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Property Values, Investment Appetite Surge In New York's Many Opportunity Zones

As the commercial real estate industry continues to sort through the details of the new Opportunity Zone program, developers and investors are working to figure out the impact on real estate values in the zones and to sift hype from reality.

Rendering of RXR's master development plan for downtown New Rochelle, N.Y.

The U.S. Department of the Treasury last month released updated guidelines for the federal Opportunity Zone program. The announcement provided some clarity, although there are still lingering questions.

Despite the uncertainty some development sites within the zones have seen price increases as a result of the enormous interest in the program — though they caution not to get caught up in the buzz and to carefully consider the fundamentals of any deals.

“Now that the guidelines are out, funds have ramped up their marketing and become aggressive in pitching investors and family offices,” said Rosenberg & Estis real estate attorney Adam Sanders, who is speaking at Bisnow’s New York City 2019 Forecast Dec. 13. “But the investors should be asking more questions … [saying] ‘what projects are you going to do, specifically?’”

Passed as part of the Tax Cut and Jobs Act in December, the program gives investors a tax break in exchange for investments in low-income communities.  The goal is to encourage development in underserved areas.

Nationally, nearly 9,000 communities across the United States were nominated. In New York, there are 514 approved and designated census tracts in the program that include areas across the city, Long Island and rural parts of the state.

The program has attracted significant attention all year, and several companies have been getting ready to make use of it. In August, RXR Realty announced it would aim to raise $500M specifically for opportunity zone projects. 

That same month, Shorewood Real Estate Group announced it had closed on a 27K SF development site in Jamaica, Queens, which it said was the firm’s first Opportunity Zone Fund platform acquisition. Heritage Equity Partners has also reportedly set up a $100M fund, with a focus on properties in Brooklyn and Queens.

The biggest deal of the year, Amazon's HQ2 choice of Long Island City, itself falls within a zone. Goldman Sachs just invested $83M into a vast affordable housing complex planned for close to the new headquarters, citing its location in the opportunity zone as the attraction.

The impact of the zones has affected development site pricing. Ariel Properties Advisors Executive Vice President Victor Sozio said he is now seeing higher offers on development sites that he is marketing in the South Bronx that are within a zone.

Amazon's HQ2 site in Long Island City was in an opportunity zone.

“There is a [large] site in the Mott Haven area in the South Bronx, which is one of the hotter areas of the Bronx, even separate from the opportunity zones,” he said. “It is very close to signing a contract, and I would ballpark the premium being achieved at about 10% to 15% above market, in an already fairly frothy area in the Bronx.”

He also pointed to a development site in East Harlem that he said has attracted higher interest because it falls within a Qualified Opportunity Zone. The recent sale of a development site at 4650 Broadway in Inwood is another indicator of the effect: FBE Limited reportedly flipped the site for $55M, twice what it paid in April. 

“There are multiple factors that contributed to that,” Sozio said. “But I know that the property being in an opportunity zone and in a good location in Washington Heights in Manhattan contributed largely to that sharp increase in value in that short amount of time.”

Across the country, the number of sales of development sites in QOZs jumped by 80% in the first nine months of 2018, compared to the same time in 2017, the Wall Street Journal reported last month, citing Real Capital Analytics data. Sellers raised prices on assets in some zones by more than 50%, according to the paper. 

Meridian Capital Group Senior Executive Managing Director David Schechtman said at Bisnow's New York State of the Market event Thursday morning prices will certainly be affected. 

“[The program will generate] the greatest influx of non-professional real estate capital since the advent of the 1031 [exchange]," Schechtman said. "It’s going to artificially inflate the prices. We are seeing it already.”

Brokers are advising that deals should still stand on their own merits.

“The features of the opportunity zones are icing on the cake," CPEX Managing Partner Tim King said. "You shouldn’t do something silly just for the sake of some tax dollars."

Shorewood Real Estate Group's Queens acquisition

Meridian Managing Director Steven Adler said the market is still trying to figure out the correct premium from the benefit. 

“The funds and investors that are looking to deploy capital into opportunity zone projects are still underwriting these transactions based on the conditions in place today and not based on forward projections," he wrote in an email.

Avison Young Head of Tri-State Investment Sales James Nelson believes it will be the second quarter of next year before any clear indicators on the market impact emerge.

Still, he said there is no denying that sites in zones are attracting more attention.

“The real benefit here is supply and demand. A whole new wave of capital is looking in these areas now,” he said. “Those dynamics alone are going to create the premiums … [but] the smart investors would say, ‘Well, I don’t want to pay premiums because of supply and demand.’”

Berdon LLP tax partner and Real Estate Group co-Chair Meyer Mintz said he believes now that guidelines are out, many developers who are planning to establish funds will be looking for suitable properties — but holding off on buying until the new year.

The reason for that is twofold. One is that established funds need to show they are meeting all the requirements by Dec. 31 or within six months of being established, whichever is first. Secondly, having properties under contract and an established plan for what they will do in the zones will make it easier to raise capital from investors.

“I suspect what people are trying to do is lock up properties in contract, and get their ducks in a row … [with the view] of becoming a qualified opportunity fund starting the first of January 2019,” Mintz said.

“In real estate, people don’t like blind funds,” fellow Berdon tax partner Hal Zemel said. "It’s much easier for people to raise money if they have properties under contract and say, ‘These are the 10 properties that I have locked up, this is my plan,' and attract the capital that way."

Experts said shovel-ready projects will see the most benefits now that the new guidelines are out. The guidelines allow for a “safe harbor” period of 31 months in which funds can disperse capital if it is for construction or improvement of a property, Sanders said.

Funds still need to be able to show that they have a plan and a schedule, and that they are complying with them, he said. But, despite the guidelines, there are still questions around the conclusion of that safe harbor period. Ultimately, investors need to be very careful in where they put their money.

“They need to do their due diligence,” he said. “Investors need to make sure the fund is property prepared and guided for compliance to the program.”

Sanders, Nelson and Adler will be speaking at Bisnow's New York City 2019 Forecast event on Dec. 13.