This year, one of the most talked about and 'conferenced' items has been this issue about Opportunity Zones. But I have to admit, I'm skeptical of many of these types of schemes. Mind you, some of this is because I tend to be over cautious, but I'm just wary of any strategy built upon saving taxes rather than sound economics. Years ago I attempted to pull off a 1031 exchange. After searching for months for a property that met the requirements, I realized nothing fit the profile. There were plenty of "buys" out there that would allow me to fulfill my 1031, but they weren't the types of investments I would have bought in any case. So I passed. I paid the taxes and eventually found a better deal based on economics rather than attempting to save on taxes. I think the same reasoning needs to be applied in Opportunity Zones.
I'd advise any investor to start with the economics. If the numbers work and the economics are sound, then you should proceed and enjoy the icing on the cake in your OZ deal. But you should never throw money at an OZ deal just to save taxes. Many will discover later that their OZ deal was poorly conceived or based on shabby economics.
We're seeing higher risk in OZ deals right now. This is because the census tracts that qualify for OZ designation are depressed areas. Overall it's a great idea. But, basic common sense tells you that throwing money into depressed areas isn't enough. For some areas, the influx of capital will bring in more stores, apartments, parks, and people who invigorate an area, but not always.
We're learning that it's not enough to find a deal in an OZ. The saavy investor will study the tract in question and do the necessary homework to find out who else is going in and what they're planning to do. Further, what is their track record and chances of success? How will their investment affect my own? What are the complimentary investments that will bolster mine? If I'm doing a self-storage deal in an OZ, is someone building apartments that will bring me new customers? If I'm investing in an apartment deal, is there some planned mixed-use and other investments that will create a sense of space in that area? I'm hoping so, otherwise, you'll just end up putting your product in the middle of aging and depressed stock.
We recently acquired an apartment community in an OZ with very significant plans to reconstruct and reposition it in the market. What made the deal even better was another group that was bringing 85mm of investment in mixed-use, apartments and stores. This entire area will be unrecognizable in 10 years. I can't wait to see it. Er, actually I can, I've got better things to do. But there are some very attractive OZ deals out there. You just need to look at the bigger picture and figure out what's going into the entire submarket.
As far as tax savings, we'll, they're pretty sweet. Sharing this infographic below from Bilzin Sumberg.