Opportunity Zone Activity Likely to Surge
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The Treasury Department released its long-awaited Opportunity Zone program guidance last month, which JLL, Chicago, said will make it easier for fund managers to raise capital and for developers to begin construction.
Treasury's new guidance should encourage participation in the Opportunity Zone program and boost commercial real estate in designated areas, said JLL Senior Vice President Jonathan Paine. "While a few investors have charged forward into the space, most have eagerly awaited the more complete guidance needed to invest before the close of 2019 in order to secure the maximum tax benefits from the program," he said. "This clarifying guidance should remove many of the barriers that have kept large pools of capital on the sidelines."
The December 2017 tax reform act created a strong incentive for real estate investment in low-income areas designated as Opportunity Zones, said Yardi Matrix Director of Research Paul Fiorilla. "Investors in these areas may defer capital gains taxes and avoid paying taxes on gains if the investment is held for at least 10 years," he said. "One thing is for certain: The opportunity is enormous."
But some analysts have expressed concern about the Opportunity Zone program. Samantha Jacoby, Senior Tax Legal Analyst with the Center on Budget and Policy Priorities, Washington, D.C., noted the tax break does not require that local residents benefit from investments receiving the tax break. "Thus, this tax break could amount to a ‘subsidy for gentrification' in many areas instead of, as intended, for providing housing and jobs for low-income communities," she said.
Freddie Mac, McLean, Va. analyzed its past multifamily loans properties within areas now designated as Opportunity Zones. The company found affordable rental housing for very low-income households is more than twice as common in these areas, where median incomes are lower and poverty rates are higher than the national average.
The Freddie Mac report predicted multifamily rental housing will be a key component of Opportunity Zone investment. Nearly two-thirds of the 105 funds the National Council of State Housing Agencies identified as targeting Opportunity Zone investment are multifamily focused funds.
Paine said many investors considered the first set of regulations released last October too vague. "For instance, investors were concerned that they could be penalized if they sold an Opportunity Zone asset and did not reinvest the proceeds immediately," he said. But the new regulations clarified that Opportunity Funds have 12 months to sell a property and reinvest the proceeds into another Opportunity Zone.
The new rules also clarify what happens if a property straddles an Opportunity Zone border with some property falling within the zone and some outside of it and specify that land and vacant buildings are eligible investments.
"These rules open up a lot of options for developers," Paine said. "They're likely to speed up the process of shovels hitting the dirt."