Today I had lunch with a friend who’s a real estate developer with an MBA from Columbia. He is smart and knows a good amount about tax law and tax incentives. He had never heard of Opportunity Funds, and it took me a good 5-10 minutes to explain to him the landscape of Opportunity Funds and Opportunity Zones. As any entrepreneur knows, an elevator pitch is typically under 1 minute long. How can we pitch this new Opportunity-Tax-Incentive-World in under a minute?
It’s a Hydra
This new Opportunity-Tax-Incentive-World has a lot of components, and that makes the elevator pitch hard. I count at least 5:
1. Tax Deferral. Sell an asset today, do an Opportunity Fund Rollover, and don’t pay tax on the gain for 8 years.
2. Tax Reduction. Sell an asset today, leave the investment in place for 7 years, and your taxes are reduced by 15%.
3. Tax Elimination. Leave an investment in an Opportunity Fund for 10 years, and all gain is tax free.
4. Opportunity Fund. The money must go into a “Qualified Opportunity Fund.” We are waiting for the regulations to flesh out what the term “qualified” means. But even when the regs are out, the question of what is or is not a “Qualified Opportunity Fund” will need to be explained to the uninitiated.
5. Opportunity Zone. This one is about to get a whole lot simpler. In the next 30 days, the IRS will approve the remaining Opportunity Zones and there will be a map. Nevertheless, most investors are going to want to know what Opportunity Zones are being targeted by the Opportunity Funds in which they invest.
The Words We Use
A second difficult aspect of the new Opportunity-Tax-Incentive-World is nomenclature. The awkward wordlike thing I used in the preceding sentence proves that point. The tax code did not give Opportunity-Tax-Incentive-World a name, so we are stuck trying to find one. I coined the term “Opportunity Fund Rollover” for the transaction in which an appreciated asset is sold and the gain is reinvested in an Opportunity Fund, and I hope others will join me in using that term.
Another challenge is what to call the space or industry. For similar structures we have common terms like “1031 exchange,” “EB5 funding,” “IRA,” and “Roth IRA.” What is the Opportunity-Tax-Incentive-World to be called? The legislation itself is entitled “Opportunity Zones”. That’s not a viable name for the Opportunity-Tax-Incentive-World because (1) “Opportunity Zone” is only one of the subordinate ingredients of the Opportunity Fund Rollover and (2) Opportunity Zone is neither the motivating factor, nor is it something that the investor will actually interact with when engaging in an Opportunity Fund Rollover. Nomenclature is further challenged by the presence of the common term “opportunity.” The terms 1031, EB5, and IRA are not used in common parlance. “Opportunity” is commonly used. I find myself vigilant to avoid saying, “The great opportunity of Opportunity Funds.”
The guy who defines the problem and does not offer a solution? I don’t what that to be me, so here goes.
1. I propose using the term OPPORTUNITY FUND ROLLOVER to describe the transaction itself.
2. We need a term for the space or industry. This one was much harder for me to answer. I think a name should orient toward the benefit(s) delivered. The financially motivating benefits are tax deferral and avoidance. The politically motivating benefits are investment in underserved communities. Merging those together, I came up with…a goose egg. Sorry. At the end of the day, my best suggestion is that that the space or industry be identified with the phrase “OPPORTUNITY FUND INDUSTRY”.
If you have other and better ideas, please share them in the comments section.
The Need to Reduce O-Zone Pollution
I have seen the term “O-Zone Transaction” tossed around. In my opinion this term should drop from use. It suffers from a range of branding issues, including: No substantive linguistic connecting to the term to which it refers; it identifies a different and unrelated concept (ozone gas); it does not describe the benefits of the Opportunity Fund Rollover; and finally it refers to the Zone, rather than the Fund; and as explained above, the zone is a subordinate ingredient, rather than a front-facing element of the overall transaction.