In previous editions of the Navigator, Camoin Associates has written extensively on the new Opportunity Zones (OZ) program, which encourages private investment in low-income communities in exchange for certain tax benefits (see below for links to associated articles). On January 17th, I will be speaking and facilitating a panel regarding this new program at the New York State Economic Development Council’s annual Economic Developer’s meeting in Albany, NY. By good fortune, we will be joined by a couple of Opportunity Zone investors, namely Al Puchala of CapZone Group and Adam Tkaczuk of Sterling Point Capital. In preparation for the event, I had a chance to discuss the Opportunity Zones from the perspective of the investor. I shared with them that many local officials and private developers often ask, “How do I know if my projects would be a good fit for this program?” and “How do I get investors interested in my community or my projects?”
It turns out that the answer to both questions is that there are specific characteristics that make your project the “Perfect Pitch” to an Opportunity Zone investor. The key for the local economic development officials will be to understand the elements of the “Perfect Pitch” and beat the bushes to find good projects your community. We outline the elements of the “Perfect Pitch” below, in order of importance:
- Strong Sponsor – An OZ investor is looking to place money into capable hands for a long period of time and to take a passive role. The investor wants to see that the project has a highly active, incentivized sponsor (i.e. with skin in the game) and a solid track record of delivering on similar real estate projects. Just having a good piece of property and a good development idea is not enough: you need a developer that can absolutely deliver.
- Low Execution Risk – In addition to a strong sponsor, the OZ investor wants to know that project will proceed expeditiously. Remember that, for the OZ investor, the clock is ticking, and the investor needs to place and employ funds within strict timelines. Therefore, it is important that the project has all its regulatory approvals (zoning, planning, etc.) in place and all its other financing is secured (debt financing and equity, as well as grants, abatements and other financial assistance as necessary).
- Assured Return – Because of the long horizon and illiquidity of the investment, it is less critical that the return be fabulous (no harm in that, of course!) and it is more important that the return be very well assured. OZ investors will typically prefer a solid but modest return that is backed by strong market fundamentals and with protections for the passive investor than a speculative play. So, look for a strong business plan backed by a good market analysis.
- Ready to Close – Again, because of the strict timing requirements and because the benefits of the OZ program will taper off after 2019, a project ready to close on the equity subscription agreement within a short timeframe will be key. The ideal would be a project closing in the first half of 2019, as some investors who realized gains in 2018 will need to have their funds locked up by then.
The above is the ideal project. The “Perfect Pitch” would be to aggregate a number of ideal projects and pitch them to OZ investors as a group. For this, it may be important for economic developers to work regionally, as each community may only have one or two ideal OZ projects. But, if by working regionally, you could collect six to ten great projects together, you would have OZ investors knocking down your door because they would have the strong advantage of not only being able to get some economies of scale, but also being able to diversify risk across project types and geographies.