EquityMultiple’s Opportunity Zone Investing Offerings to Date
As of this writing, EquityMultiple has launched four Opportunity Zone investments, representing four different property types and numerous markets across the U.S.
These investments were subject to the same degree of rigorous underwriting as all prior EquityMultiple offerings. We have evaluated hundreds of potential Opportunity Zone investments, selecting only those that offer a strong business plan, positive market fundamentals, a battle-tested sponsor with an extensive track record, and an investment thesis that is well-suited to meet the qualifications of the Opportunity Zone program.
There are over 8,700 qualifying census tracts in the United States, nominated by State Governors and ratified by the Treasury Department. The bulk of media coverage has focused on the highest-profile urban infill census tracts, and in many cases on the flurry of investment interest in gentrifying neighborhoods of gateway cities – such as Long Island City, Queens, where Amazon planned, then unplanned, a second headquarters. The majority of qualifying census tracts, however, are not in gateway cities. Many central business districts of rapidly-growing secondary and tertiary markets qualify, particularly in Sunbelt cities that can boast relative affordability, strong job prospects for millennial knowledge workers and, consequently, strong current net in-migration. Furthermore, the majority of qualifying census tracts are not in dense urban areas at all: 22% lie within suburbs while nearly 40% – a plurality of qualifying census tracts – are in rural or exurban areas. While we have a strong pipeline of potential Opportunity Zone investments across a variety of markets, we continue to evaluate most closely those opportunities that offer a rapidly-ascending submarket and a relative lack of competition.
Our First Opportunity Zone Investment Offering
Computer-generated model of the yet to be constructed proposed design for the industrial complex in Goodyear, AZ.
In early 2019 we launched and successfully closed on our first Opportunity Zone (OZ) offering, an investment in the ground-up development of a combined 325,000 SF of industrial space between two buildings located in Goodyear, AZ. We partnered with a New York-based real estate investment management firm and an experienced Chicago-based ground-up development firm. The business plan included construction of the Property, lease-up, optimization of the tax benefits associated with the Qualified Opportunity Zone Fund (“QOF”) guidelines and an eventual sale of the Property.
We selected this offering as our first QOZ investment because of the strong industrial market potential. The West Valley has seen significant corporate relocation to the region in the last few years attracted by its affordability, access to a talented and growing workforce, business-friendly environment and proximity to major Western markets. It also provided a prime location with cost-saving benefits for the tenant. The property’s location benefited from excellent accessibility within one mile of two full diamond interchanges along I-10 and is located within a Foreign Trade Zone (FTZ) magnet site, which is an area designated to facilitate international commerce by reducing operational costs and facilitating customs clearance. FTZ magnet sites in Goodyear are limited to two other industrial parks and the property’s site, with all three sites fully occupied except the Property’s parcel.
Our Second Opportunity Zone Offering (and first Opportunity Zone Fund)
Picture shown is for illustration purpose only. General photo of a Manufactured Housing Community.
Our second Opportunity Zone (OZ) investment offering was with Pax Equity, a Texas-based real estate investment management firm, and OZ Impact Partners. Investors had the opportunity to invest in a $5M Equity Offering in an Opportunity Zone Fund – National Manufactured Housing. The primary objective of the fund is to acquire low-occupancy and/or poorly managed manufactured housing community (“MHC”) sites that fit specific geographic and demographic criteria, improve on-site operations through a capital expenditure program, and stabilize occupancy at 85% through the purchase and lease-up of new homes.
We chose this Investment as our second QOZ investment and first Qualified Opportunity Zone Fund because of the compelling property type. Additionally, the fund was already almost 80% subscribed, and had already been actively acquiring and improving properties since May of 2019. MHCs are an intriguing investment because traditional single-family and multifamily homes have not been able to keep pace with a growing population and rising costs that have led to a national housing affordability crisis. MHCs have long provided a lower-cost alternative to more traditional housing options and the combination of increased demand and more institutional ownership has the recession-resistant sector poised for long term growth.
Input from Opportunity Zone experts in Washington, DC noted that this investment strategy most closely matches and implements the initial goal of the Opportunity Zone legislation by investing in low-income areas, providing affordable housing, and helping the communities we invest in. In addition to a financial return, we are making a positive difference in the areas in which we invest.
We saw strong interest from investors, and due to high demand in this investment, EquityMultiple worked with the Sponsor to increase our initial allocation from $5M to $7.5M.
Opportunity Zone Real Estate Investing: The Latest Insights and Developments
Interest from real estate investors has generally picked up following the favorable rule clarifications issued by the Treasury Department in May of this year. Review our previous article titled Update: New Rules outlining the program’s rules, clarifying guidelines and tax incentives. While many individual passive investors have, understandably, moved cautiously when evaluating Opportunity Zone investments, the outlook has generally been positive. Here are a few top-of-mind considerations as the program’s second birthday approaches:
State tax adoption considerations
At inception, the new program for tax-advantaged investing only applied at the federal level – the potential deferral, reduction, and elimination of federal capital gains tax. However, a large number of states have recently conformed to the same system of tax incentives with respect to their own state tax code. Meanwhile, a number of states (including Texas and Florida) do not levy capital gains tax at the state level, and thus conformity to federal QOZ tax benefits is a moot point. As of this writing, the majority of EquityMultiple’s Opportunity Zone investment offerings are within states that recognize QOZ tax incentives at the state level.
Deadline for Rollover
In order to harvest the maximum potential tax benefits afforded under the program, investors must roll over capital gains into a qualifying Opportunity Zone investment no later than 12/31/2019. The step-up in basis for a 7-year+ investment expires after this date. However, investors who roll over capital gains into a qualified Opportunity Zone investment after this date can still benefit from deferral, a reduction of 10% in assessed taxes for a 5-year+ investment, and elimination of capital gains tax on a qualifying investment if held for 10+ years.
Investing Non-Cap Gain Capital
A number of EquityMultiple investors have asked whether it is permissible for investors to participate in Opportunity Zone offerings without rolling over capital gains. This is a fair question, as these investments are mostly spoken of in the context of tax incentives. There is nothing prohibiting investors from participating without rolling over preexisting capital gains. Our operating strategy is to pursue Opportunity Zone investments that are attractive and offer the potential for strong risk-adjusted returns, irrespective of OZ tax benefits, and we hope that investors consider our QOZ offerings regardless of their tax situation.
Potential Expansion of Qualifying Opportunity Zones
Census tracts that were initially qualified per guidelines respecting poverty rates and incomes. As the demographic makeup of census tracts shifts over time, community organizations and investors may advocate for expansion or redefinition of qualified Opportunity Zones. Indeed, this has already begun to happen, especially with the 2020 census looming. Representatives from Delaware, Utah, Colorado, and Pennsylvania have already expressed intent to expand tracts if allowed. Meanwhile, the Treasury Department has already made clear that projects previously qualified by location will be grandfathered in for the duration of the investment, should the project’s census tract cease to qualify for OZ benefits in the future. Potential new qualifying census tracts will be considered in our sourcing of Opportunity Zone offerings, particularly at and following completion of the 2020 census.
Opportunity Zone Investing Tax Benefits: A Review
As a quick recap, Qualified Opportunity Zone investments offer meaningful tax incentives, including:
- Tax deferral on invested capital gains,
- Reduction of those deferred taxes by up to 15%, and
- The elimination of new capital gains tax on the appreciation of the investment if held for at least 10 years.
Source: KPMG September 2019
For a full breakdown of tax incentives, and illustrative examples, please refer to our Opportunity Zones resource page.
We have been focused on identifying the right real estate partners, strategies and properties for these specific investments, and are dedicated to continually offering QOZ investments on the platform. Review our video below outlining a hypothetical tax return on a Qualified Opportunity Zone investment versus a non Qualified Opportunity Zone Investment.
Our Investor Relations Team is working actively to help investors understand requirements as they manufacture gains through not just traditional public stock sales, but also a wide array of capital events. For example, individuals we have worked with have sold private stock in Biotech companies, single-family homes, a billiard manufacturing company, a roll-up of dermatology clinics. The list goes on. Overall demand from investors has increased heading toward the end of the year. Taxpayers seeking to maximize their increase in basis (increase their basis from zero to 15 percent of the deferred gain amount) must invest in a Qualified Opportunity Fund before December 31, 2019.
By deferring and reducing capital gains, investors have the potential to increase post-tax returns, and the potential to earn approximately 350 basis points higher on an IRR basis as compared to a non-Opportunity Zone investment as illustrated in this hypothetical graph