Register to watch JTC Americas, Formerly NES Financial, webinar titled Opportunity Zones: An Economic Recovery Solution here!

Opportunity Zones are a great tool in efforts to rebuild the U.S. economy.

In preparation for the economic recovery, JTC Americas’ EVP Reid Thomas will be moderating a discussion with Opportunity Zone industry leaders, including, S. Lawrence Davis, President and CEO at Shorewood Real Estate Group; Jim Lang, Shareholder at Greenberg Traurig; Michael Bernier, Partner at Ernst & Young; and David Coelho, Chief Strategy Officer and Chief Investment Officer of the Opportunity Zone program at Bridge Investment Group, during our next OZ webinar on Thursday, May 14 at 11 a.m. PST.

Join us for this free webinar, in which our panel of industry experts will talk through the ways that Opportunity Zones, though relatively new, may be just the economic recovery solution our country needs.

In the meantime, we asked Larry, Michael, Jim, David, and Reid the following OZ question on everyone’s mind:

What challenges are you most concerned about Opportunity Zones at this moment?

Read their answers below:

Lawrence Davis

“An area of concern given the current market situation is funding sources for Opportunity Zone projects, both from investors with capital gains and the credit markets. The volatility due to the pandemic could result in investors wanting to remain liquid in the short term. Investors will need to decide between a longer 10-year investment term and having liquidity but paying taxes immediately as a result of capital gains. This could cause people to hold off on investing for a while, limiting funding to OZ projects.

In addition to private investor hesitancy, there is concern that there will be difficulty securing debt for new construction projects. While it’s expected the government will look to stimulate the economy in many ways including construction, the credit markets may wait for more certainty in the market before funding new projects.”

Michael Bernier

“This is a very interesting question as it is easy to jump to some minutia of the Regulations and how it impacts a particular fact pattern that we are seeing.  There is the never ending, “if X rule was clearer,” or “if we were allowed to do Y,” or “if Z rule was changed slightly, we would see even more projects getting done.” I try not to fall into that trap and instead focus on the big picture. We see are seeing 1) a number of investors that are looking for QOFs with whom to invest their money, 2) a lot of QOFs looking for good projects, and 3) a lot of QOZBs that need financing. The slowdown in the economy has not changed those three things and those three things are the necessary ingredients for the program to be successful. We are seeing billions of dollars being invested into these underserved communities and we are starting to see the early signs of the transformational impact that the investments can have. My concern is how do we make sure that these impacts will continue? In a couple of years will the Opportunity Zone program go away, and will the underserved communities stop getting the capital and investment they need? What could cause that to occur?

  1. Losing the message battle. This program has two main beneficiaries: the investor that gets the tax benefits and the project that gets access to capital. Does the program become viewed as one where the lead is investment in underserved communities? Or will the leading message be that the program offers tax benefits for the wealthy (let’s face the fact that most people that have significant capital gains are already wealthy)?
  2. Losing the battle of the press. With many of the different programs that I have worked on (i.e., LIHTCs, NMTCs) you are faced with good press and bad press. The good press finds the projects that have truly benefited the community and tells that story. The bad press finds the bad actors, the abusive fact patterns, the projects that are within-the-rules-but-probably-shouldn’t-be-a-project and tells that story.  The good press needs to lead the narrative.
  3. Issues with people not following the rules. I am not talking about bad actors and am focused on the bad press or bad reputation that the program might get from well-intentioned people that fail to follow what are, at least in my view, incredibly complex rules.  It would be very easy for someone to run afoul of the rules despite their best efforts.
  4. Failing to make this a bipartisan program. The program had a bipartisan beginning with Senators Cory Booker (D) and Tim Scott (R) as the program leads.  However, it has since become a signature part of tax reform which is associated with President Trump and the Republican party. With the 2020 election just a couple of months away, it is important that the program is seen in a bipartisan way.”

Jim Lang

“Qualified Opportunity Zones present an opportunity to assist some of America’s most impacted communities in the current environment. Qualified Opportunity Funds may be an important tool for providing much needed community impact and revitalization in recovery efforts. Additionally, Qualified Opportunity Fund managers and investors may be challenged to balance strategies so that the proverbial tax tail does not wag the business dog in deal structuring.” 

David Coelho

“I believe that the biggest issue opportunity zones face in 2020 will be investor appetite to committing capital to development opportunities given the broad disruption brought on by the COVID 19 pandemic. In times of strain, investors often shy away from development strategies to focus on either preservation of cash and short-term fixed income investments or opportunistic/distressed investing.

Ironically, these times are often the best times to invest in real estate development. Lack of capital interest leads to lower supply and less competition upon completion of development. Another supporting factor is that construction costs tend to contract materially during downturns such as this. We are already seeing strong evidence of cost reductions in many of our QOZ projects.

Finally, the 10 year horizon of opportunity zone investments mean that you would always expect to see a recession at some point during your hold period and having it happen during the early construction/pre-development phase is the optimal timing for it. The thesis for investing in opportunity zones and the powerful tax incentives remain intact and perhaps even more attractive despite the challenging market.”

Reid Thomas

“Unlike the economic recovery beginning in 2010 (after the financial crisis), the Opportunity Zone initiative that was launched at the end of 2017 could be an agent for ensuring an equitable recovery post the COVID pandemic. 

There are three converging forces that set up Opportunity Zones as an important driver for an equitable recovery:

First the massive market selloffs in February and March 2020, after the longest bull market in history, created significant realized capital gains for many investors. I suspect that much of these gains were realized without a detailed plan in place to redeploy or minimize taxes. As such, much of these gains are probably currently sitting in cash, or other highly liquid investments that will be exposed to capital gains taxes. Under the Opportunity Zone initiative, investors have up to 180 days to invest into a Qualified Opportunity Zone Fund in order to defer paying capital gains taxes. Therefore, one might expect there would be significant investments into OZ’s made in August and September.

Secondly, the majority of OZ investments historically have been real estate oriented.  Certain segments have been very hard hit during this crisis such as retail and hospitality. Therefore, investors considering OZ investments may be looking for types of real estate investments that are countercyclical. These investments include multi-family and affordable housing, which are well suited to Opportunity Zones.

And finally, this crisis has brought a spirit of helping to the forefront in many cases. We have seen significant philanthropic investments, as well as individuals and corporations working together to help each other out. Opportunity Zones were created with the intention of doing good in the communities that need it most.  

Our country needs to rebuild after this crisis. Opportunity Zones are a unique opportunity at the right time. The incentives for investors are all aligned to help assure an equitable recovery.”

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