Opportunity Zones Are The Talk Of The Town, But Few Are Ready To Walk The Walk

Short of Marie Kondo’s new show about tidying up, few topics are dominating water cooler conversations, at least in the real estate business, like opportunity zones.

“It’s definitely the hottest thing out there," PEBB Capital co-founder and managing partner Todd Rosenberg said. "Everyone is talking about it. Everyone is thinking about it.”

“It’s like the gold rush right now,” Vagabond Group founder and CEO Avra Jain said.

Rosenberg, Jain and other South Florida real estate professionals will be panelists at Bisnow’s upcoming event, Opportunity Zones 101 on Feb. 7.

Rosenberg said that when the program was first announced last year, he thought, "Wow, this is really amazing."

"From a 30,000-foot view, it had the potential for amazing opportunities,” he said.

But like everyone in the commercial real estate business, once he got in the weeds and looked at the nuances of the new policy, he realized there were a lot of unknowns to work through, and he is still waiting for more specifics from the Treasury Department. With the longest-ever government shutdown ongoing, he and other investors will have to keep waiting.

“The very first language that came out, our attorneys reviewed it and said, ‘We have no idea how anybody could actually do this in a fund. It doesn’t jibe with well-established partnership laws,'" Rosenberg said. "That was their first comment. I felt my lawyer’s head was going to explode.” 

His team tempered its initial enthusiasm, wary of making a move now that could later be deemed impermissible. PEBB Capital is not yet accepting investors’ money, especially mindful that some investors may be choosing to forgo 1031 exchanges in lieu of qualified opportunity zone funds.

To allay the fears of his attorney — who worried about commingling funds in violation of certain partnership rules — PEBB is exploring whether investor funds should be invested on a deal-by-deal basis or pooled together across multiple projects.

"Group the investors in one deal, you can call that deal a fund," Rosenberg said.

Still, PEBB is moving ahead with two projects in opportunity zones that fit into its wheelhouse. Because they are under contract, Rosenberg declined to give specifics except to say that they are ground-up developments that fit under the umbrella and that they both are in already-transitioning neighborhoods, sites that "don't necessarily belong in what the intent was with qualifying opportunity zone locations."

One is in South Florida and has parking as a key component, and one is “urban core millennial multi[family]” in the Northeast.

Jain said that her phone has been ringing off the hook, because her company is known for adaptive reuse projects in transitional neighborhoods — many of which fell into opportunity zones. She had two such projects that were already under contract when the zones were defined: a project in Hialeah and an "industrial play" in West Little River. 

"I thought, 'OK, that's convenient!'" she said. She was surprised that even the Regions Bank building at 3550 Biscayne Blvd., which she bought a decade ago for $8M and is now worth $35M, was deemed to be in a zone. It sits at the junction of Interstate 195 and Miami's main commercial drag, US1.

"All of that was boon to those of us who had come in earlier," she said. 

She has so far set up two funds but warns that, because money must be invested within six months, the program is challenging for anyone raising money who doesn’t have a qualified project in the pipeline. They may find that banks won't lend for projects in certain neighborhoods.

“We’re still waiting on clarification on the ability to refinance, or even possibly sell, as long you’re going to reinvest in another opportunity zone," Jain said. She said the program is "not a reason to buy a piece of property. It just adds sprinkles and cherries and nuts on top." 

Gilbane Development Co. founder Bob Gilbane expressed concern about the growing gap between the haves and have-nots.

“[Opportunity] zones are an 'out-of-the-book' market mechanism that can act as a catalyst for economic development” in distressed zones, he wrote in an email. “O Zone tax incentives can tap equity from high-net-worth individuals, which has been a missing component in community redevelopment. This market can raise $200M-$300M a year.

“Gilbane Development sees great promise in this legislation and is developing Opportunity Zone qualified projects throughout the country in several different asset classes — multi-family (affordable, market rate, student), mixed-use, office and public private partnerships,” Gilbane wrote.

Rosenberg said he is mindful of the program’s potential unintended consequences, like landowners in opportunity zones raising their prices on developable parcels or the stock market taking a hit because opportunity zones give them a safe way to move gains out of the market and pay little or no tax.

 “There’s a disincentive to liquidate [stocks] because you don’t want to pay 35, 40% of your capital gains to the government ... It’ll be very interesting to see what happens there," Rosenberg said. "Now it's game on for Treasury and the government to figure out what is going to be the final answer to a lot of questions presented.

"The sooner, the better, because they themselves put the clock in front of us and it's Dec. 31, 2026, for tax payments to be made that were deferred," he said. "The longer it takes, the less likely anyone's going to get the benefit of the 15%." 

Learn more about the program from Jain, Rosenberg, Don Peebles, Tony Cho and more at Opportunity Zones 101 on Feb. 7 at The Citadel.

CORRECTION, JAN. 18, 2:20 P.M. ET: A previous version of this story mischaracterized PEBB Capital's concerns regarding the pooling of investor funds. This story has been updated.