Are Opportunity Zones Really Worth the Tax Break?

Opportunity Zone Funds may not be the mine of, well, opportunities that the industry expects. Experts at RealShare Apartments said that opportunity zones would be challenging investments to make, and the risk may not offset the tax incentive to invest in these in-need markets. While there was not an official panel on Opportunity Zone Funds, the topic came up frequently during the panel sessions, and the speakers were generally hesitant about the prospect.

Ethan Penner, managing partner at Mosaic Real Estate Investors who opened the conference with a keynote speech on The Transformation of the Multifamily Sector, was the most doubtful about the success of opportunity zone funds or the economic stimulation that they would bring. “Opportunity zones will largely be messy and unfulfilling,” he said. “There is generally a reason those markets didn’t attract capital. So, they are speculative. It is an artificial inducement to make investments that people would otherwise not make.”

The topic of opportunity zone funds came up on the Transaction Talks: The Art of Multifamily Dealmaking panel. Richard Boynton, SVP of acquisitions at Fairfield Residential, said that the firm is only in the early stages of looking into opportunity zones, because the regulations are still being released. However, he said that there is a lot of interest. Mark Deason, managing director and head of U.S. asset management at Starwood Capital Group, agreed that investors are interested in perusing opportunity zones; however, he, like Penner, said that he was unsure the risk would offset the tax benefits. “When you dive down and look at it, it is a challenging investment to make,” he said. “When you look at the areas that they are focused on, there are unique and questionable locations.” Still, they are raising some money to invest in these funds, due to the demand. “We will likely raise some money around it because it is what our investors are asking for,” he added. “I don’t know that anyone is investing in bulk until they figure out what it will look like.”

Hessam Nadji, president and CEO of Marcus & Millichap, didn’t specifically talk about Opportunity Zone Funds, however, he said that the benefits of the new tax plan were ample, especially for multifamily owners. “All of the benefits that were already baked in for commercial real estate were preserved and additional provisions were added. “This has not shown up in the marketplace yet. Apartments are the second biggest beneficiary of these benefits,” he said during his lunch keynote speech on the second day of the conference.

Nadji said that many of their clients have yet to understand the full scope of these benefits, and it might be years before we see the true economic impact they will have on the economy. “We had more than 10,000 people in our first webcast talking about the tax reform early in the year, and most people still don’t understand a lot of the benefits and the applications of some of the provisions,” he said. “Think about another cycle or two of these benefits of investing in commercial real estate becoming more prevalent. 60% of the marketplace sees the added value of the new tax reform for commercial real estate.”