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As we continue down the path of successfully raising capital for our opportunity zone deals, we often discover new resources to help achieve our goals. It became apparent early on in this process that the kind of investor we were looking for had a very different profile than those we had worked with in the past on more traditional real estate equity transactions.
The opportunity zone investor is unique in that they have to be up against a capital gains event where the clock is ticking in order to deploy their capital properly and realize tax benefits. Unlike your typical 1031 exchange buyer who has sold a real estate investment and is looking for a like-kind transaction in order to defer their gain, the OZ investor could have sold anything — a company, stock, bonds, real estate, etc. — and now be looking for a safe home where they can defer their capital gains.
This reality makes the investor pool much broader, and often the OZ investor may have no previous experience investing in real estate at all. Due to that, it can be much more challenging than usual to identify the proper profile of investor to target for these specific types of investments.
Unlike traditional commercial real estate, we have yet to see a marketplace of OZ investors where you can go to find accredited buyers who also happen to be in a capital gains event. (Free business idea for budding entrepreneurs out there — think LoopNet for OZ investments.) Because of that, sponsors would do best to utilize several different resources in order to identify the right qualified investors for these deals. Let’s take a deeper dive into five of the sources that have brought our firm the most success thus far.
1. Financial advisors: This group is always looking for quality investment opportunities for their clients who they know may have a capital gain event on the horizon. Many of them operate their own private book and may not have direct access to the kinds of OZ deals that are in development. We have had good luck contacting some of the more entrepreneurial-minded financial advisors out there who see the OZ program as an ideal safe harbor for their clients to invest in to help defer their taxes over a 10-year hold.
2. CPAs: Just like the group above, it is the CPA’s job to advise their clients in the best way possible on how to defer taxes into sound investment opportunities. They have their finger on the pulse of when their clients may have a large gains event coming, and they are there to counsel them on their best options to avoid taking a massive hit upon a sale of a given asset. We have found CPAs to be a valuable resource, eager to learn more about the OZ program and what potential deals may be in the best interest of their clients to consider when making an investment to protect their gains.
3. Crowdfunding: We are admittedly newer to this option, but after carefully vetting multiple different groups, we have partnered with one who we believe will help accelerate our fundraising efforts considerably. This particular group has a significant database of registered accredited investors on their platform who are actively looking to invest as little as $15,000 to $20,000 in OZ deals. Crowdfunding is an efficient way to passively reach a large audience of investors who are specifically looking for what you have to offer. Based on the data we have seen to date, the opportunity looks very promising, especially as it relates to scaling a business.
4. Other OZ funds: I recommend tracking every new OZ fund that comes to the marketplace (and there are a lot of them) to see who is focusing on what specific product type and geography. For example, since our firm focuses strictly on student housing and multifamily development deals, we have found there is often crossover between investors who are looking to deploy capital into different product types. Be in contact with the groups that are the most active and are actually building projects (this is a key point) to compare notes and refer potential clients.
5. Networking: Good, old-fashioned networking is a consistently good strategy. Letting everyone you know in the real estate space — attorneys, owners, lenders, other developers, brokers, etc. — that you are focusing on OZ development can bring a great deal of successful leads your way. Because the program is still so new, we have found that everyone in the space wants to learn more about how it works and meet with whoever is successfully raising equity and building projects. By positioning yourself as a market leader and attending or speaking at conferences specifically related to the topic, you can increase your visibility and ability to convert interested parties into new equity investors.
The OZ space is a brand-new frontier, and we are all learning it as we go — don’t let anyone tell you otherwise. By sharing what we know, we can all better navigate the obstacles and challenges that a budding industry presents.