April 3, 2019
The Opportunity Zone program, part of the Tax Cuts and Jobs Act of 2017, has been intriguing investors, developers and those involved with economic development. The idea of taking capital gain from the sale of assets, putting that gain into a Qualified Opportunity Fund, then rolling it into economically depressed neighborhoods is, theoretically, a win-win. The investors can defer taxes on their capital gain, while lower-income areas receive a much-needed infusion of resources and capitals.
In places like Nashville, however, the consequences of this program are already starting to be felt. According to Realiste Fund I LP Managing Director Stephen Epstein, land targeted for Opportunity Zone development is putting the squeeze on developing residential condominiums.
The main reason for the squeeze is, increasing land prices. “Land prices are already skyrocketing in downtown Nashville,” Epstein said. “Once Opportunity Zone investing becomes mainstream, prices will continue to rise, as buy-and-hold investors, seeking to place Qualified Opportunity Fund cash, drive up land costs, and squeeze out the land available for condominium development.”
The end result, he went on to explain, is that the Opportunity Zone capital will lead to escalating land prices, and an overbuilding of apartment buildings. Nashville, in the meantime, is experiencing a shortage of residential and office condominiums, as well as small flex space. The Nashville Downtown Partnership puts inventory supply of residential condos at three months or less. A balanced market has a six-month supply of units.
The situation in Nashville is additionally exacerbated, because millennials make up about 22% of the area’s population — and they are interested in buying the condos. Adding to the situation is the number of transplants who are increasing, and who want to buy a condo. However, the National Association of Realtors indicated that a lower production rate of new condominium units means fewer affordable options for buyers.
Epstein isn’t downplaying the positive effects of the Opportunity Zone program. Rather, he pointed out that one of the impacts, at least in Nashville, is a reduction in condo site availability. Add to the problem the difficulty in getting condo projects financed through banks without pre-sales. The overall result is a continued shortage in condominium developments for years to come, Epstein added.
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