The Real Opportunity Zone Gold Rush Is Happening At Events, In Consultants’ Offices
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For the past couple of years, opportunity zones have been a rolling thundercloud of interest, excitement and debate hovering over the real estate industry. But the lightning it promised has yet to strike.
Since the opportunity zone program was introduced, the flurry of investment activity that its architects foretold hasn’t materialized. In its place, an ecosystem of events, media, marketing and paid consultation has arisen and flourished — an industry based on talking about opportunity zones rather than investing in them.
Opportunity zones, which began as a little-noticed section in the 2017 tax reform law, have captured the attention of commercial real estate over the last two years, sparking a level of buzz greater than anything industry veterans can remember. Through the program, anyone with capital gains can invest them in a property or business within a disadvantaged area and get serious tax benefits for doing so.
Proponents of the opportunity zone legislation, co-authored by Sens. Tim Scott (R-S.C.) and Cory Booker (D-N.J.), claim it will create an avenue to pump billions of dollars into low-income communities for investors who would never have done so otherwise. But making the program available and making it accessible have proven to be two very different things.
Early data from CoStar shows funds are only bringing in about 10% of their target capital, and Reonomy data shows the level of investment into opportunity zone communities didn't significantly increase during the program’s first year. Many opportunity zone specialists expect a spike in investment once the federal regulations are finalized, but some think the impact may be overhyped.
“To think the program is a magic pill to create consistent job growth, rent growth and property appreciation across all 8,700 zones is a fallacy,” OPZ Bernstein principal Craig Bernstein said.
Opportunity zones will likely prove to be a windfall for law and accounting firms advising investors, but advocates of the program say it was not intended to require hiring expensive advisers, and that dynamic could prevent smaller community organizations from benefiting.
“A lot of community organizations and nonprofit groups may not have the operating budgets to support professional services that would help them structure funds,” said Rachel Reilly, the director of impact strategy at D.C. think tank Economic Innovation Group. “There’s a gap in knowledge there because of the pricing of services.”
Opportunity Zones: The Two Words On Everyone’s Lips
The interest around the program at first was limited to a niche group of tax attorneys and impact investing specialists, but it began to heat up in December when President Donald Trump promoted the program from the Oval Office and signed an executive order to push more federal resources into opportunity zones.
The administration has continued to tout the program, with Secretary of Housing and Urban Development Ben Carson speaking at multiple events, including Bisnow’s Opportunity Zones Summit in Washington, D.C., in June, and holding press conferences as recently as last week.
The program gained even more legitimacy in the business world in January, when industry leaders like Starwood Capital Group and CIM Group announced $500M and $5B opportunity zone funds, respectively. Hundreds of additional funds have been rolled out from players big and small.
The buzz around the program has reverberated through the news media, with trade publications and national newspapers alike closely covering the program. The term “opportunity zones” turns up over 180,000 hits on Google News, including features from The New York Times and The Wall Street Journal, and near-daily coverage from trade publications like GlobeSt, The Real Deal and Bisnow. Google searches for the term “opportunity zones” spiked during the December week of Trump’s event and have remained elevated since.
“It started out as quiet,” said Brad Molotsky, a partner at law firm Duane Morris LLP. “Now you can’t pick up a trade rag without an opportunity zone article every day.”
Thousands of people have attended opportunity zone conferences throughout the country, and dozens, if not hundreds, of professional service firms have set up practice groups to specialize in the program in hopes of capitalizing on the phenomenon. Crowdfunding real estate platforms like Cadre and Fundrise have dedicated funds to reach smaller investors who want to invest their own capital gains.
While the ultimate amount of money that will flow into opportunity zone communities remains to be seen, there can be no doubt plenty of money is already being spent on learning about the program.
‘A Tremendous Number Of Events’
The buzz around opportunity zones has been a persistent drumbeat, with an explosion of corporate events focusing on the program. These conferences, many of them paid-ticket events, draw large crowds and have had a similar cast of experts on stage.
Molotsky, who leads Duane Morris’ opportunity zones practice, said he has spoken on dozens over the last year.
More than 50 opportunity zone events have been held thus far in 2019 — 15 of them hosted by Bisnow — and at least 10 more are scheduled for the remainder of the year, according to a review of public event pages.
“It’s pretty tough to decide which events to go to when there are so many of them,” said Reonomy’s Sam Viskovich, who said he has attended one or two events but considered going to at least 10 others.
Event hosts have ranged from industry associations and local economic development agencies to law firms and think tanks like the Aspen Institute. Opportunity zones were a central topic in May at the SALT Conference Las Vegas, a three-day event organized by Anthony Scaramucci’s hedge fund, SkyBridge Capital — which has launched its own qualified opportunity fund with a target of $3B.
One group even formed with the sole purpose of hosting conferences around the program, branding itself as Opportunity Zone Expo and organizing events in Los Angeles, Las Vegas, Miami, Houston, Chicago and New York. The group, which also has a magazine and a podcast, is charging as much as $799 — plus a $50 fee — for its next full-day event in New York on Aug. 9.
Menkiti Group CEO Bo Menkiti, a D.C.-based developer who recently launched a $100M opportunity zone fund, expressed concern that many of the people talking on panels about the program may be experts in law or accounting, but have not invested in low-income neighborhoods.
“All I could think every time I walked out of [an opportunity zone event] was, ‘There’s this new program focused on places we’ve been working for decades,’” Menkiti told Bisnow during a June interview in his Northeast D.C. office. “I walk away every time saying, ‘We just saw another lawyer and another accountant talk about urban communities, and they’re experts in their fields, but they’re not experts in effective investment in urban communities.’”
Bernstein, who says he has spoken at more than 25 opportunity zone events, said he has seen the buzz around the program begin to recede.
“There was definitely a great deal of sizzle in the beginning. Some of that has waned,” Bernstein said. “People may be starting to get OZ’d out. There has been a tremendous number of events over the past year. We have seen attendance at these events peter out.”
Molotsky said he still sees new people attending opportunity zone events for the first time, and he has a hard time deciding whether to cater his comments to them or to the more knowledgeable crowd.
“When I go to speak, I think, ‘Do you speak to the 101 level or the 201 level?’” Molotsky said. “I can write or speak to either one, but I can’t tell who’s there: people who have already digested stuff or newcomers. The funny thing is it’s both. The reality is there’s new people every day.”
A Crowded Field
For the people who learn about the program from events but still need experts to help guide them through the process of structuring opportunity zone deals, they would then enter the other major cottage industry that has cropped up around the program: professional services.
Greg Tobias, a developer of homes and midsizedbl multifamily properties in Delaware, owns a large parcel of land in an opportunity zone on which he wants to build some form of rental housing. He attended Bisnow’s D.C. summit to learn about investing in the zones, and he heard enough to know he would need an expert’s help.
”We have cash that we want to supplement and land that’s prime,” Tobias told Bisnow at the event. “I need guidance as to what’s the best way to do it.”
A host of law firms and accounting firms have created opportunity zone practices over the past year as they seek to capitalize on the intense interest and hunger for information about the program. At least 50 law firms have set up opportunity zone practice groups, according to a Bisnow review of law firm websites.
“All of the big law firms have dedicated resources to study the opportunity zone legislation, and the same can be said for the accounting firms,” said Bond Cos. co-founder Larry Bond, whose development firm is working on projects in opportunity zones.
Chamberlain Hrdlicka shareholder Philip Karter is the co-chair of his Houston-based, tax-focused law firm’s opportunity zone practice. He said his firm is devoting resources to having specialists in the program because of the potential revenue from investors pouring money into the zones for the tax benefits.
“We’ve invested a lot of time in this,” Karter said. “Large investments will be made in the next few years, so we have to stay the course as people become more comfortable with the program. So if you can be a thought leader and try to go out and educate as many people as you can, the business will come.”
The vast majority of developers and those with capital gains to invest depend on others for information and counsel, rather than delve into the tax code themselves. Some invariably rely on previous relationships and connections, while others attend events to find experts for their specific situation.
Molotsky, who said his law firm’s opportunity zone group was one of the industry’s first, has been surprised at how many large firms have followed in his footsteps.
“I knew there would be interest,” Molotsky said. “I didn’t know it would be this much interest … It’s becoming more crowded.”
He said his group has closed 22 opportunity zone deals thus far, and he warns people to be wary of firms that have created practice groups for the program but have not yet transacted in the space.
“As I say to prospects, those firms are fine, good firms, they’re good lawyers. But you have to be an educated consumer,” Molotsky said. “The fact there are some blue-chip firms now participating, that doesn’t mean they’ve closed deals. That means they’re running around talking.”
Easy In Theory, Complicated In Practice
The proliferation of service providers and advisers catering to opportunity zones was an inevitability that comes with a new tax program, some experts argue. Others expressed concerns about such professionals raising the cost of doing business, making it difficult for the policy to achieve its goal of expanding access to investment.
Cushman & Wakefield Americas Head of Research Revathi Greenwood, who has been researching the opportunity zone program and co-authored multiple white papers on its impacts, said she is not surprised with the number of professional services firms putting resources into opportunity zone practices.
“This is always the case with new guidance — you need the law firms and accounting firms to give you guidance on how to structure it and what are the nuances,” Greenwood said. “Of course there’s a lot of work that goes into that aspect.”
But the program wasn’t supposed to require hiring attorneys and accountants to understand, Reilly said. Her organization, the Economic Innovation Group, helped draft the legislation under then-leader Steve Glickman.
To set up a qualified opportunity fund, a capital gains investor would only need to fill out a two-page form and send it to the IRS with their tax returns. But the restrictions on what actually qualifies for an opportunity zone investment are complex and still unfinished.
“The hope is and has always been that the opportunity zones policy was simple enough that once you had some early business models, those could be quickly replicable and you wouldn’t necessarily need the heavy transaction fees associated with lawyers and accountants on every single deal,” Reilly said. “But really, the money that is being spent in this moment is on innovation and figuring out how to structure around a new policy.”
HCVT partner Blake Christian, an accountant leading his firm’s opportunity zone practice, said the program is not only too complex for people to navigate without an adviser, but it is too complicated for accountants who have not devoted time to specialize in it. He said roughly 20% of his time is spent supporting other accountants whose clients need information on opportunity zones.
“I live and breathe this stuff, and it even scares me sometimes where [I’d think], ‘Oh man, I haven’t thought about that issue,’” Christian said. “It’s not something I’d tell attorneys or CPAs or other advisers to jump into without a team around them.”
The complexities around the opportunity zone program add administrative costs that can detract from the benefits the program offers. Christian said the accounting fees for an opportunity fund deal during the year it is formed are typically about double the costs for a standard deal.
Christian said he advises most clients that the overhead costs of launching a fund typically aren't worth it unless they have at least $1M of their own capital gains to roll into the fund.
A Service Or A Sales Pitch?
Many of the fund managers and service providers that have extolled the virtues of the program have done so while promoting their services as the surest way to take advantage. Some seasoned real estate investors have openly questioned the motives of the program’s cheerleaders.
“All these Wall Street fund managers building huge funds, they have no idea what they’re investing in,” Lubert-Adler Real Estate Funds co-founder and CEO Dean Adler said at a Bisnow opportunity zone event in Philadelphia. “They’re just looking to collect fees.”
As the buzz has built around the program, opportunity zones have become a key piece of brokerage marketing materials for any property in one of the designated census tracts. Some studies found property values have risen by as much as 20% in certain opportunity zones, despite the frequent refrain among industry professionals that an OZ doesn’t turn a bad deal into a good one.
“I actually think it’s brokers [hyping up opportunity zones], but the vast majority of them don’t understand the program,” Hornig Capital Partners Managing Partner Daren Hornig said. “Every property in a zone is potentially an OZ deal [to brokers], where they don’t understand the development details.”
At Bisnow’s D.C. summit, EJF Capital CEO Manny Friedman stressed the potential significance of the program for those who understand it properly — something that could “change the face of the country” for all the investment it would drive to underserved communities while providing tax-advantaged returns on that investment.
EJF Capital manages a $500M qualified opportunity fund, and Friedman believes that there would be “wheelbarrows of money” showing up at his office if those looking to invest capital gains understood the program’s potential.
“If people get it, then they will invest,” Friedman said.
Overall appetite for launching qualified opportunity funds has far outpaced the appetite for investing capital gains in those funds by about 10-to-1, a July CoStar report found. The 130 or so QOFs that have announced capital targets set a combined goal of over $15B, but had only raised a total of $1.6B, according to CoStar data.
Tobias was struck by Friedman’s exhortations — not because of the impact the fund manager promised, but the admission that the wheelbarrows hadn’t shown up yet.
“I had been under the impression that there had been a lot of money raised, but it seemed like it wasn’t as much as people were hoping or expecting,” Tobias said.
Though many attribute the relative lack of investment to the long delay in the release of final regulations — the IRS and Treasury Department still haven’t finalized the rules after months of public feedback — Adler and Hornig are among many in the industry who believe 1031 exchanges remain superior methods for real estate investing.
“I personally think the opportunity zones are going to be an absolute disaster,” Hornig said at a Bisnow event in May. “I think it’s fool’s gold chasing unrealistic returns.”
Though the program’s ultimate success depends on how much it is utilized, the same is not necessarily true for the businesses that trade in expertise, such as geographic and demographic data platform StateBook International.
“Basically, since the legislation was introduced, we immediately recognized that there was an opportunity for StateBook to provide some solutions for OZs,” StateBook CEO Calandra Cruickshank said.
StateBook, which provides location data and analytics to clients like the U.S. government and some of the largest companies in the country, devotes about 10% of its resources to opportunity zone research, and 20% of its new customers in the past year or so have been specifically interested in opportunity zones, Cruickshank said.
The cohort of StateBook subscribers that have interest in opportunity zones is split between developers or investors judging a potential deal and municipalities, economic development groups or neighborhood organizations looking to market themselves for potential investment.
If all that stands in the way of the program’s success is potential investors “getting it,” as Friedman said, then the cottage industry that has formed around informing and advising those investors is a necessary side effect.
But even some within the professional services community worry that it isn’t serving some of the program’s primary stated targets: those with relatively modest capital gains that now have a new investment vehicle with the potential to make a social impact.
“Where does a person with $50K or $100K in capital gains go to be a part of this conversation?” said Chamberlain Hrdlicka’s other opportunity zone chair, Katherine Noll.
Noll recalled one fund with a $100K minimum investment, but only for those who had already invested $5M with the fund manager.
“My husband hears me talk about this program so much, and he asks me, ‘So why aren’t we investing in this?’” she said. “And even I don’t know where to go with my money.”