Is It Too Late to Invest in Opportunity Zones?
Atlas Real Estate Partners' Noah Weiss weighs in on the program’s benefits.
The opportunity zone program took off relatively slowly in 2017, but 2022 was the strongest year for OZ investment since its inception. And as interest for projects with social impact continues to rise, there’s still room for growth for this economic development tool.
Qualified opportunity funds (QOFs) are the investment vehicles through which taxpayers defer a portion of their capital gains when investing in real estate assets, businesses and infrastructure located in qualified opportunity zones. As of the end of last year, the 1,661 QOFs tracked by Novogradac raised a cumulative $34.1 billion, representing a 39.7 percent year-over-year increase.
Atlas Real Estate Partners has been a major player in the OZ space since its early days and has recently made some significant moves in the Sun Belt area. Noah Weiss, managing director & chief operating officer, told Multi-Housing News more about the company’s experience with OZ investment, and shared his expectations for the future of the program.
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When did Opportunity Zones spark Atlas’ interest and what attracted you toward them?
Weiss: Atlas began pursuing Opportunity Zones immediately after the legislation was passed. We believe that the best way to invest in multifamily in high-growth markets or areas in transition is long term, and we have traditionally been long-term holders. However, most development capital is short term in nature.
The Opportunity Zone program gave us the opportunity to match our target hold period with the appropriate capital. In addition, economic benefits are compelling! The OZ program adds 300 to 500 basis points to returns when compared to a traditional investment in the same asset.
What are the main benefits of investing in OZ projects?
Weiss: The two main benefits of investing in OZ projects are: deferral of capital gains tax recognition for invested capital gains until 2026 and total elimination of capital gains upon exiting after holding 10 years.
Since the primary benefit of investing in OZs is no capital gains tax at exit, the goal is to maximize appreciation. When investing in the right OZs with the right product, you are fundamentally investing in an area that should be completely transformed by the time you exit, leading to outsized expected appreciation compared to investing in mature areas.
In addition to the tax benefits for investors, the OZ program has accelerated developments that may not have otherwise gotten done, adding critical housing to under-invested communities. There are many projects throughout OZs which would have not been constructed if it were not for the tax benefits of the OZ program.
For example, we recently converted an old truck yard into a 310-unit mixed-use community in the Wedgewood-Houston neighborhood of Nashville, Tenn., dubbed Standard Assembly.
Atlas recently expanded to the Sun Belt. What are your investment plans in the area?
Weiss: While we recently opened up a second headquarters in Miami, Atlas has been investing in the Sun Belt since its earliest days, and the Southeast and Texas remain our primary target markets.
Atlas has acquired or developed more than 5,000 units across the Southeast since 2010. In addition to our four projects currently under development in the Southeast, we plan to acquire three to five additional development sites and five to seven value-add acquisitions over the next 24 months.
Is it difficult to close on loans for new developments in the current economy? Are OZ projects easier or harder to finance than regular residential developments?
Weiss: Absolutely, construction financing is significantly more difficult to obtain today than a year ago, and financing levels have been cut back significantly. However, since we have always targeted low-to-moderate leverage in our developments, we have been fortunate enough to obtain debt that meets our business plan.
I wouldn’t say that OZ projects are easier or harder to finance than regular projects when they are high-quality, well-located multifamily assets. However, lenders do appreciate the fact that we are long-term holders that are aligned with the property for more than 10 years. This results in higher construction quality than many merchant-built products.
In addition, while getting financing may not be easier in an OZ, the decision to get off the ground is easier when your outlook is beyond the current market turbulence. We also have established lending relationships with high-quality lenders who remain active across cycles.
What is the main challenge in developing residential projects within Opportunity Zones?
Weiss: The main challenge in developing residential projects in many OZs is access to supporting retail and other residential amenities such as parks, schools etc. However, not all OZs are created equal and we are hyper-focused on developing in areas where these neighborhood comforts are either existing or on the way.
What are the current trends in rental community design?
Weiss: Today, we’re focused on creating highly functional spaces, including desk nooks and dens within units, functional coworking space which includes private offices, great local coffee, healthy snacks, high-speed bulk Wi-Fi and teleconferencing capabilities. We also design indoor-outdoor flex spaces, live-work units, oversized package rooms, fitness centers focused on cardio and virtual classes, bike rooms and lots of dog amenities including dog parks, pet spas, and pet-friendly perks throughout the community.
Beyond the physical design, we take a differentiated approach to retail curation, targeting tenants who activate the space, provide an amenity to our residents and whose brand overlaps with the brand of our developments. Lastly, we curate weekly events for our residents, tailored around their interests and the local community.
Please tell us more about some of Atlas’ recent OZ projects that stand out.
Weiss: We are very proud of all our projects, which are designed to be authentic and catalytic to our markets. Nothing is cookie cutter. Two projects stick out, however.
First is Westerly House, one of our Nashville projects. Westerly House arguably most embodies an “Atlas Development,” which emphasizes rent attainability and walkability, while delivering best-in-class amenities and open communal design.
In addition, our project in Charleston, S.C., with FIDES Development, The Darby, sticks out for its bold take on traditional mid-rise multifamily amenity design and its seamless integration with the burgeoning NoMo Creative Corridor.
What are your predictions for the future of OZ development?
Weiss: There is currently bipartisan, bicameral legislation being debated in Congress that would extend and expand the benefits for OZ investing. Given the combination of structural rental inflation caused by the vast and growing undersupply of housing and the history of the OZ program spurring economic development through investments in quality housing in historically underinvested communities, my prediction is that the program will be extended. Once the market stabilizes and asset appreciation returns, this should spur another wave of OZ-driven development.
We also believe that starts for multifamily development will decline given the capital market challenges, however OZs will be a bright spot as long-term-minded developers focused on emerging neighborhoods will continue to push projects forward.