Investing in Opportunity (Zones)

A look at multifamily "Opportunity Zones" created through the Tax Cuts and Jobs Act of 2017

The Tax Cuts and Jobs Act of 2017 had a large focus on making changes to the way corporations are taxed, but it also spawned a tax incentive program to encourage capital investment in economically distressed areas of the U.S. Through the use of “opportunity funds”, corporations are able to attract investment into multifamily and commercial real estate in areas that are designated as Opportunity Zones.

Opportunity Funds and an Untapped $6.1 Trillion Market

A 2017 analysis estimated that U.S. households and corporations are sitting on $6.1 trillion of unrealized capital gains in stocks and funds. According to the study, both individual investors and corporations would not want to sell any of these assets to re-invest them, as they would be required to pay capital gains taxes. Through the program, however, re-investing these funds into low-income areas doesn’t carry any incentive restrictions, and they would get to help revitalize low-income areas across the U.S. Unlike the Low-Income Housing Tax Credit (LIHTC) program, which is limited to a specific amount each year, Opportunity Zones are actually written into new IRS regulations, meaning there is no limit to the tax incentives which investors can claim under the program.

In order to qualify for the tax incentives offered through the Opportunity Zones program, investors must invest through an Opportunity Fund. In regards to real estate, an Opportunity Fund must either be used to invest in new construction or substantial rehabilitation of properties, in order to ensure the funds are actually being used to improve the area in question. In the case of building improvements, an Opportunity Fund needs to be invested more in a building’s rehabilitation than it originally invested in the building’s purchase. In either scenario, all construction and rehabilitation work must be completed within 30 months of a property’s purchase.

The Largest Opportunity Funds

Right now, there are quite a few large Opportunity Funds on the market, each of which invests in a slightly different group of assets. Some of the largest include:

  • Caliber Tax Advantaged Opportunity Zone Fund, LP: Planning to deploy $500 million of capital in Arizona, Colorado, Nevada, Texas, and Utah, Caliber’s fund focuses on affordable housing, commercial real estate, hospitality development, mixed-use development, multifamily and single-family residential, and student housing.

  • Allagash Opportunity Zone CRE Fund I: With plans to deploy $500 million of capital in Virginia, North Carolina, and Maryland, the Allagash Fund focuses its investments in commercial real estate, workforce housing, affordable housing, and multifamily residential housing.

  • Cresset-Diversified QOZ Fund: Looking to generate $500 million of capital commitments, Cresset’s fund plans to invest in all 50 states, in asset groups including low-income housing, self-storage, parking, and even relocating existing businesses into Qualified Opportunity Zones.

  • EJF OpZone Fund I LP: Managed by EJF Capital, EJF OpZone Fund I LP also plans to raise $500 million of capital nationwide to focus on investments in affordable housing, mixed-use development, commercial real estate, workforce housing, student housing, and multifamily residential sectors.

  • EquityMultiple Opportunity Zone Fund: Much like the EJF OpZone Fund I LP, EquityMultiple’s Opportunity Zone Fund is attempting to raise $500 million of capital nationwide to invest in commercial real estate, multifamily residential properties, affordable housing, workforce housing development, mixed-use development, and student housing.

Options for Opportunity Zone Financing

Financing Multifamily Properties in Opportunity Zones is as easy as finding common multifamily loan options like Freddie Mac and Fannie Mae Multifamily financing. However, Fannie and Freddie do not offer ground-up construction loans; only property rehabilitation loans and refinancing. For ground-up construction, many investors/developers may wish to obtain a short-term bank construction loan and then refinance into longer-term fixed-rate financing such as a 5-7 year CMBS loan or any of the stellar Fannie Mae or Freddie Mac multifamily mortgage options. They may also want to refinance with a HUD multifamily loan, such as the HUD 223(f) loan for property acquisitions and refinances.

Investors looking to fund LIHTC properties in Opportunity Zones may also benefit from utilizing HUD multifamily loans, such as the HUD 221(d)(4) loan for the construction and substantial rehabilitation of multifamily properties. HUD multifamily loans offer between 87-90% LTV for affordable properties and a reduced mortgage insurance premium (MIP) of 0.45% (as opposed to 0.65% for market-rate projects). Plus, the HUD 221(d)(4) loan offers a fixed-rate 40-year loan term (with an additional 3-year construction period).

For eligible properties, LIHTCs and Opportunity Zone tax credits can also be combined with rental assistance demonstration (RAD) properties — though this is only likely to occur in limited circumstances— such as in RAD demolition and reconstruction projects, which are only a small percentage of all RAD conversions.