Deal Quality Has to Shine Through: Some Quick Thoughts on Opportunity Zone Investing
By Abe Schlisselfeld | May 9, 2019
Over the last several months, I’ve been invited to discuss Opportunity Zones on real estate investor panels around the country, and there are a half dozen more coming up on my calendar. It’s safe to say that in the real estate industry, “O-Zones” (as I’ll call them here) are the shiny new thing. And now, with the recent release of the second round of proposed regulations (read our latest alert here) there will be plenty more to say!
What I hear on these panels and read in the trade publications ranges from dealmaking details (like multi vs. single asset fund structures) to risk issues (such as sponsor control of O-Zone properties) to exit strategies (like refinancing options). What I am also hearing a lot is the question of whether, with the availability of shovel-ready properties, funds should or should not wait for the third (and perhaps final) round of proposed regulations to be issued. Here, we may see the age-old saying “Fortune favors the brave” apply. I wouldn’t be surprised, as my sense from reading the new regs is that they are extremely investor friendly, and I think deals may flow like fine wine.
It’s not hard to understand why the conversation is mostly about “getting ready to get going.” After all, the estimate I’ve heard repeatedly, which was reiterated at the recent Institutional Real Estate Investors Forum in New York (and yes, I was on the O-Zone panel) is that there might be as much as $6 trillion in capital gains on the sidelines looking for places to go. With this incipient flood of capital, is it any wonder that O-Zones are attracting so much attention?
I’m “getting ready to get going” too, but here’s my six cents, and it’s what I’m telling my Marks Paneth clients: Deals have to work. They have to stand on their own merit, and the irreplaceable component of a good deal is quality. Here’s an example of what I mean: An O-Zone is overlaid on a neighborhood that features both blighted areas and other parcels that are experiencing gentrification. In the frenzy to chase the O-Zone deal, will fund managers overlook a price run-up and end up over-paying? The risk is real, but so too is the perceived need to secure first-mover advantage, which can be intoxicating. With so much money chasing a finite number of properties, mistakes are likely to be made. I believe that a little extra QC on the deal will be time well spent.
My Marks Paneth colleagues and I will have much to more to add to the O-Zone discussion in the coming weeks and months, but I’ll leave you for now with this biblical injunction: “With all thy getting, get understanding.”
About Abe Schlisselfeld
Abe Schlisselfeld, CPA, EA, is the Managing Partner of Marks Paneth LLP. In this capacity, he oversees the firm's operations, manages business development efforts and consults on key clients. He is chairman of the firm’s Executive Committee and plays a major role in developing strategy, setting policy and overseeing acquisitions. Prior to becoming Managing Partner in 2021, Mr. Schlisselfeld was the Partner-in-Charge of the firm’s Real Estate Group. In that role, he advised commercial and... READ MORE +