Commercial Question of the Week -- Opportunity Zones

MIKE HARRIS

Partner and Co-Founder

CRE Models

St. Petersburg

I think the biggest misconception about Opportunity Zones that I hear is that many folks believe it’s little more than a rehash of the old low-income housing tax credit program. As a result, people think that the properties they want to invest in either have to be dilapidated or apartments in order to qualify or it’s not worth it, and that’s just not the case. The other big misconception I see is that people think it’s only a real estate thing, but there’s a business component to it as well. But back to the locational aspects of this: Look at downtown Sarasota — there’s waterfront property in an Opportunity Zone, just north of the Quay and just blocks away from the Ritz-Carlton Hotel. A lot of people incorrectly believe that Opportunity Zones involve rundown areas or areas where there’s a lot of risk associated with it, but that’s not the case. So there are two sides to that coin. Some people feel like the government shouldn’t give any preferences to areas that people are already heavily investing in or that might be gentrifying. Others, though, say that the tax credit Opportunity Zones provide will help spur further improvements.

JOE RUBIN

Director, Multifamily Investment Sales

Franklin Street

Plantation

The biggest misconception that I’ve come across is that people are generally confused about how to qualify for an Opportunity Zone tax deferment, or how or if taxes are to be paid over a five-, seven- or 10-year period. A lot of intricate rules regarding Opportunity Zones have just been published pertaining to requirements and a few investment firms, like Starwood comes to mind, have been laser-focused on Opportunity Zones and have hired attorneys to really drill into what the regulations are and the investments that can be made. They tend to understand the rules really well, but for the most part, many investors just want to invest but they don’t understand a lot about how to qualify. And it is pretty involved; a lot has to be done. It’s a lot more complicated than just ‘here’s an Opportunity Zone, let’s invest here’ kind of thing. You have to show where your money that you’re investing is coming from, when you’re planning to put it in, you have to list the exact entity that is putting in the capital. On the surface it seems simple, but when you dig into it, there are a lot of complexities. The latest regs, which came out earlier this month from the Treasury Department, they’re 189 pages, so it’s no wonder that while a lot of groups may be flirting with the idea of investing in an Opportunity Zone, few have actually done it to date. But I think that with the new regs, as people digest them, we’ll start to see deals come together more aggressively, and will have to, because investments have to be made by the end of the year.

RICHARD LAWRENCE

Managing Partner

SRQ Property Law/Lawrence Capital

Sarasota

One of the clarifying regulations that recently came out cleared up what I think has been a big misconception on the part of investors having to do with the ability to develop multiple properties simultaneously. The thought previously had been that investors could only do one property at a time, but the new regs say that given the structure of a fund or an investment group that you can own multiple properties within an Opportunity Zone and get the benefits of that, and that should change dramatically people’s thinking about the zones and should open up the field to venture capital and others getting involved. Leasing has always been another area where people have been confused, because the thought has been that if you owned a property before 2018, you couldn’t participate in any way in an Opportunity Zone. But you can, and that’s another unique feature that’s been clarified somewhat, because it opens up the ability for start-up businesses to lease space within a zone to derive the benefits from that zone. The new regs state, for instance, that you don’t have to exclusively do business within the zone so long as your management team spends a certain amount of hours working in the zone. I think the jury is still out on Opportunity Zones, and whether the U.S. economy will derive the intended benefits from them we won’t know for several years. But since we’re seeing that they are attractive to businesses and not just developers, I think in the long run they’ll prove beneficial.

ASHLEY BARRETT BLOOM

Managing Director

SVN | Lotus Commercial Real Estate Advisors

Sarasota

My sense is the biggest misconception out there coming from owners is they seem to think the real estate fundamentals should fly out the window for properties in Opportunity Zones. There’s definitely increased activity for properties in these areas, and in many places Opportunity Zone properties are being sought out by large funds with ample capital and others, but even there, investors are still looking at, and considering, the economics of each deal before they proceed. I think they will have a real benefit but that doesn’t mean the numbers are just going to automatically run up. Until very recently, the regulations surrounding these zones haven’t even been solidified, so they’ve been kind of a moving target. Now there will be more interest in these locations but I think sellers are going to find that buyers still will have a fair amount of discipline going forward regarding the numbers for properties in these zones.

JOHN HARSHMAN

President

Harshman & Co. Inc.

Sarasota

Any time tax incentives are discussed for real estate ears tend to perk up, and that’s been the case with Opportunity Zones as well. The biggest misconception I’ve run across with the zones is many believe that they are basically 1031 tax-deferred exchanges on steroids. They’re “similar but different,” to paraphrase Yogi Berra. Capital gains invested in Opportunity Zone properties can be deferred until Dec. 31, 2026, whereas in a 1031 exchange taxes on gains are deferred only until a purchased property is sold. The real benefit of Opportunity Zone investment will be derived if an investor holds the property for 10 years. Most investors and owners are still figuring out details regarding the Opportunity Zone rules, and as with most components of the federal tax code, Opportunity Zones come with their own complicated and confusing road map.