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This past week there was no net movement regarding the 10-year yield.

Okay let’s shift back to the second part of Understanding Opportunity Zones.

Understanding Opportunity Zone Investments – Things You Need to Know (Part II)

In the previous e-blast, I explained how the Opportunity Zone investments (Part 1) work.  This week, I will go a bit deeper.

Popularity and the 4 Main Types So Far:

Due to the significant tax benefits, OZ investment groups are springing up all over the place.  There are four main types that I have seen thus far.

  • Large multi-property funds similar to buying into a somewhat blind pool of investments.  This is more difficult to analyze at the individual property level.  Investors will be buying more on the reputation of the sponsor and their historical track records.
  • Smaller individual groups going after projects in Opportunity Zones.  It is important for these groups to surround themselves with partners that will ensure success at both the project level and to stay within all the compliance rules.
  • Institutional Real Estate Professionals from the Securities industry that are offering single project offerings that meet their investment criteria.
  • Broker Dealer Opportunity Funds similar to the first one here.  These are being marketed through financial advisors that have the proper licensing.

Where Investors Most Likely Will Come From:

It is important to note that short or long-term capital gains can be a source of funds.  When you step back, then this can open up money that has been locked up for investors who have resisted selling their respective investments due to the tax consequences.

Here are a few ideas of potential investment sources. Whether or not these strategies are appropriate for the individual client needs to be analyzed thoroughly.

  • Investors who want to get off the 1031 exchange “merry go round.”  Instead of being locked into their current property, investors can opt to sell, take their tax-free proceeds, and then invest some or all of their capital gains.
    • This allows flexibility should an investor fear that the 1031 exchange provision may be taken away in the future.
    • The investor may not be happy with the investment they are currently in; and they want potentially better returns.
    • The investor likes the idea of being able to get to the equity they have built up over the years.  The tax-free benefit in the OZ investment allows the investor to do whatever they desire with their proceeds after the 10+ years in the OZ investment (upon the liquidation of the qualified project or projects).
  • Homeowners who have a lot of equity in their homes, but have not sold due to the expected capital gains bill.  Again, this can allow the homeowner to take their tax-exempt $250,000 per person, and then opt to invest some or all of the proceeds that would be subject to capital gains.
  • Investors that may be over weighted in their stock/option/mutual fund investments.  This allows these investors to sell off some of their holdings, defer the taxes, and then participate in real estate investments.
  • C-corporations or individuals who have the opportunity to create a capital gain through the sale of a business.  Again, these benefits apply if the rules are followed.

Why This Matters to the Real Estate Profession?

For those dealing with owners of real estate, it is important to at least know the benefits of these OZ investments.  By being an initial source of information, you can provide your clients with choices that have not necessarily existed in the past.  Some of these clients may decide this is a viable option.  If so, then they will be looking to their real estate professional to help them sell their properties as appropriate.

Finding the Right Investment: 

The tax benefits are huge.  However, they are not worth much if the investment under performs.  It is important to find investment groups that look for ways to minimize investor risk.  Reading an operating memorandum on an investment may not be that easy if you are not familiar with these documents.

Ideally, I would suggest finding investments that align the interests of the sponsor with the interests of the investors.  Candidly, some of these groups will be much better at this than others.  We all know professionals in every business that know how to produce better results than their competition.  It is just the way things work.

Finding those groups that are known for maximizing returns by intelligently using the tools, resources and management skills to enhance returns is critically important.  In addition, those groups that find ways to align their interests with those of the investors again is extremely important.

I can go on and on here, but I wanted to get you informed.  Not all of these investments will be created equally.  Investors have a way of discovering the best opportunities.  My guess is that the best investments will get the most investment dollars the fastest.  Also be aware that some of the minimum investments that I have seen go from $500,000 on up.  Others may allow much smaller investments.

The investors will need to decide if taking advantage of this tax break is right for them.  If so, then they will have to decide which investments best fit their needs.  My own suggestion is if this is the right move, then investors should start their due diligence quickly to capture the project or projects that minimize risk and take advantage of the approaches that set up the investment for maximum returns.

Finally, please feel free to reach out to me personally to discuss this more fully. I have been following the Opportunity Zone investments for about a year now; and there is a lot more to them than just buying a property in one of the zones.

Opportunity Zones and Disclaimer

Opportunity Zone (OZ) Investments are in the news constantly now.  There are significant tax benefits to investors; and there are programs and funds cropping up everywhere.  All of my views should be verified with tax and legal advisers as is warranted.  Clearly, I am not a CPA nor am I an attorney.

That’s it for this week.  As always, feel free to give me a call with any of your strategic financing needs.

Articles of Interest:

NREI reported “Making Rent-Controlled Properties Work for You.”

Bloomberg shared “Home Prices in 20 U.S. Cities Post Smallest Gain in Six Years.

The SJ Mercury News shared “Here’s how many Bay Area homes Lyft employees can buy with IPO cash.”

NREI shared “Trends and Tips for Investing in Qualified Opportunity Zones Based on Early Activity.”

See the table below for approximate interest rates.

Type Rate Fixed Term
Apartments 3.935% – 4.510% 3 to 10 year (30 yr amortization)
Commercial 4.185% – 4.760% 3 to 10 year (25 yr amortization)
SBA Lending Call for Options Call for Options