Opportunity zones have become the darling of real estate investors since their adoption last year, but the still-under-the-radar program is poised to receive a lot more attention, and possibly scrutiny, after it was promoted in the Oval Office last week.
President Donald Trump’s signing of an executive order to push more federal resources into the Opportunity Zone Program is a step in the right direction and could bolster the little known tax incentive program and the distressed communities that benefit from investments, experts said.
“I think investors in the marketplace are going to be excited that there are going to be a number of new federal benefits aligned to these zones,” Develop founder Steve Glickman said. Glickman is a former Obama administration official and one of the original architects of the Opportunity Zone program, which was enacted as part of the Tax Cuts and Jobs Act of 2017.
“Frankly, these zones need a lot more than private capital,” Glickman said. “They need infrastructure investment, they need to deal with crime, workforce training and other strategies and dollars. Opportunity zones were always meant to stimulate that kind of holistic activity not just on a federal level, but on a state and local level.”
Erik Marks, a Seattle-based commercial real estate attorney and founder of Opportunity-Funds.com, a website that tracks opportunity zone funds and designated areas, said the executive order still does not address the current shortcomings and problems that are present from people trying to do opportunity zone deals now.
“I think the regulation may be useful, but this is not a problem-solving regulation,” Marks said. “I don’t know what his strategy is, but I think when there are opportunity zone successes, he has a clear opportunity to put himself and his Cabinet at the locations for the photo opportunity. I don’t mean to say that in a derogatory sense … This is to make sure [everyone knows] he’s still part of it.”
For the past year, the at-first unheralded Opportunity Zone program, passed last year as part of Trump’s $1.5 trillion Tax Cuts and Jobs Act, has flown under the mainstream radar. The program’s goal is to generate economic development in the form of the redevelopment or the development of market-rate housing, affordable housing, new offices, retail buildings and businesses in these communities. In exchange for investments or developments in these areas, investors and developers receive a tax break or defer capital gains tax, depending on the length of their investment. Opportunity funds are the investment vehicle to invest in opportunity zones, and all an investor needs to do is fill out one tax form to start a fund and place their capital gains there to realize the tax break if they are reinvested into a business or project in a zone. These zones — chosen by the governors of each state earlier this year based on the census tracts — are mostly rural, distressed neighborhoods and low-income, high-poverty areas that historically have not seen a lot of investment dollars or are still trying to recover from the last recession. More than 52 million people nationwide live in economically distressed communities, the White House said.
While investors learned more about the program and began raising money, creating opportunity funds and investigating investment opportunities in the zones, they have done so with little mainstream press coverage. But Trump’s latest move to sign an executive order to put more federal dollars into the program while creating a council to oversee the money spent, led by Department of Housing and Urban Development Secretary Ben Carson, heightens the program to another level and could turn the Opportunity Zone program into a political minefield.
Trump’s son-in-law, Jared Kushner, and daughter, Ivanka Trump, could greatly benefit from this new real estate investment program, according to the Associated Press report. The Associated Press reports Kushner owns at least 13 properties in designated opportunity zone areas in New Jersey, New York and Maryland. Although his properties can’t benefit from the program (the properties had to have been purchased after Dec. 31, 2017) property prices in designated opportunity zones have shot up. Ivanka Trump was reported as being the Opportunity Zone program’s chief backer in the White House during the drafting of the tax law. Kushner also has a multimillion-dollar stake in investment firm Cadre, which recently launched an opportunity fund.
The program also received some backlash when Amazon chose to build one of two HQ2 locations in an opportunity zone in Long Island City, New York. Amazon is expected to receive up to $3B in tax incentives from the state and the development of the campus and jobs created there could allow Amazon to double dip with the federal program.
University of Southern California professor and Director of the Sol Price Center for Social Innovation Gary Painter said Amazon’s move shows how the program is intended to work. The idea is to bring businesses to economically challenged areas. “It’s an example of how capital could move into these places,” Painter said. “I don’t think Amazon choosing a place could cause some backlash on the entire program. It is an example that, if private capital could actually redirect where it’s going because of the designation, the zones are working as intended.” Amazon committed to hire 25,000 workers or more with an average salary of $150K in Long Island City while building 4M SF of offices.
SkyBridge Capital President Brett Messing dismissed notions of a possible conflict of interest between Trump and his son-in-law and daughter. “This law was not designed to benefit [Trump’s] family,” Messing said, adding that it was a bipartisan policy that was hatched by an Obama administration official. “They have significant investments in urban New Jersey, statistically it’s not surprising they would own property in opportunity zones.”
Messing, whose company was founded by short-lived White House Communications Director Anthony Scaramucci, is aiming to raise $3B in an opportunity fund, said that from the outside looking in, the perception doesn’t look good, but it doesn’t matter.
“I don’t think this will have an effect on the success of the program,” he said.
Time Is Of The Essence
Washington, D.C.-based Holland & Knight partner Nicole Elliott said the signing of the executive order could make a difference for those investors on the fence with the program. Elliott is part of the firm’s team overseeing the Opportunity Zone program for its clients. She said she is encouraged that the new White House council overseeing the program will need to engage with state and local governments, and that Trump’s order is not solely focused on opportunity zones, but also other economically distressed areas nationwide.
“I think it’s a strong signal the administration is all in on opportunity zones and spurring economic growth in economically distressed areas,” Elliott said. “State, local and tribal governments are excited about this program and really hungry to figure out how they could best harness it and leverage it. How do they get the things that they need and want in their communities to be invested in?” Time is critical to the program’s success, she said.
According to the executive order, the new council overseeing the program will have up to 210 days to come up with a list of “recommended changes to federal statutes, regulations, policies and programs that would encourage public and private investment in urban and economically distressed communities, including qualified opportunity zones.”
But opportunity funds are being set up now, and investments are being made now without engaging the local governments or agencies. USC’s Painter said local nonprofits and community groups are organizing ways to court investors.
Marks, the founder of Opportunity-Funds.com, believes the executive order is not going to make a big impact, at least in the short run, for investors looking to capitalize on the program now or in 2019.
“The first effects of this [executive order] won’t be felt until at least mid-2020,” Marks said.
By then, there might be a new administration. The council will dissolve in January 2021, according to the executive order. “This is just set up for the rest of [Trump’s] term,” Marks said. Still, other experts are bullish on the executive order, and having the government possibly provide more money just adds to investors’ appetite, Colliers International Senior Managing Director Stephen Shapiro said Shapiro said everyone is awaiting anxiously for that next round of guidelines, expected to be released sometime in January.
“The ball is already rolling,” Shapiro said. “Investors are rolling money into funds. They are laser-focused on it. There is going to be an oversubscription of opportunity in opportunity zones … Investors are starting recognize that they can make an investment on the ground floor and see it through, while at the same time creating a lasting impact on a neighborhood both in terms of real estate and creating jobs.”
December 14, 2018 Joseph Pimentel, Bisnow Los Angeles