Who Is the Right Capital Base for Opportunity Zones?

Opportunity zone funds are the hottest topic in commercial real estate. Last month, the first round of regulations was officially released, answering many of the questions investors have about the funds—but not all of them. There are still a set of unknowns, most of which should be answered in a second round of regulation announcements at the end of the year. Other mysteries will have to come from experience rather than guidance, namely the question of who will be investing in these funds and which capital base is the best demographic for these opportunities.

“We haven’t seen a lot of focus on what the capital base looks like and who the right investors are for these projects,” Adam Hooper, CEO of RealCrowd, tells GlobeSt.com. “Is it going to be high net worth individuals that have capital gains, or is it going to be unaccredited investors that have capital gains? They are probably less likely to have capital gains, but there is nothing in this regulation that prohibits an unaccredited investors from participating and taking advantage of that gain deferral. We are trying to figure out the best capital base to fund these opportunity zone projects.”

RealCrowd is already looking at the prospect of opportunity zone funds, but says this is the firm’s biggest question. “We know we have the product and we know we have access to do these deals, but the interesting part is finding the right capital base to fund these projects,” says Hooper. Guidance on the capital will come from the opportunity zone fund regulations, while investor qualification falls under the purview of the SEC. “There no restrictions on who can invest, but there are more restrictions on the types of gains that are eligible to invest,” adds Hooper. “The opportunity zone pieces doesn’t impose a restriction on who can invest. That is really a securities issuance.”

While there are questions, the first round of guidance has satisfied investors, and Hooper says that it has already spurred heightened activity. Specifically, he was happy with the clause covering the removal of land basis, which applies only to the improvement value; the guidance the only capital gains will qualify for the funds; and the clarification that the fund can sell assets and transact.

The biggest clarification in the regulations, however, was the 36-month time frame to deploy capital. “That was a big one for the investors that we are working with. The working capital safe harbor was a big one for us. It wasn’t clear in the prior legislation how quickly you needed to spend that money,” explains Hooper. The ability to have some more flexibility on how you can deploy that capital more responsibly was important.”

This time frame flexibility also creates flexibility on the capital side, according to Hooper. “If you are a business owner and you have a $10 million windfall after a sale, it would be unreasonable and difficult to expect someone to deploy any portion of that capital in a six-month period,” he says. “The ability to invest in an opportunity fund and know that fund has a 30-month safe harbor is going to create more flexibility for both sides, both the managers that are raising the money and the investors that are participating in these opportunity funds.”