From Gentrification To Lack Of Guidance, Investors Express Concerns With Opportunity Zone Program

Commercial real estate owners, developers, brokers and investment managers have a variety of concerns about the new Opportunity Zone program that gives a tax break to investors who invest through an opportunity fund into a designated opportunity zone. More than 200 of them shared those concerns in Bisnow's recent survey about the program.

One survey participant called the program “gentrification on steroids.” 

Another respondent said the nuances of the program — even with a new round of guidance from the U.S. Department of the Treasury — are still confusing and may turn off investors.

Another participant believes new development in these distressed areas could do more harm than good without proper planning with city or local government authorities.

Part of President Donald Trump’s Tax Cuts and Jobs Acts in December, the Opportunity Zone program aims to revitalize economically distressed communities by providing investors a tax incentive to put dollars and development into these areas.

Of the 202 people that responded in Bisnow’s survey, more than half expressed concerns with the program:

• 25% said there was a lack of clarity or not enough guidance from the federal government. 
• 20% said they worried about gentrification and displacement of residents who are probably low-income and come from minority neighborhoods.
• 12% said they were concerned about a lack of city or local involvement and planning.
• 10% worried a new political administration could change or revoke the program.

The respondents also worried that the Opportunity Zone program may only favor wealthy individuals and institutional investors looking for a tax shelter; that the seven- to 10-year time period for investments to fully benefit from the program is too long; that only certain areas nationwide will receive the bulk of the investments; about a lack of rules about who can set up an opportunity fund; and that properties in designated opportunity zones will shoot up in price and, rather than investors coming in to develop or grow businesses or develop in the neighborhood, will instead promote commercial real estate flippers.

Many facets of the Opportunity Zone program are still being worked on.

Treasury Department officials have said they are accepting public comments and will issue a new round of guidance in January.

Lack Of Guidance

The most pressing concern many of the survey participants expressed was the lack of guidance and clarity from the Treasury Department and IRS about the program.

"No one seems to have all of the answers at a time when we have the money to put towards investment and are evaluating various tax structures," wrote one Baltimore-based owner and developer.

A Miami-based multifamily developer wrote that the regulations created hurdles that make investing more uncertain.  

"Much of the regulations which will govern [opportunity] zones have yet to be released," the Miami developer wrote. "Also, it must be expected that the [regulations] may change as more investors participate."

A multifamily developer in South Carolina who is looking into the program had harsher criticism.

"Treasury and IRS don't really understand how investors make decisions," he wrote. "They just think they do. Why do you think there are so many redrafts of proposals?"

Investing Long-Term

In discussing the common worries about the program, Capital Fund Law Group Managing Partner John Lore told Bisnow his biggest concern relates to whether traditional investors will hold an asset long-term. To fully capitalize on the tax-free capital gains benefit of the Opportunity Zone program, investors need to hold the property for at least 10 years.

Lore said investors traditionally only like to hold commercial real estate investments short-term and not hold assets for more than five years.

"In general, the market investment fund length for a small to midsize private equity real estate fund is usually much shorter than [10 years]," Lore said. "They are looking for a five-year return and sometimes lower. I think with such a long period, one of the concerns is the ability to provide ongoing needed additional capital and also to finance management operations when the payout is so long.

"From a fund manager's perspective, they are used to getting their carried interest or profit percentage within a fairly quick turnaround so this will involve some restructuring and probably some more upfront costs to insure liquidity to cover compensation and expenses."

He also said he, like many others, is waiting for more answers from the government. He said the Treasury Department's latest guidance acknowledged that there needs to be additional clarity before it can be fully rolled out.

A New Administration

Given the current political landscape and that the program was passed under the Trump administration, several of those surveyed expressed concerns that the Opportunity Zone program could be short-lived.

Some worried a new administration could get rid of the program or, if it becomes really successful, could find a way to add more regulations.

"Politics could unwind the strategy," a Miami-based broker wrote.

Gentrification And Displacement

Many respondents worry the Opportunity Zone program could gentrify areas historically populated by low-income residents and minority groups and displace those residents. 

While investors may believe a development is good for a certain neighborhood, the residents in the community may feel differently or threatened.

A Northern Virginia-based property manager wrote: "My largest concern is that appeals about gentrification will hold up anything from actually getting done."

A Maryland-based architect suggested the program guidelines need more local input from the residents living in these designated opportunity zones.  

"[My] concern [is] that this strategy will result in gentrification on steroids," the Maryland-based architect wrote. "The guidelines and regulations thus far show little concern for the effects of new development on the existing blighted community. Focus should be on raising the quality of life for the existing population of the blighted area through new development and also through the improvement of consumer goods, and services where government falls short. Addressing social impact needs to be in the guidelines." 

An Oakland-based broker said one new project or a rehabbed multifamily, retail or office building in a designated zone can't improve a neighborhood overnight. The city or local government agencies have to be just as involved with investors and developers in shaping project plans and how it fits into a community.

"With[out] concurrent investments in infrastructure and public services such as police, public works and fire departments, this program could fail. If prospective employees and customers don’t feel safe in the OZ, or if the area remains blighted with graffiti, garbage and poorly illuminated sidewalks, then it’ll be a struggle to get businesses to be successful in those locations," the broker wrote.

Lore, the managing partner of Capital Fund Law, worries that the easy requirements of setting up an opportunity fund and investing into a zone could have a negative impact on a neighborhood.

Lore wonders what would happen if there were a downturn.

"My biggest concern is if projects are started and left incomplete," Lore said. "That could have disastrous effects in already struggling communities and we see that play out during downturns. If that were to happen in concert with lowering value — to me that is concerning."

An Arlington, Virginia-based survey respondent summed it up: "Without good planning and clear goals, money might be used for projects that harm ... communities."