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Opportunity Zones: Watch The Pitfalls

Key Bank SVP Charlie Williams, Pensam Capital founding partner Michael Stein, Pender Capital's Kristin Rick and Arthur J. Gallagher & Co. Area VP Lisa Neumayer spoke at Bisnow’s multifamily event in Miami Nov. 14, 2018.

"The Opportunity Zone program is truly a game changer," Hunt Real Estate Capital director Marc Suarez said at Bisnow's multifamily event in Miami Wednesday, echoing a sentiment felt by many around the country.

But other panelists warned that the new program — which lets people defer or eliminate taxes on capital gains if those gains are invested in certain areas for up to 10 years — could tempt people to make deals chasing tax benefits that otherwise might not be good ones.

The country's affordable housing crisis especially threatens South Florida, a tourist-based economy where service workers make long commutes from their homes to work in hotels and restaurants downtown and at beaches. 

"We think people are going to live in Homestead and drive [an hour] to South Beach?" Suarez said. "It's not worth the gas."

Suarez hopes the Opportunity Zone program will entice builders to put affordable housing in the designated opportunity zones, many of which are blighted areas. He said that for the past few years, as the economy rebounded from the housing crisis and the Great Recession, investors got used to easy returns.

But because opportunity fund capital must stay invested for a decade to realize the full tax benefit, it "paved the way for longer money," Suarez said.

"We've all been waiting. When is capital going to adjust and get off the 18-20, cash-on-cash, three-to-five-year return, right? Because how many value-adds are left?" he said. "I truly believe this opportunity zone overlay is going to help the affordable housing business because the money is longer, the money is forced to be longer." 

Hunt Real Estate Capital director Marc Suarez and Wood Partners director Jeff Quinlivan

But Wood Partners Director Jeff Quinlivan said while such programs are designed with good intentions, they may not work as intended. Profit remains the motivator for investors.

He said he has been fielding calls from investors in markets like Boston and New York who are looking for deals in opportunity zones around the country because they weren't finding deals in their areas that looked profitable. 

"With a 1031 exchange, you defer till death — your heirs benefit," Quinlivan said. "These, you defer for 10 years ... There's incentive to have that investment appreciate over 10 years."

Pensam Capital founding partner Michael Stein warned that some developers, "particularly inexperienced developers, will make tax-driven deals instead of [solid] real estate deals ... [People will] create artificial returns that look good on paper but ultimately don't work in a lot of locations. It has to work without the federal income tax incentives." 

Quinlivan said that deals on the fringe of a solid market would work best. 

Speakers on another panel said Miami is always a solid market, even with its ups and downs, because of its continued population growth. 

Dezer Development CEO Gil Dezer, Okan Group Director of Operations Selim Alpmen and Fortune International Group CEO Edgardo Defortuna

Dezer Development CEO Gil Dezer said he owed a half-billion dollars in 2010 and had to lower rents, but he recovered just fine. Talk of a current condo glut is overblown, he said. 

Fortune International Group CEO Edgardo Defortuna said 50% deposits from buyers are the new normal.

"Oversupply is really not existent," he said. "We have not experienced any default in any buildings in this cycle."

CBRE Executive Vice President Still Hunter III said Miami was expecting tens of thousands of new residents in the next few years. While 5,000 units are coming online next year, they won't be enough to house all the new residents.

"Theoretically, you can't meet demand — the fundamentals are so strong," he said. "The fundamentals are just off the charts."