Sales of Likely Opportunity Zone Properties Climb 8 Percent Over Last Year

Investors pumped $2.6 billion more into properties covered by the federal Opportunity Zone tax incentive initiative — an 8 percent increase from the same time last year — even before the Treasury Department released guidelines on the program.

Almost 40,000 properties in the nation’s more than 8,760 zones have sold this year, according to CoStar data. More than 51,400 properties are being actively marketed for sale. And the release this month of the first round of regulations is expected to amplify that flow of money through the next couple of years.

Opportunity Zone investments are a provision of the Tax Cuts and Jobs Act signed into law last December, deferring or eliminating capital gains taxes for new investments in communities that state and federal officials define as economically distressed. The Treasury worked into October this year to provide regulatory guidelines for the program.

Estimates range widely for the amount of capital that could flow to take advantage of the tax benefits from investing in properties in these zones and holding onto them for at least 10 years. The federal government calculates the capital flow at $100 billion, while some industry estimates reach as high as $250 billion — and it could go higher if all benefits are factored in.

Not every property in the zones is eligible for tax benefits. To qualify, investment buyers must double the value of the investment in a specific time frame. Many properties in these zones, however, are newly constructed or not in need of new development or redevelopment. Nonetheless, these properties could also see an upswing in investment.

The Praedium Group, a New York City-based national real estate investment firm, acquired the Luzano Apartments in Pompano Beach, Florida, this week for $94.1 million, or $232,920 for each unit. Only two years old, the Luzano presented Praedium an opportunity to acquire an institutional quality, garden-style multifamily community in an evolving neighborhood within South Florida.

“The property’s surrounding location is going through a transformation. Luzano sits in an opportunity zone, which should encourage further redevelopment in the area,” said Lindsay Schuckman, an associate of The Praedium Group. “Luzano is currently positioned as a high-quality, affordable alternative to surrounding South Florida submarkets, providing an opportunity to capitalize on strong projected growth.”

In addition to properties, other investors will be pumping money directly into businesses in the opportunity zones –- investments that are also eligible for the tax benefits.

Grey Holdings Group in Dunkirk, Maryland, this week announced the launch of the first opportunity zone fund focused primarily on defense technology. The fund will focus on firms that produce technology to combat terrorism and protect soldiers.

“Most qualified opportunity zone funds are focused on real estate, which is pretty straightforward,” said Brian Gamble, director of finance for Grey Holdings Group. “However, the greatest tax benefit of this program is the 10 years tax-free gain. Investments in qualified opportunity zone businesses will be the biggest beneficiaries because investors get the appreciation of the real estate — and the business — tax-free. This program is powerful.”

The early activity this year tallied by CoStar may provide a clue to where the expected surge of money could flow and for what property types. In CoStar’s analysis of this year’s opportunity zone sales, it excluded properties that were part of portfolio sales of $100 million or more, and that were targeting large national or regional portfolios and not specifically opportunity zone properties.

New York topped the list of markets for deals at $4.7 billion, about 8 percent more than last year. Five other markets topped more than $1 billion in deals: Los Angeles at $2.9 billion, Phoenix at $2.1 billion, California’s Inland Empire at $1.26 billion, Portland, Oregon, at $1.21 billion and Washington, D.C., with $1 billion.

The Los Angeles sales total was 3 percent less than for the same time last year. Phoenix’s 2018 total was 24 percent ahead of last year’s pace.

Multifamily properties in opportunity zones accounted for 28 percent of the deals by dollar volume total, followed by retail and industrial both at 20 percent, office at 14 percent, land at 9 percent, hospitality at 5 percent, while specialty properties made up the rest.

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