Opportunity Zone investors should look beyond real estate, experts say
By Opportunity Zones Expo Staff
When it comes to Opportunity Zones, investors have plenty of options — but so far, most are focusing their attention on real-estate developments and land deals. Blake Christian, a CPA and tax consultant at HCVT, estimates that 80 percent of the OZ-related client inquiries he’s received have focused on real estate transactions or land purchases, with only about 20 percent relating to business investments. That’s partly because many business-focused investors have a shorter investment horizon than the 10-year investments envisioned under the OZ program, Christian says.
“The private equity guys aren’t crazy about the program,” Christian says. “Ten years is an awful long time, and private equity firms like to flip businesses in four to six years.”
The initial rush of attention to OZs has focused more on the potential tax benefits than on the underlying assets, with some funds making big promises without having clear plans for the investments they’ll make. Still, says Orlando financial planner Matt Chancey, it’s worth sweating the details: there will be significant variation in the kinds of projects available in different zones, as well as more broadly from region to region.
“Not all 8,700 zones were created equal,” Chancey says. “Some are in very different stages of redevelopment and have already had money put in for five or six or seven or eight years. It’s possible to find some OZ investments that have much higher quality assets than others.”
The first wave of OZ capital will likely go to tried-and-tested coastal markets with well-established real estate ecosystems, says Olivia Byrne, a partner with K+L Gates’ Real Estate Investment, Development, and Finance group. High-profile projects such as Amazon’s new HQ2 in Long Island City, most of which has been designated as an OZ, will draw significant investments to the area. The West Coast, meanwhile, is expected to see an influx of investments focusing on tech startups.
“Money’s going to flow to L.A. and New York and the coasts without too much effort, because people see the economic potential there,” Byrne says. “It’s the other areas, which aren’t such large metro areas, that will go wanting.”
Still, Byrne notes, there are already some large manufacturing projects being planned for rural areas, especially in the southern US, and there will certainly be plenty of opportunities for investors and developers who are willing to look beyond high-profile projects in coastal states.
“We think we’re going to see mixed-use projects, manufacturing projects, and residential as well,” says Olivia Byrne. Given the sheer size of some of the more rural OZ tracts, large-scale projects like solar energy plants could also benefit from OZ capital, she notes.
One key factor in shaping such investments will be the level of existing infrastructure, Byrne adds. Some of the larger OZ tracts currently lack proper roads and other infrastructure, as well as the entitlements needed for major construction work.
“That could be very challenging,” she says. “They definitely wouldn’t be shovel ready, and it might take two years to get roads and permits in place.”