Opportunity Zones: A Compelling Way To Access The Renewable Energy Sector
The Tax Cuts and Jobs Act allows investors in Opportunity Zones—businesses or real estate—to defer taxes on realized capital gains until December 31, 2026 if those gains are rolled into an Opportunity Zone investment within 180 days of realization.
If investors maintain their Opportunity Zone investment for five years, their basis in the investment will be bumped up by 10%, and if they hold it seven years, the basis will increase by an additional 5%. What this means is that if an investor keeps their investment in an Opportunity Zone fund for 5 or 7 years they will be paying capital gains tax on only 90% or 85% of the original gain, respectively. If they hold the investment in the Opportunity Zone fund for a decade or more, they won’t incur any additional capital gains taxes on their gains in the Opportunity Zone investment.
If they’re well-constructed and implemented, Opportunity Zone funds focused on renewable energy enterprises are potentially less risky than real estate funds, and may offer similar annual returns.
One way such funds mitigate risk is by investing in renewable energy projects after they have gotten past their development phase—that is, after they have cleared hurdles such as site selection, land acquisition and permitting and other administrative or legal challenges.
Such renewable energy projects tend to be constructed in weeks or months, so there is generally less delay between groundbreaking and the start of cash flows. And to ensure long-term, low-risk revenue, developers typically ink 12 to 25-year contracts to supply power to investment-grade utilities and municipalities, ensuring that the solar or wind farm has a long-term customer in place from the outset.
Real estate investments in Opportunity Zones, in contrast, are typically developed from scratch—a process that can take years—and frequently won’t attract tenants until they are nearing completion. When tenants do sign on, their contracts are generally shorter than 12 years.
Renewables-Focused Funds: A Better Way To Capture The Potential Of Opportunity Zones
While most Opportunity Zone funds are currently focused on real estate, renewable energy-focused funds may offer a better way for investors to capitalize on this legislation. Not only do such funds potentially offer solid returns with a lower risk profile—they may also provide a better way to help the communities that Opportunity Zones were initially intended to strengthen, while also allowing investors to utilize their savings to reduce carbon emissions and drive positive impacts for our environment.
David Sher is co-CEO and director of business development for Greenbacker Capital, an investment firm focused on the sustainable infrastructure sector.