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Looming Tax Break Deadline Is Spurring Last-Minute South Florida Real Estate Deals

Time is running out for investors in South Florida seeking a tax break by investing in opportunity zones, which allows for investments in lower-income areas to have tax advantages.

The rush is fueling deals as the population continues to grow due to continued migration to South Florida. Developers hope to get deferred taxable gains on projects such as new hotels, branded residential properties and more.

Dec. 31 is the deadline for individual investors seeking qualified opportunity zone investments to help defer taxable gains. Tax benefits in the program include a 10% basis step-up and related gain exclusion. If investors take advantage of the opportunity, they can defer paying capital gains on their investment until Dec. 31, 2026.

Besides the temporary deferral, other advantages include the exclusion of taxable income on new gains on investments held for 10 years or more, and a 10% increase in the investment if the qualified opportunity fund is retained for five years and a 15% increase if the investment is held for seven years.

After the December 31 deadline, the investors have until June 30, 2022, to invest the funds in businesses located in an opportunity zone to comply with the regulations.  If they’re not, there’s a small penalty regarding the interest cost.

There are about 8,700 opportunity zones in the country with 123 opportunity zones in South Florida. Miami-Dade has 67, Broward has 30, and Palm Beach County has 26.


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New York-Based Multifamily Investors Flock To South Florida

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 FloridaMiami, 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-Dade30 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.

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Miami’s Upscale Design District Getting First Opportunity Zone Project

A nine-story retail showroom is planned as the first opportunity zone project in Miami’s upscale Design District.

BH3, an Aventura-based real estate investment and development company, will develop the 86,000-square-foot building with floor-to-ceiling glass walls on Miami Avenue north of Interstate 195.

BH3 bought the properties at 3801 and 3819 N. Miami Ave. for $15 million in 2017 and has site plan approval for the building.

The 2017 federal tax overhaul law created opportunity zones to encourage investors to put their funds into new projects and businesses to breathe life into economically struggling areas. In return, investors get tax breaks.

Critics have charged many of the projects are going into less-than-struggling areas. State-designated opportunity zones have been criticized for not living up to their original intent to help low-income and blighted areas.

The Design District was blighted but experienced tremendous redevelopment in recent years led by Craig Robins, becoming home to ultra-luxury brands and plazas with public art. The district has achieved record per-square-foot sale prices previously reserved for destinations like Miami Beach’s Lincoln Road.

BH3 said it didn’t initially plan an OZ project, buying the property two years before the tax bill passed. The company established the 3801 NMA OZF LLC opportunity zone fund this year to help finance the new building. Investors can put their capital gains into the fund by year-end.

The 3801 NMA fund will allow investors to defer paying taxes on their capital gains until 2026 and get tax-free appreciation from the project if they keep their investment for 10 years.

“The fund will provide qualified investors with the full tax benefits afforded to them under the legislation,” Gregory Freedman, BH3 principal and founder, said in an emailed media release.

The new building will have 14-foot ceilings except on the ground floor, which will have a 25-foot ceiling. Targeted tenant are fashion brands and retailers that need showroom space.

Preleasing starts next month with rents from $45 to $55 triple net per square foot, which BH3 says is less than market rates for the areas. Construction is set to start next year, and completion is planned in the third quarter of 2021.


Source:  DBR

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