How Opportunity Zones Change the Conversation

Opportunity Zones aren’t a magic bullet to solve all of an area’s ills or help floundering deals start penciling out. But Quinn Palomino, CEO of global private equity firm Virtua Partners, argues that they have changed the vernacular among investors.

“It is incredible transformational tool and it’s a tool that’s helped change the language among investors, city municipalities and nonprofits,” Palomino tells GlobeSt.com.

Palomino says Opportunity Zones have been especially effective in drawing international dollars to areas that those investors wouldn’t have previously considered.

“Before the Opportunity Zones, I would get a comment from Asian investors that they only wanted to invest in Manhattan or San Francisco,” Palomino says. “If you talked about Greensville, South Carolina, they’re like, ‘Where is that?”

But those conversations have changed over the last year or so. So have the ones with ultra-high net worth investors and institutions. “They were not as extreme as foreign investors, but they really liked investments along the coast,” Palomino says. “They wanted things in California, Austin, Denver and areas that are really growing, like Salt Lake City. But as soon as you start hitting other areas in the country, it was silence from the investors.”

If Palomino would suggest projects outside of these hot metros, these same investors had questions about risk mitigation. “It’s all about risk mitigation,” she says. “They wondered how they could justify these projects to their shareholders and their children, grandchildren, especially in your larger family offices. They have a responsibility to get a decent return.”

But now, Opportunities Zones provide the incentive to go into those areas, which changes the conversation, according to Palomino. One of the ways they mitigate risk is through depreciation recapture.

“There is no depreciation recapture and if a project is, for example, a hotel, then they have all that accelerated depreciation from the furniture and fixtures that they are depreciating and those are losses that they can apply to other areas of their portfolio,” Palomino says.

With this depreciation, what was once a 4 percent return can jump to 8 percent and even higher. “By the time you add up all of this additional depreciation that you don’t have to recapture ever, now you’re in the teens,” Palomino says. With these returns from Opportunity Zones, investors can expand their map.

“Now it makes sense to be in South Carolina and remote areas of Texas because of that return,” Palomino says. “They’re actually being able to give back [to communities] and they’re getting a return that is a decent return.”

And, as an added bonus, Opportunity Zones force cities to compete for funds, which can provide another benefit for investors, especially those providing housing.

“Cities and counties are competing against 8,700 other census tracks,” Palomino says. “How can they make themselves more attractive?”

If these localities want more workforce or affordable housing in their Opportunity Zone, they may offer incentives. “They may waive the development fee if that is what’s needed in order to get a higher number of units for workforce housing,” Palomino says. “With permits, rather than having someone wait a year, they can get their team on it and turned around in three months.”