Ranking QOZs: How State And Local Officials Can Make Their Opportunity Zones More Attractive To Developers
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It goes without saying that not all opportunity zones are created equal or present the same investment opportunities.
As the Qualified Opportunity Zone tax program gains national attention from investors looking to deploy billions in capital gains into those areas, sources tell Bisnow the designated areas stand to benefit greatly from opportunity zone-friendly policies enacted at the federal, state and municipal level to further lure investment where it is most needed.
With more than $6 trillion in unrealized capital gains eligible to be deployed in opportunity zones, interested investors who invest those capital gains into an Opportunity Zone fund within 180 days can defer taxes on those gains through 2026. Investors also are eligible to receive tax forgiveness on their opportunity zone investment capital gains if held for at least a decade.
“All OZs are not equal. There are some that are already well underway to being revitalized, and others where it is hard to believe 10 years is enough time for a turnaround,” RegentAtlantic Managing Partner and Chief Investment Officer Chris Cordaro said.
RegentAtlantic is a financial planner and wealth manager in the New York and New Jersey areas.
“Those areas that are well underway may be the biggest risk because that's where most of the money will flow and you risk supply outpacing demand — aka a bubble,” he said.
Adopted through the passing of the Tax Cuts and Jobs Act in 2017, the Opportunity Zone program was created to incentivize private investment in distressed and otherwise blighted communities across the U.S. in exchange for a hefty tax break, but a lack of clear guidelines has put much of the due diligence in the hands of investors.
Recent studies reveal only a small percentage of the 8,700 designated opportunity zones are well-positioned to produce the returns needed to justify the investment, even with the tax break.
Max Garbus, vice president of CREModels, a real estate analysis and due diligence firm that works with institutional investors and private owners to make sense of complex investment and finance models, said the program doesn't seem to be spurring deals that would not have otherwise taken place without the tax incentive.
"It’s making a good deal better, but it doesn’t make a bad deal look good,” he said.
A recent study found that only 2% of opportunity zones are well-situated to deliver what is called a “triple bottom line” — meaning investment in those designated areas will be profitable for investors and simultaneously have a positive impact on the community and the environment.
The study, called the National Opportunity Zones Ranking Report, was conducted by LOCUS of Smart Growth America, a nonprofit that works with developers, city officials and chambers of commerce to build communities across the U.S. that are socially equitable, sustainable and economically prosperous.
Opportunity zones in Portland, Oregon, San Francisco, Seattle, Philadelphia, Baltimore and New Jersey/New York topped the rankings list for their smart growth potential. These areas scored the highest marks for housing diversity, walkability, job density and proximity to central business districts. Markets like Charlotte, San Antonio, Orlando and Dallas received the lowest scores for smart growth investment potential.
The majority of opportunity zones that received a low ranking in the study are within rural and suburban America.
“One of the striking realizations that came out of this report is that 98% of OZs did not score well. That really speaks to the fact that many of our communities do not have the basic infrastructure — I like to call it the ‘basic hardware’ — [which is] the idea of having job density, housing diversity and walkability,” Smart Growth Americas Vice President of Land Use and Development Christopher Coes told Bisnow. Coes is also director of national real estate developer and investor network LOCUS.
"The fact that they don’t have the right hardware makes it more challenging for software like the OZ tax incentive to actually work in those places. We need to be thinking about how do we retrofit the hardware of those communities so that they can be part of the conversation.”
Similar to the lessons state and local policymakers learned in the competition for Amazon HQ2, there is work that needs to be done from a policy standpoint to attract opportunity zone investment. According to the report, those efforts could include the following:
- Inspiring investor confidence by establishing a one-stop-shop opportunity zones staff to coordinate efforts from interested opportunity zone investors.
- Developing opportunity zone investment strategies that make it clear where investment is most needed and where opportunities are available, such as housing projects and transit projects in the pipeline.
- Updating zoning codes for a mix of uses to create pedestrian-friendly, walkable neighborhoods that attract talent and businesses.
- Taking inventory of ripe redevelopment opportunities on behalf of investors.
“You’re going to have state and local governments where they may have a lot of their own plans and visions when they submitted these zones, but the developers at the end of the day are still going to come in and come up with what they think is going to flourish the most inside of those zones," Garbus said.
“It’ll be interesting to see how state and local governments are working with these developers to make sure they’re crafting zones according to the benefits that perhaps they were expecting at the onset."
Federal regulators can also help accelerate opportunity zone investment in blighted communities. President Donald Trump recently signed an executive order to funnel more federal resources into the Opportunity Zones program, to which the industry's response has been overwhelmingly positive.
Coes said the administration's plan to allocate more funding toward improving aging infrastructure across the nation also is a potential win for the program.
“One of the things we do know is that right now, on average, the federal government spends 80 cents on the dollar promoting road development. While some communities do need to repair their roads, one thing we’re finding is we need more money to create pedestrian-friendly attractive places.
“To do that, you need to retrofit our auto-centric communities — where you have to drive from point A to point B and C — to give them more affordable transportation options, where there’s walking, biking and transit,” Coes said. “Places like Indianapolis and Nashville, which have actually taken that step to invest in their own transit and infrastructure, are seeing enormous economic gains from doing so."
At present, there remain too many unanswered questions and a lack of guidance needed to really inform how and where investors will deploy capital into opportunity zones.
“Developers are going to be opportunistic; they’re business people — it stands to reason they would be seeking out the best investment opportunities,” CREModels Managing Director Mike Harris said. “Because of that the best ones are probably going to go first."