It turns out the answer to that question is not as simple as one might hope.
The main issue that we continue to see as we evaluate potential Opportunity Zones (OZs, or OZones) 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.
Instead, groups are targeting designated areas that tend to be adjacent to stable submarkets or those that have already experienced significant development growth in recent years where they can benefit from an existing tailwind of economic activity.
The result of this flight to safety is that many of the areas that need the development activity the least are the ones getting the most attention.
In my observation, many of the lower-income areas that the program originally targeted are not getting the same level of attention because most groups are afraid to be the “first one in” to a market that may or may not actually become revitalized.
This reality has led to what I see as a scarcity in quality OZone investment deals with solid underlying fundamentals, while creating a level of restricted access to any kind of meaningful deal flow.
It could be a while before this starts to happen, however, as I predict a continued flight to safety as investors flock to lower risk, infill markets.
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.
Over time, however, the hope is that the more attractive deals will become available to the average investor and they, too, will get to realize the benefits of this new and exciting program.