First Opportunity Zone Project Breaks Ground

The first opportunity zone fund development has officially broken ground. Private equity firm Virtua Partners and its hotel management affiliate Hotel Equities has started development on the 130-room Springhill Suites by Marriott in the Phoenix suburb of Avondale. This is seemingly early project in the opportunity zone saga, and is moving forward as Treasury officials map out the remaining regulations for these investment-friendly zones. However, Virtua was an earlier believer in the model and began fund raising last summer and planning a development pipeline even earlier.

“Our investments over the years have always been tax-centric. We followed the legislation as it made its way through Congress in 2017, and when it passed, we knew that it was going to have a pretty transformational impact on commercial real estate,” Quinn Palomino, principal and co-founder of Virtua Partners, tells GlobeSt.com. “As soon as it was passed, we put together a pipeline of projects. We currently have a pipeline of more than 120 projects across the country, mostly concentrated in the Sunbelt and primarily in residential and hospitality assets.”

So far, opportunity zone investing has been focused on developing affordable housing in underserved communities, but Palomino says that hospitality actually offers a better return for investors under the opportunity zone model. “Many investors are looking for cash flow in their opportunity zone investments, and in the commercial real estate sector, hospitality has the highest cashflow. With hospitality, we are able to achieve a double-digit cash-on-cash return over the 10 years with an IRR in the upper teens,” she explains. “There are pretty hefty tax benefits out of the tax reform in the form of increased in expensing and accelerated depreciation. These passive losses can be used to offset other income. For these reasons, hospitality is the strongest return profile of the major commercial real estate sectors.”

Hotel assets also fuel economic activity, and that is important for Palomino, who is as equally focused on the social impact component of opportunity zone investing as she is on providing strong returns to investors. The Springhill Suites by Marriott project will generate 120 construction jobs and 30 full-time permanent jobs. “We need to keep in mind the goal and the spirit of the legislation,” says Palomino. “We can’t lose sight of the social impact component. The reality is that life has changed in the US, and it is almost impossible to hit the middle class. If you don’t have a college education these days, people find themselves in dead-end jobs. In hotels, people come in at the front desk, and it is an incredible talent pool. The opportunity zone fund has allowed municipalities, investors and businesses like ours to come together so that we can create projects that make sense and get a return for investors.”

The Avondale suburb of Phoenix is a market that is still struggling from the recession, but it has economic drivers that made it an attractive opportunity zone investment market. “We like Phoenix because it is low-tax, has a moderate cost of living and the regulatory regime is not overly burdensome,” says Palomino. “This particular site is in an area of high growth. It is adjacent to two freeways and it has significant economic drivers. This is an area where we see that continued drive for growth.”

These are the characteristics are true of all Virtua Partners’ investment markets. “It has been important for us to go into markets that have long-term demand drivers,” says Palomino. “We often say, ‘if you don’t create the drivers, you go to where there are drivers.” We are holding these projects for 10 years, and the projects with competitive advantages will continue to drive growth.”