New Opportunity Zone Rules Makes Rehab Projects More Affordable
All of the answers provided by the Treasury Department illustrated the larger point that the government wants this program to work, says Charles Clinton.
WASHINGTON, DC—Since the release of the latest round of rules for Opportunity Zones at the end of last week, investors have been combing through the document to see what is allowed. One conclusion reached by Charles Clinton, CEO and co-founder of EquityMultiple, is that the bar for rehab projects was lowered significantly in terms of how much money needs to be invested in order for it to qualify.
Investors have to double the basis when improving a project and the new rules made clear that they are not excluding the value of the land in calculating whether the value of the property has been doubled, he tells GlobeSt.com. “So if you buy a building, then all you have to do is double the value of the actual improvements to the property—just the building, not the land and the building.”
It may seem like a nuanced point, but Clinton predicts it will have a significant impact on how much money flows into rehabilitation of existing properties in the Opportunity Zones versus new development. “Spending as much as the building is worth is still a lot of money to put into a new building, but taking out that land cost—that’s a meaningful reduction,” he says.
More than likely, he continues, most of the investment in Opportunity Zones for real estate will be ground up development. “It’s usually easier to start from scratch than it is to go into an existing building and improve it, but I do think that this paves the way for rehabilitation to be a much bigger component of the overall program.”
The Rules Offer A “Practical Flexibility”
In general, the new rules clarified what a lot of investors had been hoping for, Clinton says. One example: it was unclear whether debt could be placed on the properties and that was clarified (it can). “I think what the rules did was illustrate that the government really wants this program to work and they are going to create the practical flexibility you need to maximize the number of dollars sent in.”
Another clarification Clinton points to is the type of gains eligible to be rolled over. “There was a question about whether, if you were a partnership and you sold the partnership, if all of the funds had to roll over or whether individual partners could take their gain and roll it over.” The answer provided by Treasury: individual partners can make their own decisions rather than having the partnership make the move.
This is a distinction from the 1031 program, Clinton says, and it highlights the flexibility the Opportunity Zone program offers.
Waiting for the Green Light
This particular point was important to Clinton as EquityMultiple had plans to JV in an Opportunity Zone fund and was waiting for the answer to this question before it decided to move forward. It is partnering with New York based developer Youngwoo & Associates for a $500 million fund, he says.
YoungWoo has two projects it is actively developing in Opportunity Zones right now, Clinton says. “We have been waiting for this guidance to come out before plowing forward into the paperwork.”