Qualified Opportunity Zones:
A View From Developers
By Jackie Matsumura and Alyssa Duranty
Since Congress introduced Qualified Opportunity Zones
(QOZs) in the Tax Cuts and Jobs Act of 2017, developers
have been navigating the new incentives to identify the
maximum benefit for investors.
There are more than 8,000 Qualified Opportunity Zones
across the country, which include economically-distressed
communities that could use new investments to fuel growth.
Under certain conditions, investors may be eligible for
preferential tax treatment for investing in those areas.
QOZs are a current trending topic in real estate, so BPM’s
Jackie Matsumura recently took the opportunity to moderate
a CREW East Bay event panel and share her knowledge
of the complicated subject. The panel also included Amy
Coombe and Jose Luis Martinez, two CFOs of development
companies based in the Bay Area. Discussions included
how developers are currently planning construction projects
around QOZs to attract investors, and what insiders are
expecting to come next.
Looking for Current Projects in
QOZs and Choosing Easy-to-
Market Areas
When news of the QOZs started to spread amongst those in
the real estate industry, developers began searching to see
what current or scheduled projects were located inside the
zones. It was the easiest strategy to start taking advantage of
the offered tax incentives.
“When I heard the news about Qualified Opportunity Zones,
the first thing I did was pull up the map of all the zones and
start plugging in all of our project addresses,” Amy said.
“We were thrilled to learn that one of our projects in the Jack
London Square neighborhood of Oakland is right on the edge
of an Opportunity Zone. The location of this existing project
prompted us to dive head-first into learning about the rules.”
Amy Coombe is the CFO of Branagh Development. Located
in the East Bay, Branagh focuses on building custom homes,
subdivisions, multifamily and commercial developments while
creating opportunities for a pool of investors.
“The (QOZ) incentive is really aligned with our mission,” Amy
said. “We like to think we’re a small and mighty group that
can look at infill development opportunities in urban areas to
create the most value and find the best purpose for that land.”
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BPM Real Estate Insights
Developers backed by investors, like Branagh, are the ones
with the most to gain from QOZs. Investors will be able to
temporarily defer capital gains tax on the sale of assets by
reinvesting those gains into a Qualified Opportunity Fund
(QOF) within 180 days of the sale. If that amount stays in the
QOF for more than 10 years, then investors will not have to
pay income tax on the appreciation on ultimate sale.
QOZs near big metropolitan areas like San Francisco, Los
Angeles and New York are going to be the main target for
many developers and investors now and in the near future,
according to JMA Ventures’s CFO Jose Luis Martinez.
“Certain Opportunity Zones are not necessarily in the worst
areas, they are actually in pretty good areas, and so those
are the areas where we are targeting our projects and
developments, as are other developers,” he said.
JMA focuses on building leisure properties, as well as office
spaces. It was fortunate, like Branagh, to find one of its in-
progress projects in Downtown Phoenix made it into a QOZ.
Thanks to this designation, the company decided to “test the
market and see if there was any interest” in QOZ investments,
Jose said.
“And we were hugely successful,” he added. “We raised
the entire equity for the project, mainly through individual
investors.”
Development Will Eventually Spread
to Underdeveloped Neighborhoods
Investment opportunities in and around big cities will
eventually become few and far between, and that’s when
underserved communities will start to see more development.
The IRS initially created QOZs to stimulate growth and jobs in
impoverished areas. The typical QOZ has an average poverty
rate of 31%—well over the 20% it needs to qualify.
While developers are currently targeting zones that are sure
bets for investors—like Oakland, Berkeley, Sacramento, Miami
and Baltimore—Jose predicts that pockets of less-developed
areas like Northern New Mexico will see growth in the future.
But he warns that investors and developers alike should not
lower their standards just to find projects in QOZs.
“It is still important to have reasonable projects in the area,”
Jose said. “Just because it’s in a Qualified Opportunity Zone,
it doesn’t mean rules of proper real estate investing are not
in place.”
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