A panel of Opportunity Zone experts recently gathered at Connect Bay Area to provide the most up-to-date information on the hottest movement in commercial real estate today. The annual conference, held in San Francisco, drew an audience of more than 300 commercial real estate professionals. In addition to four deep-dive panels, keynotes were delivered by San Francisco City and County Treasurer, Jose Cisneros, as well as the Oakland Athletics’ Lydia Tan.
Moderator Kevin Wilson, a partner at Novogradac, kicked off the session with an overarching explanation of Opportunity Zones. He said the fundamentals of OZs include two important features: One is to incentivize investors to place capital and purchase identified distressed communities via deferring the payment of taxes through 2026. The other is to encourage long-term capital investment in these identified properties by allowing investors to circumvent any additional, generated gains from being taxed if the property is retained for at least 10 years.
These can be complemented with state income tax incentives however, “California is one of about five states that does not provide conforming state tax incentives,” Wilson explained, although the governor of California has announced he will soon provide incentives for those who invest in affordable housing and clean energy property. With the state legislature currently working through this, Wilson believes this will be enacted by the end of fall, if not the end of summer.
A key theme over the past two years is that many companies are slow in gaining traction due to the state of the tax reform bill being put together in a way that created ambiguity. The Treasury Department and IRS have been working on addressing the many issues that have come up, and are taking comments and suggestions from companies.
“The information that came out in 2017 was very unclear,” panelist Paul Monsen, vice president at George Smith Partners noted. The regulations information has been slowly improving, but it continues to be less than transparent. This limited amount of information, along with no track records or history, has made financing difficult.
Exit issues and capital raised that is regulatory are two issues that JP Walsh, director of finance at Panoramic Interests, a local Bay Area developer specializing in high-density, infill investments, has come across. “It’s difficult for an investor to make the decision to invest when the regulations are not final,” he said. Additionally, there needs to be a lot of due diligence conducted which will slow the process even more.
With a new investment strategy taking an average of 18 months to obtain significant capital, along with the second round of regulations that just came out four months ago, is counterintuitive for the OZ timelines that exist, panelists said. “We’ve only known about the designated areas for about a year,” Wilson said, “however, investors need to be placing capital by the end of 2019 for maximum benefits.”
Monsen said he uses this as leverage to encourage investors, however it also works as a disadvantage a because it doesn’t give investors much time to evaluate the prospect. “It’s a very short window as it pertains to real estate.” To that end, the aspect of OZ regulations that seems to be moving the needle is the 10-year hold.
Another concern of Opportunity Zones is that the capital will be placed into low-income communities and drive out existing residents which could cause adverse impacts. “Because of this,” Wilson said, “California is being very cautious with how to proceed to provide similar state income tax incentives.” This is one reason the state is considering incentives that are targeted toward affordable housing and clean energy.