2. Understand That All Opportunity Zones Are Not Alike
Investors should understand that not all QOZs share the same relative attractiveness. Some areas will be harder to revitalize than others, and there will be strong competition for the best quality opportunities, such as those in already gentrifying areas of the Bay Area, Los Angeles and New York City. Diversification of QOZs is prudent, as is ensuring the OZF manager isn’t pursuing investments in highly concentrated and overcrowded markets.
3. Question The Manager’s Fees
With such short fundraising timelines and strict, 31-month development cycles, OZF fees (which generally range from 1.25 to2 percent with a performance fee) should also be taken into account. Advisors should be sure that the fees their clients are paying are based on invested and not committed capital, as fees charged on committed capital could dampen and diminish overall returns.
Other Considerations
In order to make the most of an OZF investment, investors must be comfortable tying up their capital for a full decade, during which time the real estate will be subject to the usual market forces. Prices could inflate considerably in response to potentially large capital inflows, or decrease suddenly during exit-period outflows. Investors who wish to get the full tax benefits of an OZF investment should rely on their advisors for guidance during these periods.
That said, advisors seeking a way to mitigate the burden of a client’s capital gains taxes would be wise to consider partnering with a several OZFs. If an Opportunity Zone investment seems like a good fit for a client, be aware both the quality of the opportunity and manager skill is essential as competition heats up in the next few months for the most desirable opportunities.
Kittie Feiber is a senior investment analyst in the real estate boutique of Mercer Investments LLC. Nicholas Millikan, CFA, CAIA is the director of investment strategy at CAIS.