Whose Opportunity Is It Anyway?
By Mark Olshaker
15 min read
A variety of usage of Opportunity Funds
When the Opportunity Zones program was added to the bipartisan Tax Cuts and Jobs Act of 2017, it was presented as a triple bottom line win: helping underserved communities achieve economic growth and build wealth for residents and businesses; bringing a new source of investment dollars into those communities; and offering the new investors an attractive way to defer and even offset capital gains taxes. The program has had its critics who claim that some of the investment has gone into areas already doing well or on the upswing, and that the main beneficiaries were not the target communities as much as the administration’s target investors. But many Opportunity Funds have taken the mission-oriented approach seriously, aiming, in the words of Fortuitous Partners of New York City and Scottsdale, AZ, to “do well and do good.”
Opportunity Funds have flexibility and are intended to be utilized in a variety of ways. So Tax Credit Advisor took a close look at several funds and their managers across a variety of approaches to gauge the current state of the program. The one commonality: The investment itself has to make sense and, “The tax tail cannot wag the deal dog.”
Boston Financial: LIHTC and Workforce Housing
The Boston Financial Opportunity Zone Investment Fund LP is focused on Low Income Housing Tax Credit and workforce multifamily apartment projects. “When we first saw the OZone statute and looked at our own push list, which is about 200 to 250 projects around the country, roughly 30 percent were in OZones,” says Fred Copeman, executive vice president for advocacy and new business initiatives. “‘So,’ we said, ‘Here’s some additional tax benefits we can use to reach additional investors and broaden the equity market.’”
Since most financial institutions that have low cost of capital don’t have much in the way of capital gains, OZone money has come largely from individual investors and family offices. “It’s been tough sledding,” Copeman concedes. “After a year-and-a-half, we have about $75 million – a lot less than I would have hoped for, and the financial outcome is less attractive than we thought it would be. Regular corporations don’t look at these investments because of the rate of return, individuals can’t use LIHTC in most cases, and the final regs dealt us a setback in saying that in a partnership, you have to recoup tax losses from when you make the investment to the date when the deferred tax is calculated in 2026.”
One of the big questions is whether the OZone program will be extended beyond its original ten-year horizon. “I was very optimistic about a year ago,” Copeman says. “Then we started seeing projects that friends of the president had done [reported] in The New York Times, and our friends in the Democratic Party were very unhappy about this, seeing it as a playground for rich investors. Now they’re talking about reigning it in. The IRS will start asking for reports on the impact of these projects, and I’m fine with that. Senators Cory Booker [D-NJ] and Tim Scott [R-SC], who sponsored the bill, are trying to level the playing field for affordable housing projects and get us back to where we thought we were two years ago with the IRS regulations.”
Copeman thinks Community Reinvestment Act (CRA) reform proposals could expand the types of qualifying OZone investments, and, “That might bring in more financial institutions.”
As far as the intent and mission of the OZone legislation, Copeman says, “I think it’s been a great success for market-rate projects. A fair amount of capital has been raised. There will be successful real estate deals in market-rate housing and hotels. In affordable housing, the wins are few and far between.”
Winn Development: Creating Project Viability
“The whole premise of Opportunity Zones is: How do we create opportunities and investment in many of the lesser-served areas?” states Lawrence H. Curtis, president and managing partner of Boston’s WinnDevelopment. “We welcome it, because a large part of what we’ve done would have been in OZones. The premise is great, but some of the goals are difficult without subsidies. So, how have we addressed this? How do we create project viability?
“First, utilization of historic properties that can avail themselves of Historic Credits. Second, acquisition rehab of blighted projects that could meet the basis test in OZones; when you look into the economic activity that has revitalized blighted areas, the initial round is usually not through new buildings. And third, deep subsidies from tax credits and other elements to bring down the effective cost.” He adds that the basis text should be relaxed.
Though he sees some obstacles, he says, “New Markets do work. We have one that could be applicable – a million square feet in Rochester, NY that we’d like to bring a partner in on.
“All of our OZone investments have been with our own capital. We’ve tried to identify pure market-rate development but haven’t found anything where our own, and third-party capital would be enough. Sponsor equity is coming from our own gains and tax credit investment and debt are coming in from normal sources.”
Curtis says, “Workforce housing is a topic near and dear to my heart,” and Winn has made a major commitment across the affordable spectrum. But the new environment has created challenges. “We bought a project for $60,000 a unit, and spent another $30,000 on each one, then leased it out as affordable housing. That project today won’t get sold to us as affordable housing, but to someone with larger goals.”
As far as the other goal of the OZone legislation—business development—he says, “Rules are so complex on where revenue needs to be derived from, it just didn’t work for us.”
In sum, “We’re optimistic, we’re bullish, we’ve done a few and we hope to do more. We hope the program will be extended and successes will breed other successes. We’d like to see the program simplified and more user-friendly. But for developers who are used to the world of tax credits, it should work.”
GoodHorn: Improving the Senior Living Landscape
“When I got into this business, I thought the big building model for senior living had flaws. If you have a lot of needs, you might fall through the cracks. If you’re confused, you might not want to walk down a 100-foot hallway.”
“I’ve got several developments in Texas, with a focus on single-family and townhouses. But I’m a developer who likes to find opportunities. I was one of the first people in Texas who recognized the potential of OZones, after the tax cut bill passed. It just happened that our first project in Denton was in an OZone.”
The first statement is from Loe Hornbuckle, CEO of Sage Oak, developers of assisted senior living in Dallas. The second is from Austin Good, principal of ANG Development Group of Plano, TX. They came together to form GoodHorn Senior Living Opportunity Zone Fund.
“We focus on boutique senior living,” Hornbuckle explains. “A complex of small buildings on one campus, with 16 residents each, a one-to-four staff ratio during the day and one-to-eight at night, all designed around our seniors’ needs, interests and specific medical requirements. This way, food, care and communications all improve. Each building is like a large home.”
Hornbuckle was looking to “put some scale” into his concept and Good, whom he met through a real estate podcast, says, “We happened to have just contracted for a 72-unit development. I’d already negotiated for a 30-acre tract and I was only using ten acres. Hornbuckle was skeptical at first but came to check it out. He realized there was definitely room. We hired a professional feasibility company to confirm our findings. We took it from there and closed on the land.”
“The OZone was a unique element,” says Hornbuckle. “We bought the land and conceived of the project before we realized the mechanism.”
The Denton project, located 50 miles northwest of Dallas, will include 98 units in the same residential care home format, allowing for higher caregiver-to-resident ratios compared to a standard assisted living community. With a loan of around $12 million, GoodHorn is targeting $6 million in equity from Opportunity Fund investors. They expect to break ground in March with the first building coming online in January or February 2021.
“People assumed Denton was urban and impoverished,” says Hornbuckle. “But a lot of this comes from census data that is ten years-old and not representative of today’s environment. We think this type of project will bring jobs and prosperity to the area and a lot of caregivers will appreciate our model for improving the landscape of senior care.”
“There are three major hospitals and three universities nearby,” Good adds.
Among the fund’s investors, he says, are “Real estate folks who didn’t want to go through a 1031 exchange, successful people who’ve sold companies and invested in multiple OZone programs, people who’ve sold stocks and are getting out of paper assets and big tech companies with a restricted amount of time to sell to avoid big tax hits.” Others have invested without capital gains, necessitating two classes of private investors. Hornbuckle says the ten-year hold makes this a good vehicle for senior housing investment.
Good is high on OZones as “another tool in the real estate investor’s toolbelt, depending on your goals. It’s a program I would love to continue participating in as long as the tax tail doesn’t wag the deal dog. And once you’ve exploited those areas that are not in grave need, you’re still going to have a ton of capital on the sidelines. As a developer, you’re going to want to take advantage of that. There’s so much capital available, I can’t see OZones not having an impact.”
PrimeCore: A New Chapter in Real Estate Investing
“It’s not a 1031 exchange. It is a meticulously vetted program for building wealth and opportunity and a new chapter in the real estate investing world,” states Ara M. Kervandjian, chairman, CEO and cofounder of PrimeCore of Arlington, VA and State College, PA. Originally, there were five PrimeCore Opportunity Zone Funds, covering multifamily and workforce housing, office, mixed- use, retail and hospitality. “We set up five funds because we were committed to five projects,” Kervandjian notes, “and we wanted to have the structures in place. Now, because of the regs, we’re collapsing them all into one, which will improve operating costs and improve returns.
“We’ve been real estate developers for over 40 years, in multifamily and mixed-use. Student housing is a core, as well as industrial warehousing. We’ve played a big role in providing space to the oil and gas industry. We’re familiar with a lot of small towns because of that and got into affordable housing. We’ve done five projects in the last five years, of 12 to 48 units. The OZone program became interesting to us because we work closely with financial institutions, law firms and accountants.
“In late 2018, we went out looking, familiarizing ourselves with markets and attending conferences. We learned a lot and the Greenberg Traurig law firm tax and real estate departments kept up on the rules for funding OZone businesses. But projects aren’t easy to come by that make good real estate and operating sense. We all want to help society, but there are a lot of developers out there who will build for any reason, and you dry up investors if [the investment] is wasted. We are not the kind of firm that deals with large institutions. I don’t think this is going to marry well with funds or institutions that have to invest a certain amount every quarter and make it work. We’re working with wealth advisors to unwind some investments for accredited investors throughout Pennsylvania and Virginia.
“We’re looking at mix-used residential and commercial and building from the ground up. We have our own matrix to identify markets, then our own people will go out. We’re looking to grow that sector on projects that have multiple phases if we can find large enough tracts of land. Our funding is a combination of 75 percent OZone and 25 percent regular investment, but with the OZone calendar dictating a ten-year hold. This is a great program for people who want to start a business. There are real tax benefits after that period.”
In summary, Kervandjian says, “The program should work. The OZone businesses themselves should improve their [communities] and as it gets tweaked, it should make a significant impact on these markets.”
Connect Up!: Jumping in Head-First
“Can we promote community investment without disenfranchising and displacing those already in the community,” poses Y. Elaine Rasmussen, CEO of Social Impact Strategies Group of St. Paul, MN. “Let’s jump in and see if we can do really good work. Let’s jump in head-first.” That was the idea behind the Connect Up! Integrated Capital Fund, which is aimed at “mostly high net worth folks, mission-focused investors across the state of Minnesota. People aren’t thinking about impact; impact and location are a bonus that puts it across the finish line.”
But the mission is critical to Rasmussen. “The unique thing about our fund is that it is using real estate to securitize money invested in businesses. The people we deal with don’t have access to commercial real estate at reasonable prices. If you fail in our business, you can never get another lease. But we can be flexible and creative. If we lease our space to them at a reasonable price, it allows the business to grow comfortably. One of our entrepreneurs was a beauty shop owner with six chairs. Our lease allowed her to move to a new 12-chair salon. Black women know this is a $3 trillion industry, but if you approach white male investors, they don’t understand the growth potential. We understand opportunity. We say, ‘Let us help you grow,’ which will help us because eventually, there will be an equity payout.
“Our mission has stayed the same, only expanded by OZones. We stage Connect Up! conferences where we hand select entrepreneurs and investors, creating a mechanism for private equity pipelines. The relationship between social impact and return on investment is inversely proportional. If you want your community to improve, you have to give up something of yourself. But the tax advantage helps make up for the below-market return, so we can still have a social impact.”
The fund will be ready for investment by June and Rasmussen would like to see the OZone program made permanent so that money invested in communities in need can be recirculated. “We’re very plain about what we do and realize it’s not for everyone. We’re not trying to do 12 percent rate of return. If you get involved with us, you know what you’re getting into. We love our people, and anyone interested should reach out to us.”
Fortuitous Partners: Do Well and Do Good
“I’m a huge advocate of this program,” states Brett Johnson, cofounder of Fortuitous Partners. “There was private capital sitting idle that wouldn’t otherwise go into these markets, producing tens of thousands of jobs and tremendous social impact. I’m particularly interested in leveraging sports anchors in Opportunity Zones.”
Areas of major cities have been revitalized by placing major league sports stadiums in their midst, Washington, DC’s Nationals Park baseball stadium being one of the recent examples. Johnson realized that the same results could be accomplished with sports teams a rung or two below the major league level. “I own a pro soccer team in Phoenix, along with a great group of partners. We have 10,000 kids in our youth program. We were looking to build a bigger stadium, and the OZone program was a game-changer.
“Increasingly, companies want to work, and people want to live around these sports and entertainment districts. Our idea is to build year-round, multiplex arenas in OZones. The long-term hold and appreciation work to everyone’s advantage. It doesn’t have to be the [highest league] to attract people. The franchise fee for a new Major League Soccer team is $325 million. We focus on the level just below that, where the fee is $15 million.”
As an example, Johnson is developing a 45-acre site in an OZone on the Pawtucket, RI waterfront that he says was “long overdue for revitalization. A United Soccer League franchise and 10,000-seat stadium will anchor a $400 million development of office, retail and a hotel/event center. State and local officials are contributing $75 million.
Johnson is currently looking at moving into Baltimore and Cleveland with similar concepts.
Like many OZone investors, Fortuitous capital comes largely from high net worth individuals and family offices, looking for a combination of appreciation of assets, social impact and diversity of investment. “We have relationships with Coplex, an important venture capital accelerator, and Jones Lang LaSalle on the real estate side.” Johnson’s Fortuitous partners are focusing on tech and industrial uses within OZones.
Johnson says, “We’ve been working for over a year in a true-public-private partnership with the capital stack and leveraging the OZone program to make transformative changes in regions that desperately need them.”
Story Contacts:
Fred Copeman, fred.copeman@bfim.com
Lawrence Curtis, lcurtis@winnco.com
Austin Good, austin@angdevelopment.com
Loe Hornbuckle, loe@thesageoak.com
Brett Johnson, brett@fortuitouspartners.com
Ara M. Kervandjian, arak@primecordfund.com
Elaine Rasmussen, elaine@socialimpactnow.com
