NJ’s biggest O-Zone trades

Newark, once written off by investors as a forever blighted city, is now a rising star for investment, thanks, in part, to the federal Opportunity Zone program, which provides tax benefits to investors and developers buying and building in low-income neighborhoods. A look at the five biggest transactions on TRD’s list of top Opportunity Zone sales in New Jersey over the last six months shows that some sellers in Newark in particular are cashing out for double or triple what they paid.

In fact, Newark has seen a greater percentage of its Opportunity Zone investments sell than the state as a whole, with 6.8 percent of all Newark Opportunity Zone assets transacting since the legislation passed in 2017, compared to 5.9 percent for the whole state of New Jersey, Reonomy found.

The Opportunity Zone tax benefits have had a ripple effect. Owners know that being in one of the zones gives their properties more value and are setting asking prices accordingly.

“It’s increased certain land values,” said Philip Hirschfeld, an attorney in the tax, trusts and estates department at the law firm Cole Schotz whose practice focuses on real estate investments, including qualified Opportunity Zone funds. Hirschfeld’s firm has worked on multiple deals for properties in New Jersey’s Opportunity Zones. “Parties are trying to sell properties for more money than they were worth before.”

Take, for example, the largest sale on the list. Jonathan Rose Companies sold the 307-unit Nevada Street Apartments, a senior housing development in downtown Newark, to Hudson Valley Property Group (HVPG) for $69.3 million. But  the property’s assessed value is only $22.49 million, according to public records.

The biggest Opportunity Zone deals in New Jersey took place amid a 28 percent increase in investment activity in the state for all assets — both within and outside of Opportunity Zones — in the 19 months after January 2018 compared to the 19 months prior, according to Reonomy. Opportunity Zone transactions increased by 56 percent in the city of Newark and 28 percent in the state at large over the same period, the firm reported.

The Opportunity Zone program was launched under the federal Tax Cuts and Jobs Act of 2017. Funds that invest in specific low-income Census tracts, based on 2010 Census data, get tax incentives under the program. The investments can include financing new infrastructure and affordable housing, promoting job growth and workforce development. With many potential investors confused about the rules and awaiting more details, the U.S. Treasury Department issued a round of clarifications on the law in April 2019.

Investors can get a significant tax benefit by purchasing properties in Opportunity Zones via OZ funds. Individuals who make investments within the zones through “qualified opportunity funds” can defer taxes on capital gains or avoid them entirely if they meet specific criteria. If investors hold an Opportunity Zone property for 10 years, they are taxed on only 85 percent of the original investment and pay no taxes on any gains generated by the money they originally invested.

“It’s a way to shelter stock proceeds for people who are trying to get a good write-off against gains,” said Adam Levin, an executive managing director of Marcus & Millichap based in Palo Alto, California. His firm represented the buyer and seller in the third-largest deal on the list — 856 Frelinghuysen — although the OZ benefits weren’t the motivation in this particular deal.

Rich Gatto, a senior associate at Marcus & Millichap who focuses on multifamily and mixed-use properties in Essex and Union counties, has found that Opportunity Zone properties in New Jersey are attractive to developers interested in building from the ground up or doing extensive renovations to an unoccupied property.

“For large value-add plays, where you are rehabbing a vacant building, there is a significant benefit as well,” said Gatto.

The properties are also drawing interest from wealthy people looking for alternative investments.

“There are high-net-worth individuals selling some of their other assets,” said Gatto. “With an Opportunity Zone, you can take your capital gains and roll that into a purchase and defer your taxes.”

Even with interest among investors perking up, there are still plenty of Opportunity Zone deals to be had. New Jersey has 169 Opportunity Zones spanning 75 municipalities in 21 counties. Within those zones, there are currently 60,267 assets —14,725 of which are vacant land parcels, according to Reonomy. A whopping 4,116 of those assets are located within Newark’s Opportunity Zones.

New Jersey is aggressively promoting Opportunity Zone investing. In mid-July, the New Jersey Economic Development Authority launched the Opportunity Zone Challenge Program. The competitive grant program, designed to attract investment dollars to Opportunity Zones, will pay for financial and technical planning for Opportunity Zone economic development at the municipal and county levels. The program will award five grants of up to $100,000 each to two to five municipalities in the state.

Among the funds operating in New Jersey is the Hampshire Christie Qualified Opportunity Fund, which former Gov.Chris Christie formed with Jimmy Hanson, whose family runs the Hampshire Companies, a real estate investment firm. The fund has invested in five multifamily assets, four of them located in Hackensack, Barron’s reported.

Here is a look at the biggest deals in New Jersey in the first half of 2019.

Jersey in the first half of 2019.

1.
2 Nevada Street
Newark
$69.3M

When Jonathan Rose Companies — which focuses on “environmentally, socially and economically responsible projects” — sold this property, one condition was that the seller would preserve it as affordable housing, according to HVPG’s website. HVPG secured an investment from Hudson Valley Preservation Fund and financing from Prudential Mortgage and Fannie Mae to complete the transaction.

HVPG has identified renovations and energy-efficiency upgrades to be done in the near term, according to HVPG’s site.

The property was previously owned by RNJ Nevada Street LLC, the Rose New Jersey Green Affordable Housing Preservation Fund and Goldman Sachs, which purchased it for $38 million in May 2011.

Attempts to reach Jonathan Rose Companies and HVPF for comment by press time were unsuccessful.

397-447 Ferry Street, 122-126 Christie Street, Newark

2.
397-447 Ferry Street, 122-126 Christie Street
Newark
$46.5M

The roughly 1.1 million-square-foot industrial property on 22 acres of land in Newark’s Ironbound district is the site of the former Ballantine Brewery. Turnbridge Equities, in conjunction with JP Morgan Asset Management, acquired it in January 2019 for $61 million from RAR Development Associates. It was assessed at $235,600 in 2019, according to public records.

Turnbridge is planning a repositioning of the five-building property for ground-up development. A multimillion-dollar renovation, which will remake the property into a “last-mile” hub, will include roof replacement, demolition of abandoned structures and repaving of the yard and loading area to attract more tenants, according to its website.

Representing both the seller and buyer were Thomas Walsh and Joseph Garibaldi, managing directors at JLL Capital Markets, and Katelyn Borovsky, vice president at JLL.

“The Ballantine Brewery is the largest offering of existing real estate in the Port submarket,” Walsh said in a statement. “This was a terrific value-add opportunity for Turnbridge and JPMorgan to thoroughly renovate and reposition the property for use by multiple tenants. There are not many opportunities remaining in the Port submarket for small to mid-size industrial tenants to find well-located and modern industrial space.”

Originally owned and operated by P. Ballantine & Sons, the complex was shuttered in 1972 — marking the end of an era when Newark had its own local breweries. It’s now leased to 30 tenants as an industrial building. Tax records showed the property was transferred to RAR from a private partnership in 2017 for $50.

3.
856 Frelinghuysen Avenue, 99 Evergreen Avenue
Newark
$30M

FlatRate Moving sold this 1,777-unit self-storage facility at 856 Frelinghuysen Avenue to a REIT sponsored by SmartStop Self-Storage in March for $30 million.

The property has appreciated in value substantially in recent years. CMS Realty Partnership in Millburn, New Jersey, sold 856-882 Frelinghuysen Avenue to FlatRate Moving for $7.4 million in 2007.  “They bought raw warehouse space and were able to make an operable self-storage space,” said Marcus & Millichap’s Levin.

Prior to the 2019 sale, FlatRate Moving had been bringing in goods from customers in Manhattan, such as those who were selling their apartments and traveling overseas, to put them into storage at the facility. It will now lease back some of the space to continue to do that, Levin said.

The new owners hope to attract more customers from the local area.

“Part of the concern was it’s such an industrial area — will they be able to get enough drive-by traffic?” said Levin. “Time will tell if they are able to gain that potential market share in that area. They’re going to try to potentially enhance the curb appeal and alert people this is a place you can store goods.

1 Court Street, Newark

4.
1 Court Street
Newark
$29.7M

The 222-unit, mid-rise Court Tower Apartments senior living complex was acquired by HVPG from Jonathan Rose in a deal that, according to HVPG’s website, aims to preserve the property as “quality affordable housing.” It was acquired with equity from HVPG’s preservation fund, coupled with a co-investment and financing from Prudential Mortgage and Fannie Mae. It also receives a Section 8 subsidy.

The sellers bought the property complex for $10 million in March 2013 and sold it for $29.7 million in April.

Court Tower Apartments, built in 1970, is in the Central Business District in Newark — a desirable area for Opportunity Zone investors. “A lot is going on in the Newark Central District area,” said Joe Bublé, a partner and leader of the tax practice at Citrin Cooperman. “The Census tract runs from Newark Penn Station to the Broad Street Station. That is very hot.”

The 2013 buyer was the Rose New Jersey Green Affordable Housing Preservation Fund — a collaboration between Jonathan Rose Properties and Goldman Sachs — acquired the property in March 2013. That fund is focused on preserving affordable housing in transit-oriented communities and has invested in Grace West Manor, a 429-unit, Section 8 property for seniors and families in Newark, and Arlington House, a 179-unit senior Section 8 multi-family property in East Orange.

5.
81 North Hackensack Avenue
Kearny
$23.1M

JL Transportation acquired this 16.8-acre industrial parcel from Terreno Realty in March for $25 million. Based in San Francisco, Terreno owns industrial property in Northern New Jersey and New York City, the San Francisco Bay area, Seattle, Miami and Washington, D.C.

The property was acquired as partial payment of a $55 million senior secured loan that Terreno made in 2018, reducing the outstanding balance to about $30 million, according to a press release from Terreno. The property, which includes both a building and land, was assessed for $1.5 million in 2019.