What is a Qualified Opportunity Zone?
It is an economically distressed community where new investments, under certain conditions, may be eligible for preferential tax treatment. The Opportunity Zone program was established pursuant to the 2017 Tax Cuts and Jobs Act to encourage long term investment in these economically distressed communities. Nationwide, there are approximately 8,700 Opportunity Zones that have been certified by the U.S. Treasury Department.
To have an investment eligible to receive these tax benefits, an investor must reinvest taxable gain from a sale or exchange into a qualified opportunity fund within 180 days of realizing the taxable gain. Potential tax benefits include (1) deferral of capital gains until December 31, 2026 and (2) if the investment is held for at least 10 years, elimination of tax on any appreciation of the investment upon its sale.
Why did UMH Properties, Inc. (UMH) decide to create the UMH OZ Fund to invest in manufactured housing communities located within Opportunity Zones?
- Minimizes the tax effect of capital gains to our shareholders. UMH had realized considerable capital gains through its securities portfolio. The UMH capital gains invested in the UMH OZ Fund are tax-deferred until December 31, 2026.
- Provides UMH access to additional sources of capital that are long term and patient. In order to receive the full tax benefits, investors would need to hold their investment for 10 years.
- Enables UMH to have a larger acquisition pipeline by having a right of first offer to purchase the communities held in the UMH OZ Fund when the UMH OZ Fund sells them after the 10 year holding period. There are a limited number of capital-intensive deals that UMH can invest in at any one time. By partnering with long term investors who are seeking tax efficient strategies, UMH has the ability to acquire more communities.
- Reduces impact of development deals on short term earnings. Acquisitions that might otherwise have a negative impact on UMH’s earnings in the short term due to upfront development or redevelopment expenditures will have a less significant impact on UMH earnings when the acquisition is made by the UMH OZ Fund because the investment will be made with tax deferred dollars and UMH’s earnings will benefit from the investors’ portion of asset management fees and property management fees that are not eliminated in consolidation.
- Improves government relations. UMH intends to utilize programs the government has created to further the government’s goals of providing affordable housing and investing in areas that have been underappreciated. UMH is creating and maintaining a relationship with federal, state and local governments by participating in these programs.
Why is manufactured housing a good investment in an Opportunity Zone?
Many of these economically distressed communities have a great need for workforce housing. Workforce housing will incentivize businesses to invest in these areas, which will bring local income, which will also attract retail to the area, thereby improving the value of the real estate located within and around the Opportunity Zone on a long term basis. UMH likely will not see the same barriers to entry in an Opportunity Zone that manufactured housing is often confronted with in other areas.