Opportunity Zone Funds Have Already Hit $20B

Opportunity zone funds are rapidly growing. Last year, these funds—which were a tax benefit in the 2017 tax reform bill—totaled $5 billion. Today, opportunity zone funds total $20 billion, and by the end of the year, Kevin Nolan, director at Cushman & Wakefield, expects that they will hit $100 billion. Nolan spoke last week at NAIOP San Diego’s conference on Opportunity Zones, along with Phil Jelsma, partner at CGS3; Sondra Wagner, managing director at CIM; Katherine Crow, promise zone director at City of San Diego and Mark Cafferty, president of San Diego Regional EDC. Despite the capital flooding into this market, these are not going to be easy deals.

While there is a lot of money for opportunity zone deals, these deals will be most attractive for private developers. “World for institutional opportunity zone deals is limited locally, mostly just east of downtown. [There are] lots of opportunities for private developers, though,” Nolan said on the panel.

Opportunity zone deals are also best for experienced private developers because there is a narrow timeline. “The biggest struggle is the timelines of the law. You pretty much need entitlements and costs in place at purchase/investment. Otherwise, too much risk. We don’t go for Pre-TCO, condo deals or ground lease situations. We want clarity,” said Wagner. Nolan adds that “shovel-ready” deals are really the best fit for opportunity zone-qualified projects. He added that limited boxes were also the best fit. “Not a big high rise or a big horizontal development because not enough time,” he said. “You’re working with a 30-month time clock.”

In California, where there is a rigorous entitlement and permitting process, this timeline could kill a lot of these opportunities. “We’re hurt in California because the entitlement process can take 24 months. Not sufficient time in many parts of the country to work with the 30-month clock,” Jelsma added. “The government is supposed to release a second set of regulations—hopefully including longer timelines and more guidance regarding potential for ground-up development and ground leases.”

One of the biggest challenges for developers, however, is the long-term hold, which is unusual for a developer. “Developers are used to two models: in and out quickly or long-hold deals. This is different,” said Wagner. “Opportunistic with long-term hold. Putting less debt on it. Blend of two strategies in investing.” Nolan added, “It will be interesting to see how these longer-term holds will affect the rents the developers need to get. [Will there be] less pressure to increase rent rates?”

Some of these challenges could be rectified when the final regulations are released, which Nolan says should happen in the next few weeks. At that time, there will also likely be more interest. Jelsma said that the new regulations will likely focus on benefits for businesses. “Everyone is waiting for the second set of regulations from the Treasury, but they are likely to focus more on the business side of the law than the real estate side,” he said. “A business that moves into an opportunity zone

and stays invested for 10 years can sell its interests/shares/etc. with no tax. This won’t work for most start-ups, because 10 years is unlikely. The business community hasn’t embraced the benefits of opportunity zones the same way the real estate community has. Unknown how much benefit will result from either side.”