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Opportunity Zones May Benefit Rising Neighborhoods First

The NoDa district in Charlotte, N.C., has become a hot neighborhood, and portions are within the city's opportunity zone.

Some investors have been leery about investing in the new opportunity zones established by 2017’s Tax Cuts and Jobs Act, partly because the government labeled these areas “economically distressed.”

But earlier this month, Chicago-based private equity real estate firm Origin Investments launched a Qualified Opportunity Zone fund and amassed $105M in commitments from 425 investors in just 17 hours.

That level of interest seems less surprising the closer one examines the issue. The federal law allows these investors to enjoy significant tax breaks, and however the zones are labeled, a number include neighborhoods quite attractive from an investment perspective.

“The first neighborhoods this is going to help are already in transition,” Origin Investments co-founder Michael Episcope said. “We typically invest in the path of growth, and some of the opportunity zones contain very viable infill neighborhoods which overlap perfectly with the places where we have already been looking.”

Origin owns and manages multifamily projects in Atlanta, Chicago, Dallas, Denver, Houston, Austin, Charlotte and Raleigh-Durham, and is developing multifamily projects in Denver, Atlanta and Austin.

While many firms decided to raise blind capital for their QOZ funds, Origin already has three opportunity zone properties under contract — one in Denver and two in Charlotte, North Carolina — which it plans to use for ground-up multifamily developments. Each city made the top 10 markets to watch list in the Urban Land Institute’s 2019 Emerging Trends in Real Estate report. The Charlotte properties are in NoDa, short for North Davidson, the city’s rising arts and entertainment district.     

In addition to watching their dollars go to work in neighborhoods with such promise, investors can use these investments to defer, reduce or even eliminate capital gains taxes, Episcope said.

“It’s not hard to understand why people would want to be investors.”

States submitted a list of low-income census tracts for federal approval, and were allowed to designate some non-low-income tracts as opportunity zones as long as their median family incomes did not exceed 125% of a contiguous low-income community. The U.S. Treasury Department approved more than 8,700 communities nationwide, including 252 in North Carolina, 11 of which were non-low-income.   

The amount raised by Origin was not unexpected, “but it was a bit of a surprise how quickly it happened,” Episcope said. The company plans to keep “educating the public” on how the new investment tool can work, and expand the fund as it identifies more eligible deals.    

“[The] tax benefit doesn’t change the fundamentals of sound real estate investing,” he said. “These projects need to pass the same scrutiny as developments in non-opportunity zone areas, and be able to produce viable, risk-adjusted returns. All opportunities should be evaluated on their strength as stand-alone investments and the ability of the manager to perform.”