Lauderdale and West Palm Beach are among the best places to invest in Opportunity Zones. There are about 123 Opportunity Zones in South Florida, including 67 in Miami-Dade, 30 in Broward and 26 in Palm Beach counties.

“Almost 16% of South Florida’s commercial assets are located in Opportunity Zones, one of the highest rates in the nation,” Fermoselle tells GlobeSt.com.

Tax Savings

New York investors looking to move to Florida also benefits from the state not having an income tax for Florida residents. New York state tax rates range from 4% to 8.82%. Additionally, the effective real estate property tax rate for Florida residents is approximately 0.98%, compared to 1.68% in New York.

New York investors will also save on capital gains tax in Florida where the top marginal tax rate on capital gains in Florida is 25% and top marginal tax rates on capital gains in New York is 33.82%.

“We currently have 4 successful deals with New York investors including multifamily properties with 9-18 units,” says Fermoselle. “We also have properties located in emerging neighborhoods that are garnering interest from east coast investors.”

 

Source: GlobeSt.

opportunity zones

Months after the Treasury and the Internal Revenue Service released the latest round of regulations for Opportunity Zones, South Florida investors and developers are still wary enough about the rules to prevent them from investing.

A report by Bilzin Sumberg and the Urban Land Institute found that only 28 percent of respondents surveyed said that they intend to invest Opportunity Zones and only 7 percent have already done so.

The reason: investors still do not understand basic questions about the program. Nearly one third of the respondents cited uncertainty as their top reason for not investing in Opportunity Zones. The report surveyed 72 developers, investors and other professionals in June who specialize in real estate and finance in Florida.

One of the biggest questions that participants still have is around refinancings. Although the most recent regulations clarified how developers in an Opportunity Zone can refinance a property and qualify for the tax benefits, the report shows that the rules around refinancings are not understood by some members of the real estate industry.

“A lot of people still hadn’t fully digested the second set of regulations,” said Josh Kaplan, a corporate and tax attorney at Bilzin Sumberg, a Miami-based law firm.

Another reason that investors are avoiding Opportunity Zones is due to the rapid price appreciation of land in designated zones in South Florida, according to Kaplan.

Kaplan said he’s seen reports that land prices in South Florida Opportunity Zones have increased by as much as 30 or 40 percent, making it much more difficult for deals to pencil out for investors.

The Opportunity Zones program allows developers and property owners to defer and possibly forgo paying some of their capital gains taxes, or taxes resulting from the sale of certain assets. To reap the full tax benefit, those who invest in the more than 8,700 Opportunity Zones around the nation must hold the asset for at least a decade.

In Miami-Dade County, Opportunity Zones span distressed areas such as Opa-locka, parts of Overtown, North Miami Beach and Carol City, along with areas where major development is already taking place, like parts of Aventura, Edgewater and the Design District.

From April through September 2018, property sales in those areas tallied $942 million, a 25 percent increase from the same period a year earlier. Several of the Opportunity Zone tracts encompass some of the wealthiest enclaves and megaprojects in Miami, such as Turnberry Associates’ Aventura Mall and the Magic City Innovation District, a planned $1 billion development in Little Haiti.

The report shows that multifamily, however, is the favorite asset class for Opportunity Zones investors. About 82 percent of respondents view mixed-use and multifamily as the asset class most ripe for redevelopment.

Kaplan said he also expects to see more Opportunity Zones deals to close by the end of the year, as investors look to take advantage of the biggest tax benefits, which expire at the end of 2019.

 

Source: The Real Deal

Developers are finally putting shovels in the ground and deploying capital in Opportunity Zones in South Florida and across the country.

But with 124 qualified Opportunity Zones in South Florida, developers, brokers and investors at a recent Bisnow panel said they are largely focusing their attention on projects near Fort Lauderdale and Delray Beach’s urban core.

Jaime Sturgis of the Fort Lauderdale-based brokerage Native Realty said his company is involved in about 10 Opportunity Zone projects. Most of the projects are around 13th Street and Flagler Village in Fort Lauderdale, where interest in the area was already promising and density is high.

“There is a finite amount of land in Flagler Village,” Sturgis said during the Opportunity Zones event held at Sistrunk Market & Brewery in Fort Lauderdale. “That is another reason Opportunity Zone investors are flocking to the area.”

The Opportunity Zones program was part of President Trump’s tax plan, and was designed to encourage investment into low-income and distressed areas. Real estate developers quickly became enamored with the program, and large real estate investment funds such as EJF Capital and RXR Realty sought to raise substantial Opportunity Zone funds.

The benefit for developers and investors in an Opportunity Zone is the ability to defer and potentially forgo paying capital-gains taxes. Yet some owners of property in Opportunity Zones are listing them at prices that are much higher than investors want to pay, panelists said.

“Some folks think that the Opportunity Zone supercharges the value of your land,” said Dale Reed, an executive at Merrimac Ventures. “They are unrealistic on what their land deals are worth.”

Daniel Lebensohn, co-founder of Aventura-based BH3, is planning to build a $100 million mixed-use project in an Opportunity Zone on West Atlantic Avenue in Delray Beach. He said that high land prices across South Florida will come down in the future once property owners realize that smart investors won’t pay the prices property owners are demanding.

“It’s like the tulip craze” said Lebensohn, referring to tulip mania in the 17th century, when tulips reached ridiculously high prices and then fell sharply.

Panelists also agreed that Opportunity Zone incentives alone would not lead them to invest in a project. Most already had secured the land and had the projects penciled out before the legislation came out in 2017.

“Merrimac Ventures invested in two projects before the regulations were in released,” Reed said. “The two projects we did were because they were in the Community Redevelopment Agency area — that’s really the driving force with those projects initially.”

Nick Rojo with Affiliated Development, who is building SIX13, a 142-unit workforce apartment complex at 13 Northwest Third Avenue near Fort Lauderdale’s Flagler Village, pointed out that Affiliated’s project is getting $7 million in gap financing from the Fort Lauderdale Community Redevelopment Agency to complete the project.

“Still,  the program helps make deals more feasible, especially since rents have gone up in Flagler Village and other areas,” Sturgis said. “The Opportunity Zone is the icing on the cake, its makes the pot that much sweeter.”

 

Source: The Real Deal

Interstate Industrial Park

A three-building portfolio of industrial property within an Opportunity Zone in Riviera Beach sold for $11.7 million, or $73 per square foot.

When the sale closed, the buildings were 98 percent leased to tenants including the City of Riviera Beach, Saf-Glas and Palm Beach Laundry. Interstate Industrial Park Holdings, LLC, led by Harry Spitzer, bought the three-building portfolio from The Silverman Group of Palm Beach.

The 160,302-square-foot portfolio includes buildings at 6555 and 6557 Garden Road and 3541 M.L.K. Jr. Boulevard in Riviera Beach. The one-story building at 6555 Garden Road was developed in 1987 on a three-acre site. Two one-story buildings at 6557 Garden Road and 3541 M.L.K. Jr. were developed in 1968 on a two-acre site.

Located equidistant to the Interstate 95 interchanges at 45th Street and West Blue Heron Boulevard, the industrial buildings are within the Census Tract 13.02 Opportunity Zone. Investors in Opportunity Zones can defer payment of federal taxes on capital gains.

“The fact that the assets are located in an Opportunity Zone, potentially affording tax advantages, drove further interest from potential buyers,” Scott O’Donnell of brokerage firm Cushman & Wakefield said in a prepared statement.

Cushman & Wakefield’s Capital Markets Team, along with Robert Smith and Kirk Nelson, negotiated the sale of the three buildings on behalf of The Silverman Group. Adam Robbins of ARC Equities, LLC, represented Interstate Industrial Park Holdings, LLC.

 

Source: The Real Deal

questions

Developers and investors are enamored enough with the federal Opportunity Zones program that they have been raising massive funds in hopes of taking advantage of the big tax incentive, but remain cautious enough over of the program’s many unanswered questions that few have deployed much of the capital raised.

Those dueling realities just played out in Washington, D.C., when the IRS’ first public hearing to solicit questions about the year-old program drew an overflow crowd. About 200 people gathered in a small room, and a couple of dozen speakers aired their concerns, according to three people who attended the hearing. The hearing had been scheduled for January, but was delayed because of the 35-day partial government shutdown.

Steve Glickman, a co-founder of Economic Innovation Group, was one of those in attendance. Glickman is credited with helping craft the Opportunity Zones program, which provides tax deferments and tax breaks for developers who invest in projects in designated low-income neighborhoods across the country. Also at the hearing were Michael Novogradac, a CPA and managing partner at Novogradac & Company; and Jill Homan, an Opportunity Zones adviser and fund manager.

“One of the biggest questions asked was about the amount of time that investment funds have to deploy capital raised for Opportunity Zones projects,” Glickman said. “Existing regulations give funds six months from the time the money is received. But many of the funds say they want to hold the cash for at least a year before deploying it.”

Numerous Opportunity Zone funds targeting hundreds of millions of dollars have been launched in recent months, by firms including Youngwoo & Associates, Somera RoadFundriseRXR Realty and EJF Capital. Skybridge Capital is targeting a $1 billion fund. That fund was rolled out in December with EJF as a subadviser, though SkyBridge later dissolved their partnership and found a new subadviser.

In October, the government released its first set of guidelines, but left many topics unaddressed. It did specify that a business will qualify for the program if 70 percent of the company’s property is located within a designated zone.

The Opportunity Zones program pushed forward in President Trump’s 2017 tax overhaul plan gives investors and developers the ability to defer and potentially forgo paying some of their capital gains taxes if they hold the asset for at least 10 years. But real estate investors often buy and sell assets after only a few years.

Given that fact, could an investor sell an Opportunity Zone asset after three years, then reinvest the money into another Opportunity Zone project for seven years? Would the total 10-year hold period still qualify for the program?

Another question: How much capital can an investor or developer take out of a project when refinancing an Opportunity Zone property? And after the refinance, how will the proceeds of the refinancing be distributed to investors?

Asked, but not answered. IRS officials only listened. Investors and developers will be looking for those answers when the government release its second round of rules, which is expected in the next two months.

 

Source: The Real Deal