For many family offices, Opportunity Zones might be just the, well, opportunity they are looking for, investment-wise. However, families should not move forward without digging deeper into the investment. With various tax benefits for investors, it all may seem like it’s just too perfect for a family not to participate in a real estate investment within an Opportunity Zone. However, the fundamentals should not be lost when looking at these projects within the area. Just because it’s in an Opportunity Zone doesn’t make it a good investment.
Opportunity Zones were designed as a development tool for economically distressed communities enacted by the Tax Cuts and Jobs Act of 2017. They’re designed to encourage long-term investments in low-income urban and rural communities created by providing tax benefits to investors. According to the IRS, “Investors can defer tax on any prior gains until the earlier of the date on which an investment is sold or exchanged, or December 31, 2026, so long as the gain is reinvested in a Qualified Opportunity Fund.”
The creators of this program claim that employment in these areas should increase as well as spurred growth and reduced poverty, but will this be the case? The fundamentals for the Opportunity Zones are to help investors, through tax incentives, to transform areas that are declining or already have failed to thrive and create economic hubs.
Timothy Weaver, professor of Urban Policy and Politics at the State University of New York at Albany, writes: “Numerous efforts have been made to assess the effectiveness of such zones, both in the U.S. and the U.K. On the whole, scholars have reached the strikingly similar conclusion that the programs did not work, at least not as hoped.”
What I have to wonder is, how can you offer an investment without knowing all of the rules that are needed to play the game? The Opportunity Zone came out at the beginning of the year, and the areas have been identified, but all of the specifics have yet to be determined. Funds are being created and sponsors/operators are already starting to talk up their Opportunity Zone Funds. I have to question, have sponsors/operators also discussed the highest and best use and identified which properties they are going to acquire? The Opportunity Zone is being considered the next best investment opportunity, but the fundamentals still need to be followed.
Assuming a family office can get over not knowing what the total rules are yet, you still need to make sure you dig deeper into the real real estate opportunity. What is the demand of the property type, what kind of property type is best for the location, what is the experience of the developer, what is the track record of the developer, how much are they putting in of their own money and what is their plan to protect the downside if the area doesn’t take off like they think it will — or the investment doesn’t do as well as they had hoped? A bad investment — even one in the Opportunity Zone — is still a bad investment.
As with any investment, family offices must be sure to not let emotion take over and as a professional representing a family, it’s important to continue to focus on the fundamentals when making a decision. This means focusing on your due diligence including the location, property type, market demand, operator, operator’s track record and if they have developed in an area similar to the designated opportunity zone.
The Opportunity Zones definitely have the potential to be a great opportunity, assuming that the operator can produce their intended results and the area agrees to grow accordingly. In the end, just remember, the real estate investment is only as good as the underlying asset and the operator.