The burgeoning Opportunity Zone program could be one of the best development initiatives the country has ever seen, but investors and developers still shouldn’t expect it to turn every deal into a winner, top real estate executives said Wednesday morning.
“While the Opportunity Zone program certainly offers benefits that should over time reduce the cost of capital and therefore make some marginal projects that weren’t feasible, feasible, it’s not going to take projects that were absolutely infeasible and turn them into projects that are,” said Seth Pinsky, executive vice president at RXR Realty. “You still need to have an underlying project that makes sense.”
Pinsky spoke on an Opportunity Zone panel Wednesday morning with JLL’s investment sales chair Bob Knakal, Fundrise CEO Ben Miller, Heritage Equity Partners president Toby Moskovits and Meridian Capital Group managing director Steven Adler at an event thrown by The Real Deal and Berdon LLP. The panelists were very optimistic about the program overall.
The Opportunity Zone program, included in the 2017 Tax Cuts and Jobs Act, allows investors to defer taxes on income from capital gains until 2026 provided that 90 percent of their investment is in areas designated as low-income communities. The program has already proven to be extremely popular with the real estate community even as developers and investors still wait on key information about it.
Knakal described the initiative as “brilliantly conceived” with the potential to “create the best community development program the nation has ever seen.” However, he cautioned that it would only work if the people buying properties in Opportunity Zones were making a profit, something that was proving to be a challenge based on how much owners of properties in Opportunity Zones think their land’s value has increased.
He summed up the situation by inverting a famous quote from the 1987 film “Wall Street.”
“Greed, for lack of a better word, is bad,” Knakal said.
The program, Pinsky said developers looking to make Opportunity Zone deals at reasonable prices should look to secondary and tertiary markets where transactions have not already been occurring. In areas that were already seeing a good amount of activity before they were designated as Opportunity Zones, it will be much harder to find a good deal.
Both firms said they have been seeing interest from investors looking to put their money in economically challenged areas. Moskovits said investors saw it as a way to both get helpful tax benefits and make a positive impact.
“I’m getting a lot of calls from friends of mine in the private wealth industry who are advising on impact investing and getting calls from their clients asking about how to move money into these neighborhoods where they’re getting what we call the double bottom line, or doing well by doing good,” she said.
Opportunity Zones were designated based on census tracts, some of which are in areas where a large amount of development activity was already taking place. In New York City alone, this includes places like the Far West Side and the Lower East Side.
Pinsky said it is important to have capital flow into census tracts that have not already seen a lot of development to make sure the Opportunity Zone program is a political success.
“If, at the end of this program, all that’s happened is that more money has gone into the areas that were already getting capital, then the program will have proven to be a missed opportunity,” he said.