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Investors strive to get the balance right on deals in opportunity zones

  • OZ benefits include 10-pct tax break for investment carried five years, another 5 percent if  held seven years.
  • OZ deals must make sense as regular investments: investors
  • Factor in possible recession to any OZ deal: investors

Despite the buzz around opportunity zones, some investment professionals remain cautious about OZ deals.

“We have looked at a lot of opportunity zone funds, and we haven’t been compelled by most of them,” said Kevin Philip, a managing director at Bel Air Investment Advisers.

Philip said his firm has identified “a couple” OZ investments that seemed useful for clients, but “it’s very selective.” “They will from time-to-time have a role to play, but on the edges of an investment plan, not as the central thesis,” he said.

The concern comes down to whether an OZ investment would make sense on its own, even without the tax benefits that are part of the program.

“To do something that generates a subpar investment return, simply to have a delay in taxes — it’s a simple math calculation and it just doesn’t make a whole lot of sense,” Philip said.

Philip sought out more predictable real estate investments in established locations and added more risky investments in up-and-coming areas to enhance the overall return. Opportunity zones are, by definition, less developed, and therefore more risky.

“A lot of people believe we’re going to face a recession sometime in the next five years, so if you’re investing in a property in a location that you believe is gentrifying, that gentrification might get stalled and recessed if we have a recession three or four years from now,” Philip said.

He added: “I have a feeling the real estate people specifically love opportunity-zone funds because it’s helping them raise more money for projects they otherwise would have a problem raising funds for. The outcomes sometimes don’t matter as much to them as long as they’ve raised a fund they can charge fees on.”

Opportunity zones were created as part of the 2017 Tax Cuts and Jobs Act, and were spearheaded in congress by South Carolina Republican Senator Tim Scott. They provide a series of tax breaks to investors who roll their capital gains into a qualified opportunity-zone fund for investment in one of 8,700 designated census tracts.

Benefits include a 10-percent tax break for an investment carried for five years and an additional 5 percent if it is held for seven years. That part of the program sunsets in 2026, meaning investors had until June 29 to apply their 2018 capital gains to a qualified OZ to get the seven-year carry. They have until the end of this year to apply that carry to their 2019 capital gains.

Profit or impact

Fund managers and real estate investors focusing on OZs generally agree with Philip that OZ investments need to be able to stand on their own.

Avy Stein, chairman and co-founder of Cresset Capital, which is making a big OZ push, said his firm does not expect clients to invest only in OZs. “I would never tell anybody to put all their eggs in any one basket,” he told said. “I absolutely agree that this has a role in a portfolio. It is not a portfolio [on its own].”

Like Philip, Stein said Cresset is taking a possible recession into account. “I don’t think anybody does a set of numbers on a real-estate deal without pricing in a recession.”

“If you buy and/or build quality real estate in quality locations, it stands the test of time,” Craig Bernstein of OPZ Bernstein said via email. (OPZ Bernstein is a qualified-OZ fund that is part of Bernstein Cos.)

“If you can find attractive investments, and they also happen to be located in opportunity zones, we view that as a win-win opportunity for us,” said Frank McGrew of McNally Capital.

Some investors do not even see OZ investments as being primarily about profit. Kamil Homsi, founder and CEO of Global Realty Capital, the onshore arm of a Dubai-based family office, said it is “all about impact.”

“You’re not going to make more money than you’re going to make in regular investments,” Homsi said. With that in mind, investors need to work closely with communities, he said.

Kunal Merchant, president and co-founder of CalOZ, a nonprofit trade organization that seeks to facilitate OZ investments in California, said he hoped family offices would look beyond the “low-hanging fruit” of easy profits.

“I ask them to try to push a little bit out of their comfort zone for the benefit of the state and the country and all of the people in these opportunity zones that are counting on us to help them,” he said.

But most investment advisers and fund managers still stress deals must make sense on their own. “Under no circumstances can you allow the tail to way the dog, as it relates to making sound investment decisions,” Bernstein said. “The program has the ability to make a good deal great, but it will not make a bad deal good.”

Action Item: Kevin W. Philip, managing director of Belair Investment Advisors, can be reached at