Are opportunity zones the “greatest thing since sliced bread?” or a “scam?”
On Tuesday in Manhattan, I moderated a track at the Mortgage Bankers Association of New York’s Fifth Annual Real Estate & Lending Summit, titled Opportunity Zones: Clarity on the Most Talked-About Tax Incentive Program of 2019. Special thanks to my expert panelists:
- ALAN M. BLECHER, JD, Principal, Marks Paneth LLP
- BOB MICERA, Managing Principal, Micera Real Estate Investments, LLP
- BOHDY HEDGCOCK, Senior Vice President, Clarion Partners
I was looking forward to hearing what they had to say on the topic because whenever a program generates as much hype as this one is, I get suspicious. There’s no shortage of uncertainty here. It’s complicated. And the track is still being built. Federal tax guidance that should’ve been out by now isn’t. Here’s what my panelists had to say in response to some of the questions I asked in NYC:
Q: Preqin came out with a study last week that investors are wary of investing in opportunity zones. Are you seeing people jump in? Or hold back?
“Certainly there’s a sense that people are waiting on the sidelines essentially because there are some areas that aren’t crystal clear. No one wants to wade in waist high only to find out later they did something that the regulations turn out not to sanction.” ~Alan Blecher
Q: What’s unique about these types of investments that investors should be aware of?
“The deal economics are going to be important. These investments have a long timeframe. As an investor, you need to understand that the real benefit of this whole tax rule change is the tax gain that you’ll get from potential appreciation so you have to evaluate each project in terms of: ‘Is there a potential appreciation 10 years down the road? And am I willing to wait that long to receive it?’ These are not quick, short-term investments.” ~Bob Micera
Q: What should lenders be mindful of? What types of risks are at play?
“Keep in mind that this is a development opportunity for the most part. So with development, you have interest rate risk. You have development risk. You have lease-up risk. Many of these are going to be spec-built projects. They don’t come with a tenant already in tow. So when you’re looking at these deals, you have to understand this is not buying an income-producing property, and make sure you’re asking the right questions.” ~Bob Micera
“For the lending community, you’re going to do the same analysis on these projects as you’d do for any other construction loan. You’ve got to underwrite the property in the market. The tax benefit really has no bearing on that. But ultimately, you also have to ask: ‘Who are you trusting to get this job completed? And who’s going to pay you back if things don’t go right?” ~Bohdy Hedgcock
Q: Real Capital Analytics is reporting that the sale of development sites has already spiked in opportunity zones, demonstrating that the program is having real market impacts so far. What’s your prediction on pace of transactions coming out of this? Will there be a feeding frenzy?
“A bunch of money will get raised and invested, but maybe not as much as some people think. You’re going to see a real impact especially in those zones that are close to dynamic, growing in-fill areas of bigger markets. LA. Seattle. Salt Lake City. Portland. Dallas. They all have opportunity zones that are right by the central cities, and these are cities that are seeing investment appetite already so they will all benefit. I don’t think investment will reach to all 8,700 zones. There will be real winners and losers here.” ~Bohdy Hedgcock
“One thing that has not been discussed is that the intent of this law was not for the real estate community. It was actually to spur investment in businesses in under-invested communities so investors also need to consider what local agencies want. A high-end multifamily development might not be desirable for a particular zone. It has to make sense for the community.” ~Bob Micera
“This program will attract capital to areas that wouldn’t have attracted it in the past so clarification of rules will be a big development.” ~Alan Blecher
Q: What’s the one piece of advice you’d give for due diligence on these projects?
“I come at it from an investor’s perspective and regardless of whether it’s an opportunity zone project or not, I look at it in terms of: ‘Is this a good deal with future potential appreciation?’…just like I would with any other deal. Do the numbers make sense? And then ‘Who’s the fund sponsor? What’s their reputation and experience?’ Also, you’re going to have to plan for managing this property over a long horizon because it’s a long-term investment focus.” ~Bob Micera
“Make sure the numbers work. You don’t get any the tax benefits if your investment doesn’t make any money.” ~Bohdy Hedgcock
Noting that he’s heard people refer to this new program as everything from ‘the best thing since sliced bread’ to ‘a scam,’ Blecher had the best quote of the day:
“The tax benefits would make a good deal great, but they won’t make a bad deal good.” ~Al Blecher