July 23, 2019
There’s been a lot of chatter about The Opportunity Zone program and its effectiveness (or not). Though the program is still in its infancy, and a third round of guidance from the U.S. Department of the Treasury is anticipated, analysts have already started to release some metrics about the plan.
Cushman & Wakefield, in its recent report entitled “In the Opportunity Zone: Location, Timing, Capital,” listed the following 10 takeaways about the program.
1) The boost in after-tax IRR for real estate projects is already impacting real estate prices in some Opportunity Zones. Specifically, a recent MIT study noted that Opportunity Zone designation resulted in a 14% price increase for redevelopment properties, and a 20% price increase for vacant development sites.
2) The 138 large Qualified Opportunity Funds (CRE) being tracked by Cushman & Wakefield target more than $44 billion in equity. The funds have national mandates, with plans to invest in multiple product types, with 82% headed to multifamily. “Industrial opportunities are thus far underappreciated,” the report said.
3) Most deals will get done in areas with either strong CRE market fundamentals and/or economic revival. These areas include the Sunbelt, California and Mountain West, as well as Manhattan.
4) Most of the funds, and total equity, intend to invest across multiple markets.
5) Timing remains key. Once capital gains are realized, the funds must be invested within 180 days. The next deadline — Dec. 31, 2019– must be met to maximize tax benefits; the value of tax breaks declines after that.
6) Eligible real estate investments consist of new developments/redevelopments, capital-intensive renovations and a wide range of operating businesses, including those involved in managing and developing real estate.
7) Leasing activity could accelerate, thanks to inclusion of operating businesses in Opportunity Zones, as long as investments in those businesses lead to greater start-up and/or expansion activity.
8) While gains need to be invested within 180 days, working capital can be held in cash and short-term debt securities for up to 31 months. QOFs also have six months to identify projects for capital, and 12 months to reinvest proceeds from asset sales.
9) The 31-month and 12-month windows can be extended when a project is delayed due to government action. As such, projects in highly-regulated markets or those that aren’t shovel-ready can be eligible under the Opportunity Zone program.
10) The extent of the tax benefit is only as good as the success of the underlying investment. The Opportunity Zone program won’t turn unviable projects into viable ones.
For comments, questions or concerns, please contact Amy Sorter