Creating Opportunities: Avanath Capital Launches Opportunity Fund To Uplift Minority Neighborhoods
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In Sacramento, Natomas Park Apartments offers residents résumé-building classes, employment skills, homework assistance, leadership development and nutritional education for kids and teens.
The amenities in these affordable housing developments and others are services Avanath requires under the firm's Responsible Property Investment policy.
For nearly 40 years, Avanath CEO and founder Daryl Carter has known what it takes to provide for and uplift residents in low-income and working-class neighborhoods.
Now Carter's company wants to foster more of these types of amenities and projects through the opportunity zone program to demonstrate a holistic approach to investing in these neighborhoods, many of which have heavily minority populations.
"This [opportunity zone program] enhances our ability to do more in those communities," Carter said.
To further advance the mission of providing affordable and workforce housing and solid cash flow for investors, a JV of Avanath Capital and Opportunity Assets Group is launching a qualified opportunity zone fund with a target of raising $300M.
The money will go toward the improvements and renovations of three existing Avanath multifamily properties — the Woodside Apartments in Ontario, California; Arbors of Cary in Cary, North Carolina; Ravenna Apartments in Orlando; and the development of North End Landings apartment community in Detroit.
"We have a long history of investing in these communities and we have a process that we believe works in those communities that includes being inclusive with community leaders, residents and the like," Carter said. "The diversity of our firm enables us to execute better in diverse communities. We culturally understand the residents in many of the communities we invest in.
"We think that gives us a leg up," he said.
The opportunity zone program gives investors a hefty tax incentive for investing through a qualified opportunity fund into a designated opportunity zone, which are usually low-income or distressed neighborhoods.
Investors can either roll over capital gains from a stock or asset or invest traditionally into a designated opportunity zone in exchange for the deferment or elimination of capital gains upon sale of the property, depending on the length of the investment.
Nationwide, there are more than 8,700 designated opportunity zones. California has the most designated areas in the nation with 879 tracts.
Many in the commercial real estate industry have jumped on board with the federal program. Several companies have created opportunity funds raising tens of millions, hundreds of millions to billions of dollars to invest in these designated areas.
Property values in OZs have jumped by as much as 20%, according to reports.
Carter said he didn’t pay much attention to the opportunity zone program when it passed in 2017. He said he didn't fully understand the benefits and incentives of the program.
A meeting with U.S. Sen. Tim Scott, who led the bipartisan effort to pass the legislation in 2017, changed Carter's mind.
Scott, who represents South Carolina, brought Carter and his team out to Washington, D.C., to learn more about the opportunity zone legislation and encouraged him to participate in the program.
Carter recalls Scott telling him that this was a way to uplift low-income neighborhoods.
Carter's response? Who better than Avanath to invest in these designated zones.
"We've been investing in underserved markets for a long time, so it's not surprising when we looked at our portfolio that we already have 15-plus properties in designated opportunity zones," Carter said.
Avanath has $1.7B in assets under management comprising 79 properties across 12 states.
As the commercial real estate world continues to look into the nuances of the regulations and anticipates the next round of regulations slated to be released by the end of April, Carter said there is a lot at stake beyond the tax incentives the program could provide investors.
Carter said there is such a mad rush to raise money and deploy capital in these zones that not many are clearly thinking of specific neighborhoods' wants or needs.
For many of these investors, this could be the first time they are investing in communities that are predominately low-income or have heavily minority populations, he said.
"We don't run into the Scaramuccis in our world," said Carter, referring to President Donald Trump's short-lived communications director Anthony Scaramucci, whose SkyBridge Capital hedge fund aims to raise $3B for investment in opportunity zones.
"Not to disparage him or others, the fact is we have been operating in this [minority and low-income neighborhood] world and we have figured out how to be profitable before opportunity zones," Carter said.
Carter worries a bad investment by an institutional company in an opportunity zone area with a minority population could lead other companies to shy away from investing in similar neighborhoods in the future.
"My only worry is people who have not made investments in those communities that potentially get it wrong and then you have institutions say, 'Oh, we've tried this and we lost money because of this,'" he said.
"I worry about the amount of rush into this space and hope the transactions are well-conceived so it doesn't put a black eye on the [minority or low-income neighborhood] space," he said. "That's my biggest worry. I'm hoping that doesn't happen."
Carter said he started Avanath in 2007 to take a different approach than others in the affordable housing and Section 8 realm. Section 8 is a government program that helps lower-income individuals afford housing.
"It’s always been done a bit poorly," he said. "The expectations have been a bit low."
Carter wanted to bring the Class-A level of service into these B, C and D properties. He advised his team to provide strong customer service and technology and deploy maintenance to quickly resolve issues.
Most importantly, he said, team members take a holistic view of how to best serve their residents. For example, many of Avanath's residents are working class and can't afford to have someone watch their children after school. In some Avanath properties, there are after-school programs from 3 p.m. to 7 p.m.
When Avanath officials find a resident is paying rent in cash or by money order, Carter said it probably means that resident doesn't have a standard checking account.
"If you can convert them to have a conventional bank account, you've given them an 8% to 10% raise because they are not paying the check-cashing fees," he said.
Carter said it is important for investors and developers in opportunity zones to look beyond the brick-and-mortar building and look at what the residents need to succeed — the amenities and services that might otherwise get overlooked.
"I hope this [opportunity zone program] will have an impact on the places that need new investments," he said.