‘Massive Lack Of Awareness,’ Surging Stock Market Hampering Some Opportunity Zone Fundraising

With the finishing touches of federal regulations in place, a surge of capital flowed into opportunity zone funds last month. But despite the funds raising more than $2B in December alone, not all fund operators are feeling the love.

Last month, the U.S. Department of the Treasury and the IRS finalized a slate of regulations around opportunity zones, which provided more clarity to a number of issues experts and investors had raised since the program was first established in 2017. Treasury Secretary Steven Mnuchin said the changes should allow for more capital to flow into some of the most economically depressed areas of the U.S.

When the program was enacted as part of the Tax Cuts and Jobs Act, Mnuchin and other Trump administration officials touted its potential to direct hundreds of billions of dollars toward the places that need it most. The number raised to date is less than $7B, according to the latest data from Novogradac & Co.

“Right now, the investment side of the business has been OK,” Strategic Group of Cos. partner Steve Rothschild said. "It hasn't been great. It hasn't been unbelievable. But it's OK, and certainly a lot less than what everybody thought [when the program was announced]."

In a report last week, Novogradac found that the 500-plus qualified opportunity zone funds it tracks raised more than $2B in equity in December alone, bringing total QOF investment to more than $6.7B since the passage of the opportunity zone program. 

“I do think that some funds and some fund managers ... they thought it would be easy or relatively easy to raise the capital,” Novogradac Managing Partner Michael Novogradac said. "I think that's where some of the disconnect is coming."

The investors funds are targeting aren't the typical pool of real estate capital players. Rather than banks, pension funds and sovereign wealth funds, opportunity zone investors could be anyone from professional real estate buyers, to retail stock investors, to someone who sold a business and wants to reinvest in a long-term impact play to avoid taxes.

The opportunity zones program allows an investor to roll over capital gains from the sale of an asset into a QOF. That fund then becomes the vehicle to fund a real estate development or business investment in any of the 8,700 nationwide opportunity zones, in return for a hefty tax incentive.

Some fund managers told Bisnow that the final regulations are having little impact on investor demand. Instead, a range of issues continues to dam what many hoped would be a flood of capital into real estate deals.

Allagash Opportunity Zone Partners has established a fund seeking to raise $400M for workforce housing projects in Virginia, North Carolina and Maryland. Thus far, Allagash CEO Tony Barkan said the fund has raised $10M.

“I think it's been slow for everybody,” Barkan said.

He said the final regulations were a godsend for clarity. But that matters little when investors and investment managers — many of whom have little professional knowledge about commercial real estate — are still under-informed about the program.

“There's still a massive lack of awareness, a massive lack of understanding of how the rules work,” he said. “I think that it's incumbent on the professional managers ... to do a lot of education of how this works.”

Reports about the struggles of opportunity zones to attract investors have been a deterrent in the past as well, TD Land Management founder William Hersey said, especially as investors were experiencing big gains in mainstream investments on Wall Street.

“That's been one of the hurdles I've seen ... In my opinion, everybody's fat and happy with their returns right now,” Hersey said. “It takes more time for them to explain [opportunity zones] to their clients. The money managers choose not to devote their time to that.”

TD Land operates a fund called ATDL Opportunity Fund I, aiming to raise $150M to develop residential and retail and to install high-speed fiber optics in poor urban areas. Hersey said raising capital was slow when his fund was established in November before the final regulations but has picked up momentum since the holidays. 

But it is far easier for a money manager to point out the average return on the Dow Jones in recent months — which is still operating at historic highs — than the potential returns for an investment in an opportunity zone 10 years from now.

Hersey said he has been meeting with money managers in recent weeks to raise awareness of opportunity zone investment potentials and said he's noticed attitudes begin to shift with the new IRS guidance. 

“A 10-year hold is a long time to hold your money,” said Rothschild, whose Strategic Group operates two opportunity zone funds, one focused on public/private partnerships and another focused on historic rehabilitation of commercial properties.

"[You're telling investors] 'I have this deal that is in a blighted, under-served market, and I'm going to go ahead and do ground-up speculative development. Oh, and by the way, you're going to give me money and for 10 years.' That's a tough sell," he said. "Now you understand why it's been so difficult.”

Other fund managers said it may just be a matter of timing. After all, at the end of last year, many people sold stock or businesses and received capital gains. Now, should they want to avoid paying taxes on the returns — and/or invest them in a distressed or up-and-coming neighborhood — they are finally coming around to opportunity zones.

By opportunity zone rules, investors have 180 days to reinvest capital gains into an opportunity zone project.

“We definitely saw a surge in terms of updates ... and closings at the end of the year,” Novogradac said. “I think that final regulations absolutely will increase the level of investor interest and their level of investment."

After the final regulations were solidified, Activated Capital's $75M QOF saw an uptick in investor interest, Managing Partner Josh Burrell said. The fund invests in residential properties in opportunity zones and provides renters with a path to homeownership and is now at 15% of its funding goal, Burrell said.

Beforehand, especially as there were threats to do away with the program, many investors shied away from opportunity zone funds due to the uncertainty, Burrell said.

Controversy surrounding the program became so great last year that the program's sponsors, Sens. Cory Booker (D-N.J.) and Tim Scott (R-S.C.) threatened to kill the program because of reports of abuse. In November, Sen. Ron Wyden (D-Ore.) introduced a bill to require a reporting element and eliminate 200 opportunity zones that were deemed too affluent to be included.

The opportunity zones were chosen by the governor of each state based on census data from 2010, but that process came under fire as real estate executives with political ties were revealed to have benefited from the selection process.

“Now it's a big bifurcated [market] where investors are either bullish on the overall legislation or skittish,” Burrell said. 

Hersey, the founder of TD Land Management, is still a bull. He said his fund is starting to see interest among institutional investors since the finalized regulations were released.

“Now we're seeing a huge influx of larger checks,” he said. "When people say it's a $3 trillion market, that's what it truly is. There's trillions of dollars out there."