Fellow RE Monkeys,
Wanted to hear everyone's thoughts on Opportunity Zones. Personally, I'm very skeptical this program will work for 3 reasons:
1) Required Hold Period - material tax advantages only kick in after 10-yr hold period. For anything shorter, basis step-up is nice, but can't see how it makes sense to deals in the OZs for a measly 10%-15% step up in basis.
2) Raising Equity vs Generating Yield - this is the biggest one to me. The legislation obviously makes is easier to raise equity. However, that is not the key bottleneck in today's development environment. RE is awash in equity capital. The primary constraint in today's development environment is yield. Given where construction costs are, it's hard to hit more than a 6.75% stabilized RoC on suburban MF and a 6.25% on urban product in my markets. How in the world are these deals going make sense? Assuming market rent is 15%-20% less in OZs, yields on both suburban and urban product will be 75 bps to 100 bps lower than non-OZs. At that point, you are probably talking about underwriting negative leverage and high single digit / low-double digit IRRs on medium to long-term holds. In what universe does this return profile justify development risk?
3) Lots of Capital Chasing Few Deals - In order to build projects with decent yields, the only OZ deals that make sense will be ones on the edges of the OZ boundaries in close proximity to high-income/desirable neighborhoods. The amount of deals that fit this criteria are slim in comparison to the amount of OZ designated capital chasing them. I fear that land numbers in these deals will be comparable to those in non-OZs. At the end of the day, a lot of these funds may end up with undeployed capital past their investment periods or overpaying for the "good" OZ deals.
Any and all discussion is welcome. I've been stupendously wrong in the past, so feel free to insult, disagree and pick nits.
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