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Whoops! 3 Opportunity Zone Mistakes People Have Made Already

Interest in opportunity zones is as hot as ever, especially ahead of the IRS public hearing scheduled for Thursday morning. With everyone running headfirst into deals, it's good to be aware of how other people have messed up already — so that you don't have to.

A February 2019 Bisnow panel about opportunity zones featured Greenberg & Traurig shareholder James Lang, Metro 1 CEO Tony Cho, Cherry Bekaert partner Carol Surowiec, PTM Partners CEO Michael Tillman, OPZ Bernstein principal Craig Bernstein, Vagabond Group CEO Avra Jain and moderator Clarence Williams, senior government relations consultant at Becker.

At Bisnow's Opportunity Zones 101 event in Miami last week, a lineup of panelists included Peebles Corp. CEO Don Peebles and Vagabond Group CEO Avra Jain. Panelists ran through expert tips on what to do (be a high net worth individual) and not do (make an iffy investment thinking that the zoning will magically save it) in regards to opportunity zones.

But ears especially pricked up when panelist Craig Bernstein, head of private equity firm OPZ Capital, mentioned that he has seen clients who have already messed up deals. Bernstein provided more details after the event. 

"I have spoken with an investor who, within a single Opportunity Zone Fund, purchased an interest in a minor league sports team and an industrial warehouse building," Bernstein wrote in an email. "The way the Opportunity Zone legislation is written, you currently need to sell your partnership interest in the fund. So basically if he wants to sell the sports team to an interested party, the buyer would also be forced to acquire the industrial warehouse. This is one of the primary challenges of having multi-asset funds."

Experts spoke at a Bisnow panel on opportunity zones in Miami: Affiliated Development CEO Jeff Burns, Pebb Capital co-founder Todd Rosenberg, Saul Ewing Arrnstein & Lehr partner Ronnie Fieldstone, Gilbane Development Chairman Robert Gilbane, and Weiss Serota Helfman Cole & Bierman member Joseph Hernandez.

Bernstein said he has seen a fair number of investors who have set up funds and self-certified them, rather than consulting with a qualified attorney or accountant. The way the state tax and organizational documents are filed, no steps — like specifically indicating that the new entity is a qualified opportunity zone fund — can be skipped.

One of the basic principles of the program — whether land falls in an opportunity zone — is subject to blunders. Each state determined which areas would be a zone, based on income levels and the desire for private investment in certain census tracts.

"I have seen numerous errors on the maps depending on which website you visit," Bernstein wrote. "One individual I spoke with placed a property under contract under the guise that it was in an Opportunity Zone, to only find out after closing that there was an error on the map he initially reviewed. In fact, the property was not located within a designated Opportunity Zone. Before you acquire or invest in a property, check multiple sources, including the Treasury’s website, which specifically lists out the approved census tracts."

Peebles Corp. founder Don Peebles and Bilzin Sumberg associate Andrej Micovic

Other notable suggestions at the event included Greenberg & Traurig shareholder Jim Lang's suggestion to set up a "sidecar vehicle" in a joint-venture structure if mixing an opportunity zone fund with another funding source. Metro 1 CEO Tony Cho suggested  deploying "conscious capital" and improving life for current residents in opportunity zone neighborhoods. 

Peebles said to watch out for more instructions from the Treasury Department  — he hoped rules will be expanded so that current landowners, not just new purchasers, will be allowed to benefit from the program — as well as legislative developments at the state level that could piggyback on or otherwise affect opportunity zones.