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Developers And Investors Told To Sweat The Small Stuff On Opportunity Zones

When it comes to the country’s new Opportunity Zones program, it is almost as if people need to hurry up and wait.

Passed as part of the Tax Cut and Jobs Act in December, the federal program gives investors a tax break in exchange for investments in underserved communities.

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

The idea is to lure development to low-income areas — around 8,700 communities were selected by governors across the country as possible opportunity zones. The state of New York suggested 514 census tracts to become zones, including parts of the five boroughs, Long Island and rural areas of the state.

But while New York’s zones were nominated in late April, the U.S. Treasury has yet to release the regulations, meaning developers and investors are still contending with gray areas, even though the zones are legally in effect. 

“There is a huge amount of questions related to how to handle various different types of real estate investment … from what qualify as a gain put into an opportunity zone fund all the way to what type of investment in an opportunity zone would work,” Rosenberg & Estis New York City real estate attorney Adam Sanders said.

There has been widespread interest in the zones, though some developers across the country have complained there is too little guidance from government on how they will operate.

Sanders said developers and investors should pay close attention to the details when creating or investing in funds, but delaying may not be the answer.

“If [developers] are ready to go, then they should. The program is in effect. … If you wait too long, you may miss these opportunities.”

Investors who put money into funds that are qualified are able to defer or reduce taxes on capital gains.

There are significant tax benefits on offer, Sanders said, but people should tread carefully and seek advice.

“It’s easy to say, ‘We are doing a fund, it’s going to be huge, it’s going to be billions' ... [But] it has to fit within the regulations.”

Empire State Development Executive Vice President Pravina Raghavan, who oversaw the creation of New York’s zones, said developers reached out when the state was settling on the areas to nominate.

Now, she said, there is a lull as some savvy investors and developers await clarity on the regulations. They had been hoping the regulations would be out by May or June; now they are expecting them by the end of next month.

“The bare, basic regs are out, like what it is and what it can do .. [but] how it’s going to be formulated, what you have to fill out, what you need to be thinking about when you have one of these funds is all up in the air,” she said.

“There’s a lot of pressure on Treasury to get them out because the clock is ticking on this program … you have six months from when you had your initial capital gains to put it into one of these funds and if you want to do it for this tax year [it is] only a couple of months away.”

Until the parameters are clear, investors should be careful where they direct their funds.

“You want to get the benefit from this great program, but you want to be cautious because there’s no regs out,” she said. 

“Some of the big developers [have started raising capital] — that’s fine. I’m more concerned about a guy who’s got like $100K and he reads an article, and says ‘Hey, my friend down the block says he is starting an opportunity fund.’ And you are like ‘OK, what has he done before that? Is he a fund manager?’”

Some New York developers are already moving to make use of the zones.

Last week, 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.

Shorewood Real Estate Group's Queens acquisition

The plan is to build a 215K SF mixed-use property featuring up to 300 rental units that will be a mix of affordable and market-rate housing.

Shorewood is targeting $250M with its opportunity zone fund, though its CEO, Larry Davis, was not able to say how much has been raised so far. The firm is looking for more sites in the zones, and is actively negotiating on a number in New York and New Jersey, a state which has nominated 169 zones.

Davis — whose firm raised $200M in crowdfunded equity for previous projects — expects use of the zone will unlock significant capital. Some analysis has found that there is more than $6 trillion in unrealized capital gains in the economy.

“I think there's a lot of capital on the sidelines waiting to get the final regulations from Treasury,” he said, adding he thinks it will be settled by the end of the year at the latest.

Supporters of the zones say they will revitalize ailing parts of the country, and help fix the housing crisis that has left millions of Americans struggling to meet the rent each month. 

But critics question its effectiveness and have suggested it could just be used as a tax dodge by developers who would have been developing in the zones anyway.

“A question I've been asked repeatedly is, ‘Are these deals that you would have developed anyway?' And the answer is, 'Yes, because we only want to do deals that are economic on their own merit and not just based on tax incentives,’” Davis said, noting that he understands the criticism of the program.

“The tax incentives merely increases the pool of capital that's available.”

Shorewood is not alone. Scott Rechler’s RXR Realty is aiming to raise $500M specifically for opportunity zone projects.

Its $170M development in downtown New Rochelle is a possible contender for the program, as is an $83M project in Nassau County and its development near the Brooklyn Navy Yard.

RXR President Mike Maturo said the firm has been investing in these types of areas for the past five years, so it already has a strong pipeline of assets.

“We have a fairly strong competitive advantage in terms of offering investors opportunities to invest in these areas,” he said.

It is not a hard sell for investors, he said, as it is a potentially lucrative and beneficial program.

“The intention is to unlock capital that's dormant and have a community benefit aspect of the investment," he said. “Anything can get abused but I think in substance it's a pretty good idea to take dollars that are completely dormant and invest them in areas that are underserved.”