On May 9, 2019, The Federal Housing Administration (FHA) announced a package of incentives to encourage multifamily property owners to invest in Opportunity Zones.
An Introduction to Opportunity Zones
Created by the 2017 Tax Cuts and Jobs Act, Opportunity Zones are an economic tool intended to encourage economic development and job creation in distressed communities around the country. As a result of this measure. investors receive substantial tax benefits to build in these areas:
- Investors can defer tax on any capital gains from money invested in a Qualified Opportunity Fund (QOF), an investment vehicle set up for the purpose of investing in an eligible property located in a Qualified Opportunity Zone, until the earlier of the date on which the investment is sold or December 31, 2026. Investors receive a 10% exclusion of the deferred gain if the investment is held for longer than five years and 15% if held for longer than seven years.
- If the investor holds the investment in the Opportunity Fund for ten years or more, then any additional profit received above and beyond the original capital gain will be received tax free upon sale.
FHA Incentives for Opportunity Zone Investors
The Department of Housing and Urban Development (HUD) is offering two key incentives for investors in Qualified Opportunity Zones: reduced application fees and designated senior underwriters.
Application fees have been reduced from 30 bps to 10 bps for Broadly Affordable properties (at least 90% of units are Section 8-eligible or classified as affordable under the LIHTC program) and to 20 bps for all other properties. For example, for a borrower taking out a $20 million loan, this reduction in fees would save them $40,000 for a Broadly Affordable property and $20,000 for all others.
In addition to the reduced application fees, HUD has designated specialized Senior Underwriters in each region to process applications for properties in Qualified Opportunity Zones. This measure is intended to ensure a speedy and expert review of these applications.
These incentives are available immediately for market-rate properties that have not yet submitted a pre-application and for affordable properties that have not yet applied.
The Benefits of FHA Mortgage Insurance for Opportunity Zone Investors
HUD loans provide numerous benefits to real estate investors, including:
- Long-term fixed-rate non-recourse loans up to 35-40 years
- Self-amortizing loans, with no balloon
- Low interest rates independent of location, leverage, or property type
- Up to 90% LTV for affordable housing
- No yield maintenance