Apartment Syndication - "opportunity zone" investments?

[Emily Cox]

Hi there. I am pretty new to Bigger Pockets and to real estate investment (at this point, have mostly invested in condos in Kansas City and Arlington, VA). Our advisors at Keystone CPA have encouraged us to consider passive investments in opportunity zones, but I'm really not sure where to begin. Early next year, we will be in a position to cash out some of our holdings and are looking to expand our horizons in apartment syndication investment opportunities.

[Brian Burke]

Welcome to BP, @Emily Cox.  Opportunity zone funds offer some really nice tax benefits.  But don't let the tax tail wag the investment dog.  Focus first on making quality investments, and on tax benefits second.

I say this for a few reasons.  First, the tax benefit is offered to encourage investments in areas otherwise less attractive for investment dollars.  So this could mean, in some instances, that the investment might not perform as well due to the location.  Be sure to thoroughly research.

Second, everybody and their brother is trying to jump on the opportunity zone bandwagon.  Probably because investors hear the words "tax savings" and throw dollar bills on the stage without regard to what band is playing.  This could mean that sponsors of lesser quality enter the fray hoping to get investors that aren't focused on doing their due diligence.  And lesser-quality deals enter the marketplace for the same reasons.

And third, if you are looking at apartment syndication opportunities, opportunity zone funds aren't likely to be a fit for you.  The devil is in the details, and the big detail about opportunity zone funds is they are required to spend an equivalent amount of money on capital improvements as they do on the acquisition of the buildings.  

So this third point means that the typical multifamily syndication where a sponsor purchases an apartment building for $75,000 per unit and intends to spend $7,500 per unit on improvements does not qualify for the special tax treatment even if it is in an opportunity zone.  The sponsor would have to spend $75,000 on improvements and that will just never happen.

Because of that, opportunity zone funds will be forced to focus on development and redevelopment projects, not on value-add multifamily.  And of course, development and redevelopment carry higher risk.  So your tax upside does not come to you without potential down side.  Choose carefully and consider all options, opportunity zone or not.