Choosing the right location for your OZ investment
By Opportunity Zone Expo Staff
The U.S. Department of Treasury designated more than 8,700 tracts nationwide as Qualified Opportunity Zones, chosen by governors of each state based on census tracts. For investors interested in opportunity zones, experts say selecting the right location for their investment should be carefully considered.
“Programs are available throughout the United States, but much of the immediate activity appears to be in the major metro areas,” said John Lore, managing partner for New York-based Capital Fund Law Group. “New York has been a primary area of focus for opportunity zone investing. In the recent past, it has been difficult for investors to find quality opportunities in New York, due to rising prices.”
The top 10 areas with opportunity zones in the U.S. are Oakland, Los Angeles, San Jose, San Diego, Seattle, Portland, Phoenix, Nashville, Atlanta and New York City – areas noted due to their location in or near growing neighborhoods of growing cities, according to Fundrise.
The top five ranked opportunity zone states – scored on walkability, job density, housing diversity and distance to the nearest Top 100 central business district – are Oregon (downtown CBD,) California (downtown Oakland), Washington (downtown Seattle), Pennsylvania (Center City East) and Maryland (Inner Harbor), according to a report from Smart Growth America, LOCUS, George Washington University and SPARCC.
“In our geographic region in the mid-Atlantic we’ve identified areas that are anomalies and have experienced significant rapid organic growth in the past five years but still are in weaker census tracts,” says Andy Little, principal at John B. Levy & Company, Inc., in Virginia. “…We have made an investment in a deal that we would have made without the OZ benefits, so we expect this designated area to continue to blossom but at an accelerated rate given its OZ status.”
The Opportunity Zones program, which was enacted in late 2017 as part of the Tax Cuts and Jobs Act, provides tax deferments and breaks for investors, designed to spur investment in low-income areas.
“Since the regulations are still in very early stages, most of the interest thus far has been in locations that were already being pursued even without the Opportunity Zone benefits,” said Mike Harris, managing director of CREModels in Florida.
Jeremy Neilson, founder and co-CEO of Assure Services in Utah, says he thinks people are still waiting to see what incentives the states will give, if any.
“Some investors will likely stay local. Others will look for the best overall deal including potential tax benefits at the state level,” says Neilson.
Neilson says some states picked a good mix of urban and rural areas while others did not.
More than 75 percent of certified tracts lie within metropolitan areas, but Opportunity Zones are nearly evenly split between high-density urban zip codes and low-density rural ones, with the remaining percentage in medium-density suburban communities, according to statistics from the Economic Innovation Group.
Neilson says certain zones will be better than others, but opportunity zones support a broad range of investment types, ranging from real estate to business, rural to urban.
“There are many different strategies. Some states may offer more incentives than others,” he said.
Lore says many states and municipalities provide stacking incentives that increase the attractiveness of the opportunity zone tax incentive. He says these incentives play a strong role in investment decisions, particularly in development-focused funds.
“Much of the initial investment thus far is planned for urban areas, since recently urban investment opportunities have been difficult to find, and much of the mainstream real estate investment has needed to push to non-traditional investment regions,” says Lore.
He says the program appears to be providing a new opportunity for a new class of fund managers, many of whom are developers.
“Pay particular attention to student housing funds, development funds, and other boutique funds that can be pulled off in a relatively short period, and without needing to scale to excessively large sizes,” he said. “The QOZ regulations anticipate a fairly short horizon for investing, limited to 31 months from the time they receive investments.”