OZ WIZARD PREDICTS!

WHAT TO EXPECT WHILE YOU ARE EXPECTING

Others wait, expecting clarity to come soon from final Treasury regulations – a.k.a. Part One –

regarding Qualified Opportunity Zone Funds (“QOZF”). While they wait, allow for the following

bold predictions about how QOZF will develop!

WHO WINS?

1. HUGE SPONSORS. They already are successfully raising billions in equity annually (e.g.

Kevin Shields). Why is this important? QOZF is a new concept for NON real estate

investors (who already have 1031 DSTs as an option). Go big, with a national network of

wholesalers, or go home.

2. ONE HIT WONDERS. Single property developments (e.g. Greg Genovese) will attract

those investors who want / need to see how a proposed property fits in a neighborhood

(and also with a little more confidence, at least in the short run, regarding applicability

of QOZF regulations).

3. FRIENDS & FAMILY. Some few folks are both excellent hands on developers and have a

following of devoted “Friends and Family” investors (e.g., Vanessa Sturgeon). Investors

need assurance that what they see (in marketing material) is what they will get.

Sponsors need to be sure that they can raise the minimum equity to complete the

proposed project (otherwise the investor may lose their equity capital AND their tax

deferral). A well done “Friends and Family” QOZF can be “right sized” to match the

reality of what can be realistically raised in equity to size of project to be developed.

WHAT ELSE IS BEHIND THE CURTAIN?

1. LOCAL EXCLUSION. Governors selected a year ago the 20% of potentially qualified

census tracts in their state. Want to bet that those living / owning in the 80% of tracts

NOT selected will make their exclusion a state and local election issue?

2. 1031 DST IMPACT. Promotion of QOZFs will help in the sales of 1031 DST. Why? More

real estate selling investors, in reading of the comparison, will gain comfort in 1031 DSTs

as they have 15 years of history (versus not yet dried ink…does the government still use

ink?) and DSTs (can) have cash flow (import to retirees) where a development deal has

initial cash flow only if the books are cooked (with a few potential exceptions with

already leased properties).

3. NATIONAL TAX DEFICIT. The national tax deficit runs around $22 trillion. The potential

capital gain tax break of QOZF exceeds $6 trillion. If you are running for Congress, might

this be an interesting point to hammer into an incumbent who voted for the 2017 Tax

Cuts and Jobs Act?

4. SWEET SWEET CHARLOTTE. For a Charlotte County (Florida) – and other under-

developed rural / challenged urban core areas - to compete for QOZF investors /

developers with, for instance, the City of Charlotte (NC), the game has to be “rigged”

with additional incentives (e.g. block grants), local investors (e.g. in a JV Reg D offering),

workforce training (to help attract out of area tenants to the new development),

anticipatory land use planning already approved (to cut development time), and “tenant

ready” users of the proposed development (e.g. community college, government as

tenant, businesses ready to expand).

5. CONSULTANT FEA. Those consultants who understand the challenges of local

government (e.g. former Cleveland Mayor Jane Campbell), balancing the needs of

effective developers (e.g. Molly McCabe), and how “other peoples’ money” impacts the

successful equation (e.g. …well, me!), will thrive with the QOZF FEA (“Full Employment

Act”)!

BOTTOM LINE. The potential for QOZF is huge, but only a few of the 300+ firms announcing

funds will succeed in attracting sufficient equity capital to accomplish their goals. There are

over a million parcels of land in the 8700 qualified opportunity zones. Only those local

governments prepared to compete with additional incentives will overcome the investors /

developer bias to locate where other successful business / real estate are already thriving.

Andy Chess