In the last year, Opportunity Zones have been the center of many conversations for those involved in commercial real estate. Opportunity Zones mark the latest way of helping investors save on taxes, while also aiding to advance the economic fabric of an underdeveloped community.
The Opportunity Zone program was established in the Tax Cuts and Jobs Act of 2017. It was put in place to funnel unrecognized capital gains into the U.S. census tracts that need it most, and to bring them development they wouldn’t see otherwise. From the passage of the program in December of 2017, there has been a continued and substantial increase in the interest and investment in these zones. With over 6 trillion in unrealized capital gains in the U.S. the potential for change in these areas is astronomical.
Reonomy is the only platform where you can not only identify properties in OZ’s, but analyze areas of interest for investment and development. Utilizing this data, we here at Reonomy looked at Opportunity Zones in and around 6 of the largest markets in the U.S.
While there is already be substantial development in these areas, the government of each state and county worked to identify the areas most in need of attention. For more information about potential investment and additional incentives, head to county and state specific websites for investment advice and details.
Table of Contents (Click to Jump to Section)
OVERVIEW OF OPPORTUNITY ZONES:
- What are Opportunity Zones?
- How to Invest in Opportunity Zones
INVESTING IN OPPORTUNITY ZONES IN BIG CITIES:
What Are Opportunity Zones?
How Opportunity Zones Are Chosen
Every area of the country that is part of the low-income census tracts was eligible to be designated as an Opportunity Zone. A geographic region can get the designation if the median family income is under 80% of the median income of the surrounding area. Plus, if the area has a poverty rate of over 20%, there’s a good chance that it will become an Opportunity Zone.
Deciding whether or not an area is an Opportunity Zone is a burden that fell on the governor of each state, albeit with some limitations. Governors had the freedom to choose up to 25% of high-poverty areas as Opportunity Zones. The tracts were reviewed by the National Community Reinvestment Coalition (NCRC), which helped to finalize the list of opportunity zones around the nation.
What an Opportunity Zone Designation Means for the Area
Garnering an Opportunity Zone designation can be big for a certain census tract as unrealized capital gains, which are used to fund these investments, is valued at roughly $6.1 trillion. Such an investment can help to completely reshape communities as long as local groups, investors and city officials join forces to determine the best initiatives to invest in.
How Taxpayers Will Benefit if They Invest in Opportunity Zones
Taxpayers have plenty of reason to invest in Opportunity Zones, which is an opportunity that is offered to those who reinvest gain from a sale of property into a “Qualified Opportunity Fund.” One such benefit is that reinvesting this gain in a Fund results in the gain being deferred until the earlier of the date when the taxpayer sells their interest in the Fund or December 31, 2026.
The investment also states that if a taxpayer invests in the Fund for at least five years, 10% of the original gain is excluded. If they do so for at least seven years, an additional 5% (amounting to a total of 15%) of the original gain is excluded. Plus, if a taxpayer invests in a Fund for 10 years or more, all appreciation in that investment will be tax-free once they exit the Fund.
How to Invest in Qualified Opportunity Zone Property
The basic requirements of investing in an Opportunity Zone are as follows:
- Anyone that would like to invest in a Qualified Opportunity Zone (QOZ) must do so by reinvesting existing, realized capital gains.
- To be eligible for tax breaks, they must invest those capital gains through a Qualified Opportunity Fund (QOF).
- They must reinvest their capital gains in a QOF within 180 days of the realized exchange date of those gains.
Once capital gains are reinvested in an Opportunity Fund, investors qualify for a temporary tax deferral on their realized, reinvested gains. Taxes can be deferred until the sale date of their OZ asset, or until December 31, 2026, whichever comes first.
From there, increasingly large tax breaks are earned at three distinct milestones. Investors hit those milestones based on how many years they’ve held their asset in an Opportunity Zone.
Investment in 5 Major Markets
Los Angeles Opportunity Zones
The greater Los Angeles area alone has over 270 designated zones that qualify for these incentives, spanning from locations in San Fernando, all way throughout Santa Ana. As the second most populated city in the United States and largest city in California, Los Angeles’ Opportunity Zones are full of potential.
It is predicted the LA county’s population of 10.6 million will increase by another million by 2035. This significant population growth is causing a housing crisis across the region. Today, nearly half of all developable land throughout Los Angeles is zoned exclusively for single-family homes, and according to the Department of City Planning, a little under two-thirds of the city’s land is now zoned for residential development. But of the land zoned for residential development, over 75 percent is only reserved for single-family homes or duplexes.
The city’s shortage of affordable housing is problematic: homelessness rates have surged a staggering 75 percent in the past six years, while over 30 percent of renters are critically cost-burdened, delegating over half of their monthly income to rent each month. But with nearly half (48 percent) of all assets in Los Angeles County’s Opportunity Zone’s categorized as multifamily, investors and developers have a chance to mitigate the area’s affordable housing issues while simultaneously securing tax benefits.
Reonomy data shows over 36,500 different multifamily units in Los Angeles County. So, what neighborhoods, specifically, should real estate professionals pay attention to? While downtown L.A. continues to boom, trends show surrounding submarkets, like Koreatown and Inglewood, are on the rise and have Opportunity Zones ripe for multifamily investment. Koreatown is on the come up, with 52 different construction and development projects currently underway or in the pipeline. Inglewood is experiencing momentum as well, with a number of large developments coming down the pike, including a new multi-billion dollar football stadium slated to attract a number of additional projects. Investors and developers should consider investing in exploring the 2,000+ multifamily properties in Opportunity Zones between the two suburbs for helping growing communities and ensuring maximized return-on-investment.
Miami Opportunity Zones
As the second most populated city in Florida and the fourth largest urban area in the nation, Miami is full of possibility. Below, we explore Miami’s Opportunity Zone investments based on asset class in Miami-Dade, Broward and Palm Beach Counties. Using Reonomy’s robust sales data in conjunction with city-specific trends, we asses Miami’s Opportunity Zone parcel breakdown and sales data to uncover investment opportunities.
With the city of Miami in the county seat, Miami-Dade County has a population of 2.5 million in over 2,000 square miles. The county’s economy is flourishing; between population growth, an attractive tourism industry, and strong employment rates, Miami-Dade is an epicenter for advancement. And while other cities are struggling with retail, in Miami-Date retail is particularly thriving.
Currently, there is over 2.9 million square feet (sf) in retail space under construction throughout South Florida. In Miami-Dade, specifically, plans have been approved to develop the 6.2 million sf American Dream shopping mall—the largest in North America. Additionally, the mega mixed-used space, the Miami WorldCenter, is slated to finish construction in Spring 2019. This promises over 300,000 sf in retail space, 500,000 sf in office space, and 500,000 sf in hospitality space.
According to Reonomy data, there are over 1,133 different mixed-use assets in Miami-Dade’s Opportunity Zones, as well as 110 retail spaces. Data also shows over 4,000 general commercial real estate assets. Since asset classes are determined on a county-by-county basis, this could include a variety of properties that might be considered “retail” or “mixed-use” elsewhere. With these industries advancing in Miami-Dade County, it might be a prime time to consider investing in these assets within the area’s designated Opportunity Zones.
Houston Opportunity Zones
Everything is bigger in Texas, even the counties. With nearly 4.6 million residents, Harris County (which includes city proper) is the most populated county in the state and the third most populated county in the nation. With over 300,000 commercial properties throughout the county, Harris County is a hotbed for investment and development.
Due to its burgeoning population, the city’s multifamily market continues its trajectory, with unit absorption and occupancy rates steadily increasing and closing in on 90 percent. Layer on the Opportunity Zones in Harris County, and now might be a good time to capitalize on the multifamily boom.
Reonomy data shows that multifamily only makes up an 11.9 percent of the county’s entire Opportunity Zone parcel breakdown. Vacant land dominates the majority at just over 60 percent—the high percentage of vacant land in Houston’s Opportunity Zones is something to consider for multifamily development.
Chicago Opportunity Zones
As the third largest metro in the United States, Chicago is full of potential, especially in these designated Opportunity Zones.
Opportunity Zones are especially ample in Cook County, where 133 of the state’s 327 designated census tracts are located. The second most dense county in the United States, Cook County is bustling with commercial real estate investment and development. Currently, the city has big plans in the pipeline, including a $7 billion mixed-use project known as “The 78.”
Spearheaded by Related Midwest, the plan includes developing a 62-acre parcel on the riverfront to build what will eventually be home to as many as 24,000 new employees.
Interested in investing in Cook County Opportunity Zones? Reonomy data shows a fairly diverse split amongst total assets in the county. Vacant land leads the total parcel breakdown at 27.2 percent, followed by multifamily and special purpose at 18.3 percent and 17.1 percent, respectively. Data also shows retail dominated this year’s past sales at just over half (50.5 percent) of the 2018’s total sales. As more mixed-use space is built, like with The 78, now may be an excellent time to consider investing in Cook County’s Opportunity Zones.
New York City Opportunity Zones
Opportunity Zones are booming in the Big Apple. Appointed areas vary from borough to borough; Brooklyn has over a quarter (125) of the state’s entire Opportunity Zone pool, while Staten Island has only eight designated census tracts. For information on all of NYC’s opp zones, read our in-depth article here.
Brooklyn Opportunity Zones
Brooklyn is a hotbed for the multi-family market. By the end of the first half of 2018, Brooklyn had already outpaced Manhattan’s multi-family market and proceeded to eventually cross the $1 billion dollar threshold at the end of September. While activity is occurring across the borough, certain neighborhoods are catching the eyes of real estate professionals, especially with the introduction of Opportunity Zones. Sunset Park, for example, is gaining traction for its proximity to mixed-use spaces like Industry City and the Brooklyn Army Terminal. Bushwick and Bed-Stuy are also on the rise. These neighborhoods have already experienced a transformation that will likely continue its trajectory as more industry professionals take advantage of new incentives.
Reonomy data supports multi-family’s success throughout Brooklyn. In 2018, the asset class comprised 47.3 percent of the year’s entire sales. For those interested in investing in this market, opportunity is aplenty. Brooklyn’s Opportunity Zone asset pool is 70.4 percent multi-family housing, ranging from small, cozy apartment buildings to sprawling condo complexes. Sales prices are low compared to other asset classes, as well—data on 2018’s multi-family sales shows an average price $1.9 million and a median price of $839,000.