Opportunity zones’ tax-free potential

Opportunity zone
The Hornstein Fetter Apartment Group at Pinnacle Real Estate Advisors, listed and sold an opportunity zone site at West 14th Avenue and Pierce Street in Lakewood.

Opportunity zones can spell opportunity for real estate investors and developers in Colorado and nationwide.

Congress created opportunity zones last year to jump-start economic growth in low-income and other neglected areas.

Interest in the program really started to perk up after the Treasury Department issued guidelines in October on the program, which offers tax incentives for investing in both urban and rural areas that meet income or poverty guidelines.

Opportunity zones could become big.

opportunity zones

Areas highlighted in yellow represent opportunity zones in Colorado. Source: Colorado Office of Economic Development and International Trade

Last month, a venture capitalist likened opportunity zones to “Lady Gaga coming to a concert at your town hall,” according to an article in the Wall Street Journal.

Opportunity zones could lead to $100 billion in projects nationwide, according to Treasury Secretary Steve Mnuchin.The Treasury has designated almost 9,000 opportunity zones across the U.S., following state nominations.

Colorado has dozens of opportunity zones

There are 126 opportunity zones in Colorado, according to the Internal Revenue Service. Of those, 37 of them are in the Denver area.

Denver has 10 opportunity zones. Both Adams and Arapahoe counties have nine opportunity zones, Jefferson County has five, and Boulder has four.

“We have not yet seen a gold rush to invest in opportunity zones,” said Eric Veith, a broker with Pinnacle Real Estate Advisors.

However, Veith, and Joe Hornstein and Scott Fetter of the Hornstein Fetter Apartment Group at Pinnacle Real Estate Advisors, last month did sell a property in Lakewood that was in an opportunity zone.

“It was the first opportunity zone sale I was involved with, but I don’t think it was the first in the Denver area,” Veith said.

A local buyer paid$1.34 million for a 47,800-square-foot site that includes a total of nine rental units. The property includes nine rental units – a six-plex and three rental single-family homes built in 1930.

opportunity zone

The location of Forty West was as important, or more important, than, the property being in an opportunity zone.

“All of the serious buyers looking at it definitely considered the opportunity zone angle,” Veith said.

“But not everyone could make it work for them,” he added.

In fact, the driving force for the sale of the Lakewood property, called Forty West at Pierce Street and West 14thAvenue, was not that it was in an opportunity zone.

Rather, the group that bought it liked the site because it represented a great value-add opportunity.

Investment had appeal beyond opportunity zones

The site is about a block south of West Colfax Avenue, near two light-rail stops, and is only about a mile west of the Sloans development on the former St. Anthony Hospital campus near Sloan’s Lake.

“The buyer definitely throught it being in an opportunity zone was an attractive part of it, but it wasn’t the main reason it bought it,” Veith said.

“They are looking at it to see if they can take advantage of the opportunity zone, and how possibly it can leverage it for both long-term and short-term advantages,” he continued.

“While he will focus on short-term improvements and stabilization in the immediate future, his ultimate plan will be to leverage the location within an opportunity zone to develop it or sell the development rights on to the next owner,” Veith said.

“This is one of the first deals we’ve seen close within an opportunity zone, and it’s been exciting to see how this unique legislation may have an effect on the market both now and in the future.”

opportunity zones

A closer look at the Lakewood opportunity zone site recently listed and sold by Pinnacle Real Estate Advisors

I spoke to a real estate investor who has been closely following opportunity zones since last July. The investor owns about 500 rental units worth about $50 million in the metro area.

He asked that I not use his name because he doesn’t want to be put at a competitive disadvantage.

“I do believe right now there is an advantage to be a first-mover,” he said. “I don’t want people reading this article and saying, “Oh, he’s the opportunity zone guy,” and charge me a 15 percent or 20 percent premium. A year from now, I think everyone will know about them and it won’t matter.”

Indeed, he recently purchased on opportunity zone property at about 12 percent below the asking price.

Best part of opportunity zones

The best part of an opportunity zone is that if you hold the investment for at least 10 years, you will not have to pay any capital gain taxes on your sale.

“Honestly, if it wasn’t for that, I don’t think opportunity zone investments would be that compelling,” he said.

He said one “wrinkle” with the legislation is that the owner basically has to invest at least the equivalent of the purchase amount within three years back into the property. (The legislation is nuanced, he added. For example, if you paid $2 million for a property and half of it was for an apartment building and half of it was for the land, you would only have to re-invest $1 million, he said.)

“Now, if I’m paying $90,000 a door for a property, it is just about impossible for me to spend that much on improvements,” he explained.

On the other hand, if a developer bought a property, razed it and built something new on the site, he would easily spend more than his initial acquisition cost.

However, while investors might own a property for a decade for the cash flow, that is seldom the case with developers.

“Developers almost always want to get their money out and sell the property within three or five years,” he said.

Future of opportunity zones?

Veith said he didn’t know if opportunity zones will become a big deal and sell for premium prices down the road.

“Honestly, your guess is as good as mine,” Veith said.

“Everyone involved in this industry seems a little bit confused on exactly how opportunity zones are going to play out. People are still waiting for clearer guidelines from the IRS and the Department of Treasury.”

The developer I spoke to said that he also is concerned that some designated opportunity zones are not in blighted areas and development would happen anyway.

opportunity zones

Eric Veith

“But the beauty of it is that not one taxpayer dollar is being spent on opportunity zones and they are designed not to be wrapped up in red tape,” he added.

If you scratch the surface of just about any deal, there is a story behind it. The Rebchook Real Estate Corner looks at the what and who that make the Colorado commercial real estate industry spin every Tuesday and Thursday online at CREJ.com. The people behind the deals are passionate about what they do, whether they focus on offices, apartments, industrial, retail, land or lending. They also are passionate about their clients. Given the cyclical nature of commercial real estate, those who prosper in it have plenty of stories to tell. I hope to share them with you. 

This column includes news stories, in-depth looks at deals, profiles, Q&As and pieces on the latest trends. Contact John with story tips at JRCHOOK@gmail.com or 303-945-6865.

John Rebchook has been taking the pulse of the Denver-area and Colorado commercial real estate world for almost 35 years. He joined the editorial staff of CREJ in 2011. Prior to that, he was the Real Estate Editor of the Rocky Mountain News from 1983 until it closed in 2009.