The site you're about to buy is on the proposed Opportunity Zone map. Now what?

A developer called me last week after finding his site on Texas’s proposed Opportunity Zone map. He has spent months on a redevelopment in Dallas, a building that has sat empty for years. He’s in the middle of his equity raise and he closes next year. He wanted to know what this changes.

He won’t be the last. Last go-round the City of Dallas had 15 OZ census tracts. This time Texas nominated 44 in the city and 60 in Dallas County. There will be a lot of developers waking up over the next few months, realizing they’re in one and wondering what that means.

If you have a site under contract, or one you’ve been eyeing for years, and you’ll close on it in 2027, this is for you. Here’s what I told him.

One caution before any of it. These tracts are nominated, not designated. Treasury certifies the map, probably by late November, and it can strike tracts. The new map and the new five-year deferral start January 1, 2027.

What does it do for you?

It doesn’t change your deal. It changes who can invest in it and what they keep after tax.

Investors with capital gains who come in through an OZ fund get a better after-tax return on the same real estate.

It also opens a pool of capital that wasn’t looking at you before. OZ funds can only invest in zones.

Do you want a 10-year hold?

Being in a zone doesn’t obligate you to anything. The big question is whether you want a 10-year hold. There’s some additional complexity with attorneys and CPAs, but it’s not a ton. The 10-year hold is much more important.

Does the deal qualify?

For a development or redevelopment deal there are three main buckets:

• Ground-up development on vacant land.
• A building that has been vacant. That means less than 20% of the usable space in use for three straight years, or for at least a year if that started before the tract was designated. Either way it has to stay that way until you buy it.
• What’s called substantial improvement.

Substantial improvement works like this. If you’re buying something for $10 million and the land is worth $4 million and the building is worth $6 million, you have to put more than $6 million into the building during a 30-month period. You end up with a cost basis over $16 million. The land doesn’t count toward the hurdle. In a rural tract the hurdle is half.

The two most common ways to split land and building are an appraisal, or carrying the tax-roll ratio over to your purchase price. For depreciation you want the land low and the improvements high. That also raises the improvement hurdle, and whichever split you use has to be supportable.

One more thing on the purchase. The OZ entity generally has to buy the property from an unrelated seller. If you already own the site, that’s a different conversation and it starts with an OZ attorney.

His building has been empty long enough to skip the improvement hurdle, and he doesn’t close until next year. Middle of the fairway.

How do the investors fit together?

Here’s how we set it up. Think of it as two tiers. The first tier is the entity that owns the building. That’s the Qualified Opportunity Zone Business. It sounds silly, but that’s just what it’s called. It’s the buyer at your land closing. If your contract is in another name, it gets assigned to this entity before you close, so check that your contract allows it.

Above it, investors come in two ways. Regular Investor LLC is for people who don’t have capital gains. They just love your project and the returns. Qualified Opportunity Fund LLC is for investors who have had a capital gain and want the tax benefits. It’s just another LLC, taxed as a partnership, that certifies itself as a fund on its tax return and follows the fund rules.

The money moves in that order. Investors with gains fund the OZ fund, the fund puts it into the property entity, and the property entity closes on the land. The construction cash is covered for up to 31 months, as long as there’s a written plan and schedule for spending it and you follow it.

You don’t have to be the only fund in your deal. Our deals these days usually have eight or more OZ funds in them, and the biggest has 19. Say a guy sold his business last year and set up his own family OZ fund. He’s an investor. A big national OZ fund is an investor. There’s brain damage involved, obviously.

Control works like any other real estate deal. The LLC that owns the real estate has a managing member, and the decision rights sit there. The only deals where we don’t keep 100% of them are a couple with a single investor. If you have 15 funds in one deal, it’s much easier to herd cats when you keep the decision rights.

Sell the deal first

He was raising from a small group, people he knows who care about the neighborhood. Most had never heard of Opportunity Zones, or had heard of them in a bad light.

What we’ve found is that folks who can write $500K, $1 million, $2 million or bigger checks typically have capital gains every year. So go back to them and ask, “Would it move the needle for you if we offered this additional tax benefit?”

You’re selling yourselves and the deal first. If they like that, you say, “By the way, we’re going to have an OZ fund in this deal. If you’ve had a capital gain, you can invest through it and we’ll give you some additional tax benefit.”

None of it saves a bad deal and suddenly makes it good.

What do investors get?

1. If you owe capital gains tax today, you don’t have to pay it for five years.
2. You get a discount when you do pay it. After five years, 10% of the gain drops off and you pay tax on the other 90%.
3. Much bigger: if we hold this for 10 years, you’re never going to pay tax on the appreciation of the asset, and you’re never going to pay recapture on the depreciation losses we give you along the way.

The 10-year hold is the main thing they give up. We always tell investors that once a deal is stabilized we’re going to try to do a cash-out refinance in year three, four or five. Just like any other real estate deal, those proceeds generally come out tax-free. And because depreciation never gets recaptured, we’re very aggressive with cost seg and bonus depreciation.

Don’t assume a wealthy investor knows this stuff. Not long ago I got a call from a founder who had sold his company for nine figures. He didn’t know what Opportunity Zones were. He spent the last decade building that company. He has to be led to water.

When does the investor have to fund?

Investors have 180 days from the gain to put the money into an OZ fund. As with all things IRS, that’s not as simple as it sounds. If somebody sells stock in their personal name, it’s 180 days from the sale. An investor who sells this fall can still be inside the window when the new rules open in January. If the gain comes through on a K-1 from a partnership or an S corp, they can start the clock on the original due date of that entity’s tax return, which for most is March 15. So if the partnership sold its business yesterday, the partners have until September of next year.

Who else might invest?

I think next year there will be more OZ funds looking for projects than ever, small and large. None of the ones I talk to has a significant amount raised yet, because investors can’t put money in under the new rules until January. Some are taking commitments. I haven’t heard of anybody having overwhelming success raising money yet.

One group plans to raise $500 to $750 million in the first half of next year. Another thinks it will raise $1.5 billion. Well over a dozen groups plan to raise nine figures in the first half.

Some of them are lining up deals softly now. One OZ fund we have history with is using one of our deals as an example of a possible 2027 investment, to build excitement for its OZ 2.0 raise.

If you don’t need the money for nine months, it’s a good time to start talking. Tell them, “Once you guys are loaded for bear, we’re going to be ready for some of that.” I think many of them will be flush with cash in six to nine months.

Your lawyer, your CPA and what can go wrong

He has used the same small-firm attorney and CPA for years. Neither has done an OZ deal. I always tell people to start by asking them, “Who do you know? Who do you trust that really knows this stuff?” 90% of what you’re doing here is the same blocking and tackling you’ve always done. You’re just adding a wrinkle. You don’t want a whole different team because of it. You want an expert they trust to consult on this one thing.

The equity works like any other deal. The risk is on the compliance side. You can only hold certain amounts of cash, you have to meet certain deadlines, and you have to file your tax returns a certain way. Penalties can range from small fees to total loss of the tax benefits. Honestly it’s not that hard, but there is a checklist of things you’ve got to do, and somebody has to own it.

Where we sit

Savoy has put about $95 million of Opportunity Zone equity into 25 Texas projects since 2020, and we’ll invest under the new map. We have a stake in the program working.

The Texas nomination list is on the Governor’s Economic Development page. Go look.

Talk to your CPA. This is a tax article from a guy who builds apartments.