CCIM Feature CCIM Education

A Return to OZ

The opportunity zone program continues to thrive despite skepticism and the pandemic.

It’s only been three years since opportunity zones were created to encourage investment in low-income communities across the country. The program has been welcomed and used by many, though some look on with skepticism. Now, opportunity zones face new challenges related to the COVID-19 pandemic. 

The Qualified Opportunity Zones program had bipartisan backing as a part of the 2017 Tax Cuts and Jobs Act. State governors nominate low-income census tracts to be opportunity zones, which are then certified by the Treasury Department. Investment comes through opportunity funds, a vehicle developed for the program. Funds need to invest at least 90 percent of their capital in OZ assets, which are classified broadly and include not only commercial and affordable residential real estate, but also investment in startups and local entrepreneurship, historic renovation, industrial developments, and job creation initiatives.

The program’s tax incentives are meant to encourage long-term investment. Investors get numerous benefits: a temporary tax deferral for capital gains invested in an opportunity fund; a step-up in basis (the basis of the original investment is increased by 10 percent if the investment in the fund is held by the taxpayer for at least five years and by 15 percent if held for at least seven years); and a permanent exclusion of any future capital gain income realized upon the sale or exchange of an investment in a fund if the investment is held for at least 10 years. 

Still, the program has generated controversy, with critics noting examples of questionable designation of tracts and billionaires using the tax break for projects such as luxury condos or other high-end uses that provide little benefit to struggling neighborhoods. In January, the Treasury Department initiated an investigation into the program at the request of three Democratic lawmakers, including Sen. Cory Booker, one of the program’s original backers. And in June, two members of the House Subcommittee on Economic and Consumer Policy requested documents from the Treasury Department questioning the eligibility of tracts in Detroit, Los Angeles, and Oklahoma City. 

At the same time, though, the program has boosted economic development projects across the country with participation by governmental bodies, nonprofit groups, investors, the real estate community, and more. There are now more than 8,700 OZs, with projects in every state and territory. According to September figures from Novogradac, more than $12 billion has been invested in opportunity funds. The firm, a nationwide accounting and valuation company based in San Francisco, reports fund activity on its Novogradac Opportunity Funds List, and noted an increase of 19 percent since April, shortly after the COVID-19 national emergency was declared. 

“We’re excited by the wide use of opportunity zones and the different activities they’re supporting, as well as the geographic distribution of where investments are happening,” says Rachel Reilly, director of impact strategy for Economic Innovation Group, a Washington, D.C.-based bipartisan public policy organization. Opportunity zone funding, she adds, “isn’t meant to be the only source of financing in any one deal. It’s a source of financing that can come in and accelerate a project or close gaps in the capital stack. That’s where we’re seeing it used most frequently.”

Opportunity Zones

EIG has done extensive research on OZs, and the organization offers a deep well of resources, planning tools, demographic information, and examples of how OZs are being used. Among the projects EIG spotlights:

  • Construction of an Orlando mixed-income, energy-efficient apartment building with 96 affordable and 24 market-rate homes.
  • The renovation of a vacant Newark, N.J., hospital into an arts education center with office space for nonprofits and 25 apartment units, including 20 co-living units.
  • Construction of a $400 million renewable diesel plant in rural southern Illinois.

Late last year, Forbes unveiled its Forbes OZ 20, a recognition of 10 community organizations and 10 opportunity funds that were “harnessing the new tax policy to unlock transformative economic potential and create lasting change in America’s overlooked communities.” The organizations are a mix of statewide, regional, and municipal groups that focus on job creation and neighborhood revitalization. The funds have both local and national focus and concentrate on a variety of areas. 

The list also demonstrates the range of activity outside major metropolitan areas. “One of the tenets of opportunity zones was to get investors looking outside of their traditional geographic footprints, where they usually invest,” says Reilly. “By nature, it moved interest into secondary markets, and right now I think pricing in secondary markets is better than in major metros. As folks look at the long-term hold and benefits of opportunity zone investments, they are expecting that their investment will appreciate at a greater rate in secondary markets.”  

Erie, Pa., is a good example. The city’s push toward revitalization — aided by its Flagship Opportunity Zone Development Company and the Erie Downtown Development Corporation — has added two opportunity funds in the last year, as well as projects ranging from a cyber education center in partnership with a local university to a mixed-use waterfront development. In August, a New York-based recycling company announced a $100 million investment to construct a large cutting-edge plastic recycling plant in Erie. According to the Erie Times-News, the company’s chairman was attracted to the city after hearing about the $50 million opportunity fund created by Erie Insurance. 

Reilly sees activity in rural areas as well, “in communities where there’s been intentional leadership and focus on opportunity zones. It really does speak to the fact that local ecosystems play a big role where opportunity zone capital ultimately flows.”

But OZs thrive in major urban areas as well. Maurice Williams, CCIM, vice president of economic development for the Chicago Community Loan Fund, a social investment fund, points to Pullman, a historic neighborhood on the city’s South Side that has experienced a surge of industrial and mixed-use development in recent years, including a recent 400,000-sf warehouse. 

COVID and Beyond

Professionals in the OZ arena are cautiously optimistic about the effects of COVID-19 on activity in the sector. “Believe it or not,” says Williams, “there has still been lots of investment going on. Since it’s a serious part of CCLF’s mission, we never stopped lending during the pandemic. In fact, we’ve been doing more in our customer bases than ever before, from a technical assistance standpoint and a creative lending standpoint. So, when it comes to opportunity zones, specifically, the optimism is still there.” 

Down markets, he continues, provide opportunities to buy lower. “But at the same time, because this is a health and economic crisis, I have seen more and more people wanting to be philanthropic. Most of our funds come from investors — large downtown banks, philanthropic investors, foundations, and individuals. All of them have stepped up and said, ‘How can we help? We know that your mission is to serve communities that are already distressed, already underinvested. Now that they’re really in trouble, how can we help?’”

A May EIG survey of the OZ marketplace revealed that there was, in fact, a slowdown when the pandemic first hit. “Deals stopped temporarily because there were mandatory shutdowns,” says Reilly, “but folks overall felt optimistic about the future of the marketplace. The survey also indicated that investors were still looking for opportunities to place capital and that the investors who paused their conversations still remained interested in opportunities and activities, but were hesitant to make final commitments as the market unfolded and stabilized itself.” 

And, she adds, since the survey, a lot of the activity in OZ marketplace has picked up again. “Opportunity zone capital actually filled the gap where traditional capital fell out of deals. It was able to come in and complete the capital stack and get these projects moving forward.” 

Some caution may depend on the type of project. “In general, we’re not seeing much demand for new office construction, so any developments that we were looking at investing in that had a speculative office component, we’re really putting on hold for now,” says Drew Sigfridson, SIOR, managing director at the Boulos Company in Portland, Maine. Boulos partnered with Coastal Enterprises, to create CEI-Boulos Capital Management, an opportunity zone fund manager. Its initial fund through investment with Texas-based Woodforest National Bank created the Woodforest CEI-Boulos Opportunity Fund, which will roll out its portfolio this fall. 

“Two-thirds of our investments are in mixed-use projects that have affordable housing or mixed-income units with some retail-restaurant or nonprofit office spaces on the ground-floor levels, but it might only be 20 percent of the project. We’re willing to take that risk. Mostly all the projects we’re investing in the fund are new construction. If they’re permitted and approved in 2020, most are going to be placed into service in 2022. That’s two years out, and a lot can happen over the course of the next 18 to 24 months.” 

There’s also potential for opportunity zone projects as municipalities and states move into pandemic recovery plans. “We’ve been really encouraged that opportunity funds have been working with local governments to identify what the pressing needs are in the recovery effort,” says Reilly. One example: In June, Massachusetts-based Arctaris Impact Investors announced an initiative for 10 cities to receive up to $25 million in funding for recovery community development plans in opportunity zones. Arctaris will provide 80 percent of the capital; the city is responsible for raising the other 20 percent. The proposal is aimed at areas such as digital-divide issues, affordable housing, renewable energy, and transportation infrastructure. 

Demographics in OZ


Running the Numbers

While OZ projects can offer significant social benefits, they’re still a business deal. “Most investors who I talk to who are looking at opportunity zone deals first want to make sure that the deal really is viable and makes sense as a stand-alone real estate investment,” says Sigfridson. “The opportunity zone benefits are really the cherry on top — they may be a differentiator for two deals that are somewhat equal. You might attract more investment into a deal that has OZ benefits as opposed to one that doesn’t, but it’s really important to find projects that are viable.”

It’s also essential that the project aligns with community needs and values. “Especially in the midst of the pandemic, the best strategy for moving forward on an opportunity zone deal is ensuring that you’re in alignment with community priorities,” says Reilly. “That’s really helpful to ensure that there’s demand for the type of project you want to deliver. It helps move projects forward and can help get regulatory relief at the local level.” 

Sigfridson notes building local relationships is essential as well. “At the end of the day, everything seems to be about people, and so trying to find local talent, where those partners really know the market, is key,” he says.

Sigfridson also advises the importance of a good team. “People should find an attorney 
and an accountant who are well-versed in opportunity zones and funds and have had experience in placing those investments. We’re on the phone with our attorney on a daily basis; they’re a true partner in running the fund. There’s a lot of compliance to make sure what you’re doing is done the right way.” 

One other important element: Patience. “Some projects will teach you a level of patience that you’ve never known,” says Williams. “There are so many players who have to come to the table to make that project successful, and you can never control the mentality, the mission, the understanding, and the optimism at the same time. Everyone comes to the table with their own timeframe, their own train of thought, and their own experience. Your job, as the manager of the project, is to pull all those resources together, so the investors, the project manager, and the fund manager have to realize that.”

For more on this topic, check out CCIM Institute's "Opportunity Zones vs. 1031 Exchanges: Weighing the Options" course.

Sarah Hoban

Sarah Hoban is a business writer based in Chicago.

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