In the past two years, opportunity zones have been creating quite a buzz in the investment, finance and real estate industries. During conferences and meetings with clients and investment advisors, I’ve discovered that there is a lot of uncertainty in the industry and lack of understanding about this program.
As the CEO of one of the largest Qualified Opportunity Zone Funds (QOF) in the southwest, I wanted to take a few minutes to outline a few things I wish more people knew about opportunity zones.
Unlocking Dormant Capital
One of the largest benefits of opportunity zones is unlocking dormant capital. What is dormant capital, you ask? Over the course of the last year, we have spoken to many investors who are hesitant to sell an asset due to a heavy tax burden. This leads investors to believe they are stuck holding on to their assets and creates a pool of unproductive capital that is rarely cycled back into the economy.
The Opportunity Zone program helps take the burden off investors and encourages sales as capital gains that can now be invested in opportunity zones in exchange for favorable tax treatment. As a result, sidelined, or dormant capital is being recirculated into the economy and funding rapid development in communities that will benefit from the growth.
Funding Left Behind Projects
Opportunity zone funding is empowering entrepreneurs and improving communities across the country. It’s supporting small businesses and spurring development that creates jobs and multifamily housing in up-and-coming neighborhoods. These are projects that do not qualify for a conventional loan and would not come to fruition without opportunity zones.
One example that we are very proud of at Caliber, and is near to my heart, is a project in our pipeline that will build out a series of behavioral health centers. Working with an established medical group, Caliber will be developing facilities across the southwest to care for patients struggling with both mental and physical health issues. According to Mental Health First Aid, less than half of people with mental disorders receive the professional care they need. There is a distinct lack of services available, and those struggling with behavioral health conditions often do not receive adequate palliative care in traditional medical centers.
Believe it or not, this particular project was turned down by traditional financing sources. Because of opportunity zones, we will be able to build medical facilities that address a desperate need in our community.
You Cannot Afford to Wait and See
The Opportunity Zone program is in its infancy and we have spoken with potential investors who want to be interested observers before investing, which is reasonable thinking for an investor placing their trust in a new program such as Opportunity Zones. However, it is not only investors who are on the sidelines, some fund managers are waiting for the next tranche of regulations to be issued, or for a QOF to be officially vetted by their institution. The truth is, there is simply no time to wait. Let me explain why.
Short and long-term capital gains derived from any source are eligible for the program benefits but must be invested into the program within 180 days of being realized to qualify. There was some flexibility for investors recognizing gains from a partnership or S corporation, with the clock set to December 31. That 180-day window closes June 28, 2019.
Investors with capital gains recognized at the end of 2018 cannot afford a delay. It takes time to do your homework and find a partner that can properly manage the complex regulations of opportunity zones… and time is running out.
Seek An Experienced Fund Manager
Keep in mind that real estate investments, like any investment, requires the right team. Accredited investors should look for a fund manager with a proven operating history and a track record of success. Moreover, it’s important that potential investors have enough information about qualified opportunity zone funds, and what it takes to manage these investments, to make smart decisions.
Caliber, as one of the early adopters of the Opportunity Zone, has begun deploying assets in the locations we believe we have a competitive advantage. With this approach, Caliber’s Tax Advantaged Opportunity Zone Fund, LP boasts a diversified portfolio of residential and commercial assets in targeted zones across the southwest.
Our single $500 million offering has allowed us to work with top tax and legal experts to ensure fund compliance is met. For the past 10 years, more than half of Caliber’s deals have been located in what are now designated opportunity zones or are the type of project that would apply to the stipulation of providing substantial investment, renovation or improvement – which makes Caliber uniquely positioned to manage a successful QOF. Not only have we completed many successful deals in opportunity zone offerings, but we have the deal flow and expertise to manage these types of projects well into the future.
There are more than 150 funds open today with more launching soon. Investors should pick the QOF that’s right for them, even if that’s not with Caliber. However, I urge everyone interested in taking advantage of this program to learn about the funds and do their due diligence before investing.
I wholeheartedly believe in this program. I believe it is good for investors, good for our economy and good for the people living in opportunity zones. If done right, thousands of communities will significantly benefit from funding they may have otherwise never seen. If done right, investors will have a little fun with their capital while making a great and lasting impact on our country.