This is about Opportunity Zones and a completely different way of thinking about them.
Let’s start with the former Opportunity Zone program, which I will refer to as OZ-1. The concept was wonderful; I mean, how could anyone argue against rich people investing in poor areas? However, there were some problems with it that limited its efficacy.
First, if it was a really blighted area, investors shied away for obvious reasons that the risk/reward profile wasn’t optimal. This took away part of the doing good benefit and steered projects – logically – towards the least blighted areas.
Second, it was really hard to raise OZ dollars largely because the investors were almost universally not real estate investors. They were people who owned stock in, say, Apple, that had appreciated. It was a tough sell to coax them to sell their stock and invest in the riskiest real estate investment ever, i.e., a development project in a blighted area. Making it worse was the fact that those trying to raise dollars – people like me – knew a ton of real estate players but few non-real estate target investors.
Third – when you got right down to it, a ten-year horizon is a long time to tie up money. Maybe there is a pot of gold waiting, but that is a long time to wait, and many things could happen. The risk/reward profile was challenging, to say the least.
Now, we are hearing about changes to revamp the Opportunity Zone program, referred to herein as OZ-2. Those changes seem to involve tweaking the program, but the underlying concepts will remain intact.
This means that I don’t think OZ-2 will be much different than OZ-1 since the foregoing issues will still be front and center.
But here is something that is quite different, and that I think would work a lot better. I thought of it about ten years ago, and it sat at the back of my mind. For some reason, this morning, I thought of it again. I will call it OZ-3. Here goes….
If you think about the real estate industry, its fuel is tenants and occupants. No tenants/occupants equals a bad or dead deal. Lots of tenants/occupants equals a great deal. It is really that simple, and smart investors consider demographics and tenant demand as a core investment diligence matter.
So, instead of focusing on investors, let’s revamp the OZ program as having its mission to be attracting tenants and occupants instead of seeking to attract investors. This is because the investors will certainly be there if there are tenants and occupants.
So how about if the OZ program gave tax benefits to companies that relocated to an OZ, and these benefits would be increased depending on how many jobs they created? If the tax benefits were significant enough, I would bet there would be a feeding frenzy of prospective tenants eager to relocate there and hire the local populace.
And it would be the same for people with incomes over $[fill in a number]. If they moved into an OZ, they would get a tax break, which would stimulate tenants or condo buyers to come to OZ’s in the same fashion.
To get right to the obvious point, once you have demand from tenants and occupants, you don’t need to worry about the real estate investors and lenders, as they will line up to invest and put in dollars since the risk/reward profile has changed.
I am sure there are devils in the details here that I haven't thought of and that have to be hashed out, but my sense is that OZ-3 has a much greater chance than either OZ-1 or OZ-2 if it is similar to OZ-1.
Finally, I note that my law firm –Adler & Stachenfeld–
has been all over OZ deals since the very beginning. We were one of the first to realize the benefits of OZ-1, and we have handled many OZ deals in the past six years since the program started. As for me, in my fund-raising capacity, I have seen first-hand the challenges of raising dollars.
I think it is high time for OZ-3. Who’s with me!!!