2 Months Until The OZ Deadline. How Can Investors And Developers Prepare?
Though the opportunity zone program has been making headlines for over a year, many sponsors are still actively working to raise equity from investors to help capitalize their deals. Meanwhile, many potential investors are biding their time for an OZ project that suits their financial goals.
With less than two months remaining before the deadline to take full advantage of the program’s tax benefits, parties on both sides of these transactions can benefit from a marketplace, or better yet, a matchmaker, to help their OZ ambitions get off the ground.
“Investors, sponsors and developers all need a one-stop-shop like Meridian’s to hit their deadlines,” Meridian Capital Group Managing Director Steven Adler said. “If it’s OZ related, we’re aiming to be their first call.”
Meridian, a New York-based commercial real estate capital markets, investment sales and retail leasing firm, has been building out a dedicated OZ practice, Meridian OZ, combining capital sourcing, advisory services and investment sales. Partnering with specialized legal and fund management firms, Meridian OZ is able to guide clients through structuring and capitalizing an OZ fund and identify suitable OZ deals to reinvest qualified capital gains into.
Making An OZ Marketplace
The company was inspired to create Meridian OZ to help clients navigate opportunity zone deals, which can be surprisingly different from real estate deals in practice. Developers who have a stable of investors or syndicators they reach out to for non-OZ deals might find that those investors don’t have large capital gains to reinvest into an OZ project, or simply aren’t interested in OZ investments.
Conversely, it may be difficult for investors to find OZ projects that fit their tolerance for risk or financial goals. Some investors, Adler said, may only be willing to place money into very specific markets or asset classes, or might be looking for an immediate cash-on-cash return that many OZ projects don’t provide. Other investors may be more focused on the social impact of their investment. Very often, the biggest problem for these investors, who may not be seasoned in the real estate space, is that they do not have access to deal flow to match their criteria.
Because its core practices lie in debt and equity capital markets and investment sales, Meridian sees a very wide breadth of projects from developers around the country. In addition, through an extensive network built over more than 28 years, Meridian has links to high net worth investors, funds and family offices with capital gains. As a result, the company is in a strong position to bring together these various parties.
“Aside from our direct network of investors, we’re constantly talking to accounting firms, law firms and other service providers in the opportunity zone space, so we may have a line into clients with capital gains who may not be out in the wider market,” Adler said. “And we see so much deal flow that there is very often going to be a project out there for an interested investor.”
Adler rattled off a handful of residential, retail and office OZ projects with different risk profiles, all in different cities — a $25M deal in East Harlem, a $60M deal in Miami’s Design District, a $90M deal in Stamford, Connecticut, a $40M deal in the Los Angeles Arts District. In addition, he mentioned many smaller-market deals where local investors may have more interest in investing. Each of the projects had come across Adler’s desk and could potentially be ideal for a new OZ investor.
Aligning Interests, Assessing Risks And Making Deals Happen
Some investors have proven hesitant to lock up their capital gains for the decade it takes to see the full tax benefit of the OZ program and are wary of ground-up development projects that could still take years to stabilize. For these investors, Meridian OZ is working on projects that are fully built but require some additional capital expenditures and lease-up to get to profitability. These properties often turn cash flow-positive more quickly, a benefit for investors interested in cash-on-cash returns in the near term.
Adler cited a 130K SF office building in an OZ in Phoenix that he helped a family office acquire. The building was fully vacant and required a few CapEx improvements, but no construction was needed.
“They bought at around $35 per SF, and it was easy to double their basis on investment,” Adler said. “With no heavy construction risk, just the CapEx and lease-up risk, it was a perfect project for this family to take on.”
Maximizing Benefits Before Year-End 2019, With Or Without An OZ Deal In Hand
Even if they don't have a project in hand, OZ investors can consider setting up their own OZ fund before the Dec. 31 deadline. By depositing capital gains into an OZ fund account before the end of the year, investors will be able to capture the maximum tax benefits. The investors will then have an additional period to deploy their capital into an OZ property or business. Meridian can help these investors structure their funds and give them options into 2020 as necessary in a secure, transparent and compliant way.
Adler expects the deal rate to increase as the end of the year approaches, but urged a bit of caution.
“There's no reason to hustle into a deal and close just because of the deadline,” Adler said. “We're explaining to investors that there is potentially some flexibility available to them that would allow them to take advantage of the year-end deadline by creating and funding their own OZ fund prior to consummating a transaction, so long as they have a bona fide intention to pursue an opportunity zone deal or deals. They don't need to feel pressure to jump into a transaction or partner with a sponsor they aren't completely comfortable with.”
Setting Up A Personalized OZ Fund Prior To Year-End
Meridian has tapped Jonathan Talansky, a partner at the national law firm of King & Spalding, and has also teamed up with NES Financial, a leading opportunity zone fund administrator, to help investors quickly set up personalized OZ funds at a reasonable cost. Investors and sponsors can obtain assistance from them in order to comply with the necessary timelines and regulatory requirements. And since Meridian expects to have a steady flow of transactions, these investors can continue to see new opportunities over the period of time required for them to deploy the capital in their funds.
“Our goal is to be able to help our clients as they manage their investments over the course of the life cycle of a particular opportunity zone transaction,” Adler said. “There will be many considerations down the line from financing upon stabilization, paying the 2026 tax liabilities and ultimately disposition. We want to provide a one-stop solution to be able to advise our clients as they navigate the OZ process.”
This feature was produced by Bisnow Branded Content in collaboration with Meridian Capital Group. Bisnow news staff was not involved in the production of this content.