Leveraging Experience And Investor Interest, S.F. Firm Launches Second Opportunity Fund
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While many of those in the industry are still figuring out the details of how opportunity zones could work for them, San Francisco-based JMA Ventures has closed its first qualified opportunity zone fund and launched a new one.
"We're certainly excited about the opportunity the platform provides," JMA Ventures President and CEO Todd Chapman said. "We're also trying to be smart and conscientious and focus on good projects."
The first opportunity fund from JMA Ventures was a single-asset fund that the company is using for a multifamily project in an up-and-coming neighborhood in downtown Phoenix. The 278-unit project, called The Battery, will be the first major multifamily project in the area near Chase Stadium, he said.
The project has been underwritten at a cost of $75M, including $8.4M for the land value.
The federal opportunity zone program was established with the passage of the Tax Cuts and Jobs Act of 2017. The program identified distressed communities that would benefit from new investment and created tax incentives for those who invest in those areas.
Chapman will be among the speakers discussing opportunity zone investment at Bisnow's Opportunity Zones 101: San Francisco, South Bay & The Peninsula event Feb. 6.
Because the firm was still figuring out how to take advantage of the opportunity zone program when it launched its first fund, it opted for a single-asset fund to minimize risk and make it easier to adjust if changes were needed as new rules emerged, Chapman said. The company worked with accounting and tax advisers to stay on top of the program and the fund, which launched in August, closed by November.
Building on higher-than-anticipated interest from investors in that fund and a more secure understanding of what the final regulations will look like, JMA Ventures' next fund is a multi-asset fund. The company always had the objective of launching a larger fund.
"There's obviously a lot of interest out there — a lot of people out kicking tires," Chapman said.
The new fund will invest in ground-up development and renovation projects in opportunity zones in the western U.S., targeting properties including hospitality, office, multifamily and mixed-use.
Investors in the first fund came to it for several reasons. A lot were individuals with capital gains to invest who were looking to take advantage of the program's tax deferral on those capital gains, Chapman said. Some wanted to diversify, taking advantage of the more diverse investment options with opportunity funds as opposed to a 1031 exchange, which is solely real estate-based, while others were traditional real estate investors looking for tax advantages.
An important part of launching the funds has been educating investors about the possibilities of the opportunity zone program and how to invest through opportunity funds.
"For a lot of investors, there's a lot of uncertainty," he said. "They want to make sure they're not making a mistake, [since] it's a new program."
JMA Ventures has held webinars, has information about opportunity funds on its website and has had frequent one-on-one conversations with investors while sharing insight from tax and accounting partners on where the program is likely headed, he said.
Chapman said there are differences about investing in opportunity zones versus traditional investing that investors need to be aware of. He said the company recognizes that opportunity funds are a 10-year bet that stretch beyond the usual real estate investment horizon of three to seven years.
"For the right project, it does give the opportunity to think about projects a little more deeply," he said.
The firm can look at the data on the project and area today and where it is going and make the investment based on what that data shows.
One of the things that made opportunity zone investing interesting to the firm was that the legislation requires the investor to make improvements, which makes it more appealing for vertically integrated firms such as JMA Ventures that have more control over how those improvements are made.
The firm has tried to be careful about the type of deals it pursues and in which markets. There are added challenges for having opportunity funds invest in markets like the Bay Area, where there are high barriers to entry and the entitlement process can take an extended amount of time.
"We certainly are looking at a number within the Bay Area, but those are likely to be more challenging as qualified opportunity zones," he said. "The Bay Area has a ton going for it from a macroeconomic standpoint, but those become challenges, too."
While the final guidelines have yet to be released and meetings to drive that forward have been delayed by the government shutdown, Chapman said he is confident JMA Ventures has a good understanding of the general framework of investing in opportunity zones.
The key is making sure there is enough flexibility in the platform to be able to adapt if needed, he said.
Chapman said it is best to approach the program in an informed, yet cautious manner.
"There's just a lot of energy around the qualified opportunity zone program and we need to all be cautious and make sure there's not a misunderstanding of the program," he said. "A qualified opportunity zone-eligible project doesn't make a bad project into a good project. We have to make sure our underwriting is sound."
Hear more from Chapman and others taking advantage of the opportunity zone program at Bisnow's Opportunity Zones 101: San Francisco, South Bay & The Peninsula event Feb. 6 at Hotel Nikko in San Francisco.