The main question we keep hearing within the investment community is, “Where are all the deals?” Once the initial novelty of what sounds like a game-changing tax deferral vehicle has worn off, investors want to know where they can turn to get actively involved and gain consistent access to quality deal flow. The main issue that we continue to see as we evaluate potential Opportunity Zones is, “Do the deals make sense on their own merit, independent of the potential tax advantages an investor might realize?”
If a deal doesn’t pencil out on its own over the 10-year hold period required to meet the OZ, an investor could end up losing money even though they are able to offset some significant capital gains on the front end. There is no shortage of qualified capital chasing the deals that actually make sense right now, so access to those opportunities for the average investor becomes very challenging. In turn, the market is starting to become more saturated with deals that simply don’t stand up on their own merit and investors are pursuing them given their restricted access.
My stance is to strongly encourage investors to view OZone deals through the following lens: Would you do the deal as-is if there were no tax incentives included whatsoever? If the answer is no, move on and wait for an opportunity where you feel more comfortable with that being the case. The key here is to not become blinded by the potential tax-deferred benefits of Opportunity Zone investing and really look for deals that you would want to invest in regardless of their designation. These deals may be slow to come to market in the initial stages of the program being rolled out, and they will most likely be controlled by groups with limited access.