There are solutions and structures to ensure greater certainty in opportunity zone investments that also capably serve and include the residents of communities where OZ investments are made. But, such certainty can only be borne by those with the experience to ask the right questions.
Revitalizing Urban, Distressed Communities
When I founded my company, I was driven by a simple absurdity: Washington, D.C., the nation’s capital, had almost no grocery stores. The District was the definition of a “food desert” before the term was even coined.
Inspired by this observation, my firm went on to contribute financing for a project called City Market at O Street, which delivered necessities including a new grocery store and affordable senior living facility just north of D.C.’s business district. That was in 2008, inside the eye of the storm that was the Great Recession.
To date, we’ve invested $343 million across 15 commercial real estate projects in the District, creating over 16,000 jobs for District-area residents. From that initial investment onward, we became extremely well-versed in making investments in what the EB-5 industry refers to as “targeted employment areas,” or simply put, urban and distressed regions that are lagging economically — areas that share key characteristics with designated opportunity zones.
Planning For Government Oversight
Much has been made of the ease of self-certifying as an opportunity zone fund. One tax document submitted to the IRS, and you’re ready to begin as an opportunity zone fund. No bureaucracy; straight to the point.
There’s no guarantee the lack of oversight over this program will continue. Presidential administrations come and go, and with them come and go priorities and rules governing programs like these.
Smart investors will develop an approach to planning for and anticipating rules set by the government agency responsible for oversight. The due diligence process should include a battery of questions that range from security of principal to impact on the economic microclimate of the neighborhood.
For example, our firm finances new construction mixed-income class A apartments in transitioning neighborhoods, or newly crowned opportunity zones. All of the housing in our portfolio must meet the criteria of zero displacement, meaning we do not tear down existing housing to build. Developers must repurpose non-housing like parking lots and former industrial, fast-food and abandoned properties. We are thorough in our accounting, calculation and documentation of our work, anticipating the questions those responsible for oversight of the program may have at a later date.
Seeing Beyond The Asset
The greatest challenge in opportunity zone investing will be seeing beyond the specific asset(s) and calculating the asset’s ability to return your initial investment in the broader context of that city and area in question. Given the re-densification of urban neighborhoods, smaller and smaller geographies compose economic microclimates. The success of your property may depend on a 10-minute walk radius instead of a 30-minute drive radius like it might in the suburbs. Did you calculate that difference in your investment risk? Suburban success metrics will virtually guarantee failure in an urban environment, from the size and mix of your units to the distance to neighborhood services.
There are a multitude of considerations: Are you planning the right kind of finished product for the specific needs of the area? What is the local workforce like? Can it support the asset once it’s been materially improved? Do you have support from city leaders? What about support from the local community? How do you gain support from the local community? Are there local laws that support or undermine successful community engagement?
These are a few of the questions investors should ask when betting on developments in distressed and economically depressed areas. They may seem like basic questions at first, but in my experience in the EB-5 industry, I can tell you that these and other important questions are not ones everyone knows to ask. Plenty of poor investments have been made pursuing an easy path to victory rather than a thorough path to ROI.
The fund managers who can see with a 360-degree perspective will see returns on opportunity zone investments. And yes, it is not difficult if you use a complete equation for success. But if you leave out any variables, it will lead you away from a successful result.
If you’re chasing capital gains tax savings in opportunity zones, be certain your fund or investment team is asking the right questions. If not, your opportunity zone investment might turn into a lost cause. Remember, few fund managers have an established track record of investing in these communities, but understanding the economic microclimates is the most important ingredient for success. Choose a fund manager who has geographic expertise over one who has asset expertise or is simply someone you know.