What are your opinions on opportunity zone investment?

Question

Just wanted to know what the current zeitgeist was on opportunity zone investments on the commercial side. I am looking to purchase opportunity zone investments less than 6 mil in the southeast United States, is this even possible?

Ellie Perlman · Answer

I think OppZones create a huge buzz, but many investors don't understand the risk involved with it. As a former real estate lawyer, with a lot of experience in regulation implementation and working with regulators, I will advise you to examine deals positioned in an OppZone very carefully. I wrote an article about it on Forbes, and basically said that something to consider is the fact that we’re in the midst of a very long cycle, and we’re probably approaching the tail end of a great expansion. If you’re planning to invest in an Opportunity Zone, be sure you question whether your investment will perform in light of a worst-case scenario. Bear in mind that many Opportunity Zone areas are in low-income communities, where there is economic distress.

One way to analyze investment potential in a worst-case scenario is to convert different possibilities into hard numbers. As an example, if the property is located in an Opportunity Zone and the potential returns look great with a 5% vacancy rate, run the numbers and see how it will perform with a 10% vacancy rate, or if rents will not increase for a few years. Is the opportunity still profitable, do you break even or lose money? You need to have profit to enjoy special tax incentives, like those that the Opportunity Zone program offers. If the opportunity is not profitable, then you are seeing losses and the tax breaks from the Opportunity Zone program are not as great an incentive or as helpful at that point.

Smart investors realize that, as with other areas that undergo refurbishing and renovation, the properties surrounding the Qualified Opportunity Zones may present attractive investment opportunities as well. Hence, don’t exclusively focus on Opportunity Zone areas. And when looking at properties within an Opportunity Zone, be sure to look at the median household income of the area to make sure that the tenant base is solid and there is rent and job growth in the market.

Location is still key when it comes to real estate investing. An investment in a bad neighborhood will not make it a great investment just because it is eligible for Opportunity Zone tax incentives. A colleague recently reminded me that another risk facing investors is finding a fund manager who understands how the program works. Due diligence is needed, and vetting the qualifications of the fund manager is critical, especially since this program is relatively new.

Joel Owens · Answer

I stay away from over complex stuff where the whole Universe has to align properly to get the expected benefit.

I like more simple and sweeter lower hanging fruit.

Chris Martin · Answer

?

South Park? Downtown Raleigh? I don't know if the developers there are getting O-Zone benefits, but that has been about as hot a development spot in Raleigh for the past few years. Am I missing something?

We (my partners and I) looked into Opportunity Zones in NC about a year ago. There were a lot of unknowns then, maybe that's still the case. Every county in NC has at least one O-Zone, many have several. In the Raleigh area, our eyes were on South Park and the swath from the southern beltline to 10-10 Rd, between Lake Wheeler Rd and 401/Old Stage Rd. I can't say why this area was selected, but politics may be at play?

The difficulty I had, other than being unable to thoroughly answer potential partner questions, involved incentive vs. risk. If your potential partners have ITC assets, deferred capital gains may not be that enticing. Add in the current era of more advantaged capital gains rate (15% generally in our case), and the risk/reward became a harder sell.

NC Department of Commerce: O-Zone site

Jeff Kehl · Answer

I just invested in an opportunity zone fund and I think they are pretty great and have good advantages over 1031 especially for me.  I am selling quite a few smaller properties with different closing schedules and gain amounts. It's nearly impossible for me to 1031 them into something I'm interested in buying.

Instead I can just put them into opportunity zones as and when the closings happen. None of this struggling to identify properties in 30 days and then being forced into one of them if they're a bad investment.

Also, they're a great back-up if you try to 1031 and can't find a decent deal.

The final thing I would say is that I hear people say 'these are terrible areas to invest' as someone above did. When I hear that I know that person has not spent much time looking at the maps.

The best, most expensive area in my town is in one. From what I hear there are great, already gentrifying areas in many major cities such as Phoenix, Portland, and umm Raleigh that this is true. I heard, but did not verify that the area in queens that Amazon was going to go was a QOZ.

Trevor Ewen · Answer

@Rafael Weiss

@Ellie Perlman has got the right idea. You really need to protect your downside in these situations. You need good reserves and a long-term theory of the case. "It's a good deal" won't cut it. Many people have been snowed in places like Detroit with that kind of logic.

There are some interesting shenanigans going on to push the definition of opportunity zones. I do think the real story is still the fact that it's hard to make the management and growth strategy work.

I would caution against doing it at a distance. Have a theory of why and how you are the right person to take advantage of it. The market is efficient enough once these things are known. But I do think there is a tendency to run straight to the blue light special when there are plenty of decent sales all over the store.

David Miller · Answer

@Ellie Perlman excellent reply! Most projects in Op zones will be forced to work as you said they are in areas that are impoverished and lack stable and sufficient household incomes. However, I do have a project in Delaware in an opportunity zone which has all the necessary factors for success.  If you are interested in learning more about it contact me at your convenience.

Matt Burns · Answer

We had a conference call with Costar a couple weeks ago. They mentioned opportunity zones several times and now have a feature to search for them on their maps. We're in Raleigh and I can tell you that the zones here are not in favorable submarkets (obviously). The fundamentals just aren't there. If you do find a deal worth pursuing, I'd consult with a CPA or compliance agent and ensure they'd perform without the incentives in case they were to go away.

Charles Kao · Answer

@Rafael Weiss Alot of buzz but so many things to comply with that doesn't make alot

of sense unless you are doing some

serious developing.

Ronald Rohde · Answer

Sure its possible. What is the strategy?

What are your opinions on opportunity zone investment?

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