Picking the Right Opportunity Zone Sponsors

Scottsdale, AZ—With a flood of sponsors pouring into the Opportunity Zone space, investors need to be careful. “Everyone is jumping into Opportunity Zones,” says Quinn Palomino, CEO of global private equity firm Virtua Partners. “Some of them have never even been in the business.”

With so many choices out there, Palomino says investors must focus on execution and long-term management when evaluating sponsors.

“A lot of ultra-high-net worth individuals and institutions are looking at execution,” Palomino says. “They’re asking, ‘How do we execute this successfully development?’” They have to have a team that is experienced in development.”

Factors such as weather delays and cost overruns can doom new developments. Palomino says investors need partners who have managed those challenges. “Development can be an exercise in pain management,” Palomino says. “You have to have a team that knows how to keep it on budget and on time.”

Palomino says investors want to know if sponsors are using third-party firms develop their project or if they have actually built something. It is also important for investors to make sure that the sponsor they’re working with has a pipeline. “It’s nice [for the sponsor] to be able to walk in and say, ‘Here is the property, here is the due diligence on it, here is our track record and here is how it’s being managed,” she says.

Since Opportunity Zone investments are for ten years, Palomino says a lot of investors are also looking at intergenerational planning when choosing a project.

“Investors are also looking at the social impact,” Palomino says. “Institutions also have a very genuine heart for philanthropy. I think a lot of people realize that this is a government subsidy, and, at the end of the day, this subsidy does need to give back to the community. They need the strong return, but they’re also measuring the actual improvement.”

When picking a sponsor, investors also need to be cognizant of any potential downturns. “You need to understand what their philosophy is on the downturn,” Palomino says.

That philosophy can best be expressed in the product types funds choose to build. “The asset class that people go into is critically important,” Palomino says.

If a recession is coming, Palomino suggests that investors seek sponsors that build residential projects and hotels.

“In a downturn, hotels are the last ones to be hit and the first ones to come back,” Palomino says. “People always think that’s counterintuitive. When the downturn happens, companies deploy employees out to the field to figure out what to do to survive. So, the business hotels get booked up.”

Palomino also likes sponsors that offer opportunities in the rental market, both single-family homes and apartments. “[In the current job market] If people can get a better job somewhere else, they will move,” she says. “So, the rental market is incredibly attractive for young families and even older families as they downsize.”