Investing Capital into New Communities

Will 2021 be the year of Opportunity Zones?

By Sean Burton

Opportunity Zones (OZs) have been a hot topic for the past four years. Yet, despite the noise around the tax incentive program, fundraising and actual development of OZ projects, including in multifamily, had fallen short of expectations in the early years following the introduction of the program. Despite the chaos of 2020 brought by a global pandemic and a tumultuous election year, 2020 certainly seemed to be a good year for OZs, and 2021 is shaping up to be even bigger.  

“Despite the chaos of 2020 brought by a global pandemic and a tumultuous election year, 2020 certainly seemed to be a good year for OZs, and 2021 is shaping up to be even bigger.”

What is an OZ?

Introduced by the Trump Administration in the Tax Cuts and Jobs Act of 2017, OZs are a bipartisan effort to spur the economic development of economically distressed communities by providing tax incentives to invest new capital in these communities. OZs can be found across all 50 states and five U.S. territories.

There are three main tax incentives for investors who are looking to invest in OZs. First, capital gains on investments in a qualified opportunity zone fund (QOF) that are held for at least 10 years are exempt from federal taxation. Second, investors may defer tax on any prior eligible gain from other investments until the QOF is sold or exchanged, or December 31, 2026, whichever comes first. Third, the program rewards long-term investments by providing a 10% reduction in deferred tax owed in 2026 for eligible funds invested prior to December 31, 2021. 

Revitalizing through Quality Housing Project

At the heart of the OZ program, is the impetus to breathe new life into low-income, undercapitalized communities. Beyond this objective, OZs are also a great tool to support the development of housing in parts of the nation that are grappling with a severe shortage. Cityview is currently developing two OZ projects in California, Adams & Grand in Los Angeles and Oakland Waterfront in Oakland, which will bring a total of 674 units to two of the state’s most impacted cities. 

Withal, investors and developers who are considering building in OZs should be mindful that the tax incentive alone is not sufficient to guarantee the viability of a project. As for any other multifamily developments, a wide range of market fundamentals remains critical, such as strong population growth, access to employment centers and public transportation and nearby lifestyle amenities that attract renters. In fact, Cityview’s OZ projects are located in areas in which the firm has previously invested without any OZ tax incentive because the firm believes in the strong demand drivers of those locations.

For instance, Oakland Waterfront is a 378-unit mixed-use community developed as part of Brooklyn Basin, a 65-acre master-planned community on the Oakland Estuary approved for 3,100 units of housing, 32 acres of parks and 200,000 square feet of retail. Residents will be able to take full advantage of oceanfront parks, a marina and bountiful retail offerings with multiple grocers, destination restaurants, watersport rentals and more. They will also have access to the Brooklyn Basin transit shuttle service which will connect them to the region’s main job centers in under 30 minutes. 

What’s more, many OZs located in urban cores have been disproportionately impacted by the pandemic. OZ multifamily projects will enable to not only provide much-needed housing but will also help bring back new jobs to struggling communities, including construction jobs and employment generated by the services, retail and restaurants catering to construction workers and future residents. Cityview’s Adam & Grand and Oakland Waterfront OZ projects are expected to create upwards of 3,000 jobs across Los Angeles and the Bay Area. 

2021, a key year for OZ

Because of the 2026 tax deferral deadline, 2019 was the last year investors were able to reap the full tax benefit (15% step-up in basis) of a QOF. Yet, many investors were deterred by the fact that at the time, the Treasury had not yet finalized regulations. Despite all the buzz around OZs, a report shows that only 7% of a total target of $66 billion had been raised across 366 QOF by year-end 2019. 

2021 is another key milestone for the program, being the last year that investors can satisfy the five-year requirement to qualify for the 10% step-up in basis. What’s more, capital markets froze during the first six to nine months of the pandemic as investors adopted a wait-and-see approach. Now that the nation is on track to fully reopen and multifamily has emerged as one of the most resilient asset classes, they are looking for long-term investment opportunities in the sector. In addition, the Treasury released its final set of OZ regulations at the end of 2019 and investors’ confidence in the program has increased, leading to a flurry of investments in OZs at the end of 2020 and the beginning of 2021. Cityview can attest to this. The firm was able to raise $375 million to develop both Adams & Grand and Oakland Waterfront and is currently pursuing additional OZ projects.

Despite a slow start, there are many reasons to believe that 2021 could be the year of OZ investments. As investors seek out new opportunities and investors become increasingly concerned about the potential for changes to 1031 exchanges, OZs could truly provide a win-win for them and for undercapitalized communities that can benefit from a boost in their housing inventory and from the thousands of new jobs created by large development projects. 

Sean Burton is CEO of Cityview, a premier, vertically integrated real estate investment management and development firm dedicated to redefining 21st-century living. Led by a team with unparalleled expertise in real estate, development, operations and finance, Cityview’s investments have generated more than $4 billion in urban investment across more than 100 projects to date.