Do Opportunity Zone funds buy multi-family projects? How?

Question

I understand that a lot of money has recently flowed into Opportunity Zone Funds - with likely more coming through the "deadline" at the end of 2019. I'm under the impression that those funds haven't identified all their projects - and that there will be significant demand, by these funds, for qualified projects in Opportunity Zones.

I'm interested in securing such projects and selling them to Opportunity Zone Funds - is this a plausible strategy?

What sort of smaller multi-family deals would Opportunity Zone Funds want to buy?

And, how should these deals be structured? Should I, as the project "finder", do these deals in my own Opportunity Zone fund?

If this topic has already been discussed, I welcome your pointers to those threads - sorry, I didn't find them with a quick search.

(To help keep this topic focused, I suggest we not discuss the basics of Opportunity Zones and Opportunity Zone Fund investing herein - there are lots of other threads and websites about "the basics" - thanks!)

Greg Dickerson · Answer

@Cooper Marcus yes lots of capital looking for deals to invest in Ozones.

Ozone funds do not buy the assets they invest equity.

you have to meet the substantial improvement test for real estate assets to qualify in Ozone.

You are better off sponsoring deals vs trying to start a fund unless you already have a fund or raise capital regularly.

If you find a good deal in an Ozone there are lots of operators you can partner with but the deals have to make sense on their own merit.

Just because it’s in the Ozone doesn’t mean it’s worth exponentially more.

Lastly you need to make sure the Ozone you’re looking in is highly rated. Some zones are in great locations and some are not. The same rules of location apply to Ozones as any other type of real estate investment. It’s hyper local.

Payton Chung · Answer

An OZ fund (QOF) would make an equity investment into the project LLC (which holds QOZBP or is a QOZB), and would hold that stake for 10+ years. Most QOFs are looking for pretty standard PE returns, although with an emphasis on (tax-free) long-term capital gains instead of (taxable) operating distributions.

As mentioned, you need to get a securities lawyer involved to properly set up the LLC with equity classes, write OZ language into the incorporation documents, and draft a business plan and timeline for the QOF's records. Most of the additional tax compliance down the road is handled by the QOF.

I've seen some entitled projects listed for sale directly to QOFs. However, most QOFs are run by private equity shops, not by developers, and are looking for someone else (e.g., you) to do that work. Also, since most are private equity shops, they're most comfortable with institutional-scale assets—but a local fund might be interested in smaller assets.

There are a few marketplaces that have been set up to match QOZBs and QOFs. I know that the state of Maryland has set up one for in-state projects, and a couple of national platforms have popped up.

Cooper Marcus · Answer

Thanks all for your replies, good stuff!

I'm still trying to understand the specific deal structure under which one might secure a project in an OZ and then sell it to an OZ Fund, while maintaining all the benefits of OZ investing.

In the base case, I'd buy a property as an individual or single-property LLC, then get it entitled, then sell it to an OZ Fund - I believe this would work OK, though my entitlement work would likely raise the value of the building, which would then raise the minimum additional investment the OZ Fund would need to make.

Would it be better to setup a OZ Fund (let's assume this step is "free" :), have the fund buy the property and get it entitled, then... this is where I'm not clear - could a larger OZ Fund buy my smaller fund?

Here is another way of asking my original question: If I believe I can secure and entitle viable development projects in OZs, how should I best structure my acquisition and entitlement process to make these projects optimally attractive to a subsequent acquirer of shovel-ready OZ projects?

Matthew Ryan · Answer

@Cooper Marcus - Small MF would only make sense if you're able to put a lot of money into the project and increase density. In higher cost areas, you can also make heavy value add projects work; not just development though some might consider that level of rehab "development." You could act as a finder, but unless you have specific market expertise in an area (or connections), I don't know that you'll have a competitive edge. You can set-up your own fund but it's costly, and you must do it as either an open/closed-ended fund or syndication. For the syndication, you could recruit capital into a fund (or place your own) then purchase one asset with the money from the fund. That's the simplest way I can put it; obviously, a lot more goes into it that requires a securities attorney who's done an OZ Fund formation start to finish.

Payton Chung · Answer

As Basit mentioned, the substantial improvement test means that these funds are looking to build, not buy. As a developer with QOF backing, I'm looking for sites with strong fundamentals and entitlements in place, or better yet plans and permits in place. My investors don't have time for anything complicated.

And as Greg mentioned, QOFs invest in project equity -- and hold it for the long term. The projects I've heard about that have gone forward were shovel-ready, but had a financing gap between the construction loan and the owner's equity that additional (and patient) equity could fill.

I've heard multiple fund managers say that they calculate about 200-250 basis points of excess returns for an O-Zone project. The deal has to make money first.

Basit Siddiqi · Answer

@Cooper MarcusThere is a requirement for QOF's to put a good amount of work into these projects. as a result, brand new construction won't be in demand.They prolly want real estate that needs a good amount of improvements made.

Do Opportunity Zone funds buy multi-family projects? How?

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