Opportunity Zones are one of the hottest topics in commercial real estate right now.
This isn’t surprising considering the market is estimated to be as large as $6.1 Trillion with over 9,000 designated Opportunity Zones throughout the US and including territories, potentially one of the largest economic development initiatives in US history. In fact, the United States Department of Housing and Urban Development estimates that this program could stimulate as much as $100 billion in investments and has the potential to transform communities nationwide.
So, with all of this excitement—and opportunity—why aren’t more people buying in? While the reasons to invest are clear, the specific rules and policies are still somewhat ambiguous. There is uncertainty around the potential outcomes of Opportunity Zones, particularly since they are a long-term strategy. In today’s on-demand, instant gratification culture, data, and insights are increasingly important, and being able to build trust with investors is more critical than ever before. The answer? Commercial real estate technology that enables you to provide investors with the accessibility and transparency to alleviate their concerns.
What is the Opportunity Zones Program?
Created by the 2017 Tax Cuts and Jobs Act, Opportunity Zones are an economic development tool. The intent of the program is, at its most basic, to drive community restoration, infrastructure development, and job creation in distressed areas by providing tax benefits to investors. These zones, which must meet specific criteria and be designated and certified as such, can range in size from a few blocks to an entire zone, and they can be urban or rural. Opportunity Funds are the vehicle for investing in eligible property located in an Opportunity Zone. With Opportunity Funds, investors can reinvest their gains from a prior investment and in return receive tax benefits including deferrals, exclusions, and deductions. The longer they use the funds, the more rewards they receive, and the strongest benefits go to those who stay invested at least 10 years.
Areas of Concern Around Opportunity Zones
The Opportunity Zone program offers willing investors tax advantages that are only available through this program, which are instead of tax credits or other traditional subsidies. While the benefits are certainly enticing (Deferrals! Exclusions! Deductions!), many investors are still somewhat hesitant to participate due to risks and uncertainty associated with the program. For example, investing in Opportunity Zones is a long-term strategy, the longer you wait, the more benefits you will accrue…but that also means limited liquidity. There is no cap on the amount that can be invested to benefit from these tax credits or the amount of gains deferred and forgiven. And there are no requirements for investors to ensure a specific outcome, such as job creation.
Even with the benefits as outlined above, investing in Opportunity Zones still carries some risks. These areas were designated as places in need of investment due to their historical underperformance economically, which trickles down into the value of the properties within them. Understanding which of these 9,000+ zones, and which properties in particular, have the most growth potential requires thorough due diligence on the property and other related factors like wealth growth or local economic development programs.
One of the biggest frustrations investors have with the Opportunity Zones program is the ambiguity surrounding the rules, policies, and guidance. There are still many questions around how exactly Opportunity Zones work, one of which has to do with the vague language around when the timeline for tax deferrals starts. Currently, the federal government says that they need to see “substantial improvements” to a property if there is a planned use change. This improvement must be larger than the original tax basis of the property. But, what if the proposed improvements get caught up in a drawn-out permitting process? This unforeseen event could result in a different schedule than promised and could make for some rather unhappy investors. Also remember that local governments did not designate these zones and so may not have the same desires and expectations as the federal legislators who did. Investors have to trust that their sponsor is accurately representing what kinds of benefits will actually come from an Opp Zone investment.
Addressing and Alleviating Concerns
Investors are eager and excited about Opportunity Zones, but many are waiting for guidance and solutions that can address their concerns. Recent regulations certainly provide some of that clarity, but sponsors can take it a step further by providing investors with transparency, accessibility, and insights. Investors want to feel confident that they are making an informed decision about choosing a sponsor and making an investment.
At its simplest, transparency just means giving investors easy access to information — not just in the investments that have been made but of the deal pipeline and the investment thesis in general. This practice allows sponsors to build credibility with their investors and enables an open exchange of information, which can ultimately facilitate a smoother transactional process. Today’s investors don’t only expect firms to be transparent, they demand it. In fact, two-thirds of investors cite transparency as being an important consideration when making an investment.
Along with transparency, investors expect insights into how their money is performing and where it’s going, as well as easy, on-demand access to their investment, project progress, and key documents. With the ambiguity around Opportunity Zones, it will be increasingly important to communicate frequently and effectively with your investors. That means more than a short quarterly or even monthly email. Even if there is no major news to report, investors will be happy to know that you are taking the time to engage them. No one has ever pulled out of an investment due to over-communication. The more engaged and connected investors and sponsors can be, the more benefit both parties will receive from the relationship.
As more information becomes available, the excitement generated by the Opportunity Zones program is expected to rise. Soon we will see more of these projects coming to fruition. While some challenges lay ahead with these new initiatives, there is no doubt that Opportunity Zones are an attractive investment option. However, it will be critical that investors have the accessibility and transparency that makes them feel confident about their investment. And by using reporting technologies, real estate professionals can better navigate the shifts in investor expectations. As investors become more aware of these enhanced communication techniques, this kind of tech will transition from “nice-to-have” to necessity.