As published in the Kansas City Business Journal on January 28, 2019:
“Opportunity Zones could be a nice investment if you’re sitting on a lot of capital gains, but what do you need to know to be successful?
Terry and Ryan Anderson, co-founders of Fairway-based Platform Ventures, offer some guidance. The veteran real estate investors have raised several funds that own investment properties nationwide. They said Opportunity Zones are a great alternative, albeit one investors must think about carefully to make sure it fits.
“It’s an illiquid investment that needs to just be parked for at least 10 years,” Terry Anderson said. “So it’s locked up money. There is an illiquidity premium that people need to take into account.”
Opportunity Zones are a new tax tool that allows people to invest in specially designated economically disadvantaged areas and then reap tax savings on capital gains. The legislation allows investors to reinvest capital gains within an Opportunity Zone and delay realizing that gain until Dec. 31, 2026. If investors leave the money in that project for five years, they will eliminate 10 percent of the liability, and if they leave it there seven years, they can eliminate an additional 5 percent. If they leave the money alone for 10 years, they owe zero capital gains on the Opportunity Zone investment itself.
Although investors are allowed to sell an Opportunity Zone property at 10 years and one day to reap the benefits, they shouldn’t necessarily rely on that.
“What if we hit a recession?” Ryan Anderson said. “You aren’t going to want to sell that asset in year 10. You really have to tell yourself that whatever money you’re putting in you might not see for 12 years.”
Because it’s not liquid, investors don’t want to have a huge percentage of their overall net worth tied up in an Opportunity Zone just to chase yields. They need to think about things that might happen in their personal life, job or business that might require liquidity.
Most wealth advisers recommend a bit of diversity in the Opportunity Zone fund itself, where more than one investment is made in more than one city. So unless investors are an extremely high-net-worth person with a huge amount of capital gains that allow them to go out on their own, they probably will seek a pooled fund.
Terry Anderson said most pooled Opportunity Zone funds aren’t going to have the liquidity to buy one investor out, so they’re probably going to have clauses in the agreement that prohibit investors from leaving early.
If the investor still is interested and has the capital gains to invest, what are the best investments to make?
Ryan Anderson said there are a lot of great Opportunity Zones nationwide. Those include local places like North Kansas City and the Crossroads Arts District, but it also includes downtown Houston, St. Louis, Los Angeles, Indianapolis, etc.
In those cities, Anderson said he prefers to look at multifamily properties over shopping centers. There’s a pretty low risk that during the course of 10 years an investor will lose every tenant in a 300-unit apartment complex. However, it’s pretty common for a strip mall to lose an anchor tenant, which could affect the return on an investment over time.
Investors also need to consider that property values on the West Coast and East Coast are going to be much higher, so if they focus on the Midwest, they can spread the investment out more easily and be more diversified.
“If you’re a wealthy guy in the Midwest, you’ll probably have a tough time justifying investing in one $750,000 apartment unit in LA when you could invest in three $250,000 projects in Kansas City,” Ryan Anderson said. “While there will certainly be some big gains made on the coasts, I think the Midwest creates more value proposition.”
See the published article here.