Investors Get Realistic About Opportunity Zones
With most of these buildings, you can’t invest a renovation amount equal to the purchase price and have them pencil out
WASHINGTON, DC—When Opportunity Zones first debuted in 2018, CRE interest was undeniably high. Since then enthusiasm has moderated as investors gain a more realistic view of their pros and cons.
For example, Opportunity Zone funds have so far, on average, raised less than 15% of their goals, according to an analysis by Novogradac & Co., which was cited in the Wall Street Journal. Specifically, the 103 funds set up to invest in Opportunity Zones, which the accounting firm is tracking, have raised a combined $3 billion of the $22.7 billion they seek.
A similar trend can be seen among individual developers, who have now realized that while Opportunity Zones’ tax benefits can sweeten some deals they do not work for all—including for multifamily buildings, says Jon Morgan, co-founder and managing principal of Chicago-based Interra Realty. With most of these buildings, you can’t invest a renovation amount equal to the purchase price—which is a requirement for Opportunity Zones—and have them pencil out, he says. The only buildings that may make sense are the very cheapest, vacant buildings, Morgan adds. For instance, a viable project could be a vacant building that will be converted to another use. Ground up construction is another example.
When They Do Work
That said, many projects are penciling—and in fact, would not have at all without the tax benefits afforded Opportunity Zones.
Ogden Commons is a $200 million 10-acre mixed-use project in Chicago’s North Lawndale neighborhood that Habitat Affordable Group is developing in partnership with the Chicago Housing Authority, Sinai Health System, Cinespace Chicago Film Studios and the city of Chicago.
“It has been to the utmost benefit of Ogden Commons for it to be located in an Opportunity Zone—particularly with our first phase of commercial/retail,” says Charlton Hamer, senior vice president of Habitat Affordable Group. Previously Habitat sought out New Market Tax Credits to provide needed equity, he explains. Unfortunately, the process, competitiveness, complexity and timing for acquiring NMTCs became very burdensome. “Finding investors for this project has had significantly fewer difficulties and hurdles to place the capital to the project than using NMTC,” Hamer says. “If it were not for Ogden Common’s location in an Opportunity Zone our timing to initiate construction would be much longer.”