IN THE

OPPORTUNITY ZONE:
Location. Timing. Capital.
JULY 2019
 CUSHMAN & WAKEFIELD RESEARCH

IN THE OPPORTUNITY ZONE:

Location. Timing. Capital.

Top 10 Takeaways
It’s rare for a policy program aimed at low-income Eligible real estate investments comprise new
areas across the country to garner a high level (re)developments, capital-intensive renovations
of attention and capital. But the opportunity zone and, under the new guidelines, a wide range of
program does just that. Program benefits: (1) increase operating businesses including those involved in
capital inflows into the $8 trillion commercial real estate managing and developing real estate. Investors can use
(CRE) market1 by anywhere from $100 billion to over debt on their projects and are permitted to execute cash-
$6 trillion. 2/3 (2) Boost after-tax IRRs for real estate out refinancing after two years.
projects by up to 150-300 basis points (bps) in the first
10 years. This is already affecting real estate prices in The inclusion of operating business in opportunity
some areas. A recent MIT study4 found that opportunity zones means that significant additional capital will
zone designation resulted in a 14% price increase for be raised. Provided these investments lead to greater
redevelopment properties and a 20% price increase for start-up activity and expansions of existing businesses in
vacant development sites. opportunity zones, leasing activity could accelerate.

We are currently tracking 138 large CRE funds Working capital can be held in cash and short-term
targeting more than $44B in equity. Most of these debt securities for up to 31 months. Funds also have
funds have national mandates and intend to invest in six months to identify projects for newly raised capital
multiple product types: 82% of capital in multifamily, 60% and 12 months to reinvest proceeds from asset sales. This
for office and 49% for retail. Industrial opportunities are will make it easier for opportunity zone funds to raise
thus far underappreciated. capital and function.

Most deals are likely to get done in areas with In addition, the 31-month and 12-month windows
strong CRE market fundamentals and/or where can be extended when a project is delayed while
economic revival is beginning. Fast-growing markets awaiting a government action. As a result, projects in
in the Sunbelt, California and Mountain West, as well as highly regulated markets or ones that are not shovel-
Manhattan, offer attractive opportunities. Target markets ready will be easier to do than previously thought.
in our database range widely—from Oakland, CA to the
This program is unlikely to make commercially
New York City boroughs to a number of Sunbelt markets.
unviable projects viable. The extent of the
Most funds (66%) and an even larger share of tax benefit depends on the success of the underlying
total equity (85%) intend to invest across multiple investments, enhancing upside. Evaluation of individual
markets. Among single-market focus funds, New York deals should focus on the specifics of each investment.
City is the most preferred destination with over $1 billion
in dedicated capital.

Timing is key! The clock starts ticking once capital DID YOU KNOW:
gains are realized and funds should be invested
• 10-YR After-tax IRR up 150-300 bps
180 days afterward. The December 31, 2019 deadline to
maximize tax benefits is fast approaching and the value of • OZ Prices Up
the tax break declines after that. However, investors can 14% (redevelopment), 20% (land sites)
still contribute new capital to the program until the end
of 2026 and avoid capital gains on the opportunity zone • $44B+ being raised
fund investment itself which can grow tax-free until 2047.
1 “A Bird’s Eye View of the Markets: 2017 Update,” PGIM Real Estate, March 2017, http://www.pgimrealestate.com/re/pdf/PGIM_RE_Birds_Eyeview_March_2017.pdf
2 https://eig.org/news/opportunity-zones-tapping-6-trillion-market
3 https://thehill.com/hilltv/rising/408980-mnuchin-predicts-100b-in-cap-investment-from-new-opportunity-zones
4 http://src.bna.com/Jsg Where is the Opportunity in Opportunity Zones?”, Sage, Langden, Van de Minne, June 2019

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 CUSHMAN & WAKEFIELD RESEARCH

Cushman & Wakefield

Cushman & WakefieldOpportunity
Opportunity Zone
Zone Fund
Fund Database
Database Distribution
Distribution
Percent (%)
of funds in sample (%)

84% 82%

71%
66%
64%
58%
51%
49% 48%
42% 44%
36% 38%
34% 33% 35% 35%
30%
27%

16%

Single Multiple Single Multiple Office Industrial Multifamily Retail Mixed-Use Other
Geographic Focus Product Types *
Share
Share of of Funds
Funds (138)
(138) ShareofofTarget
Share Targeted Capital
Equity ($44.1B)
Capital ($44.1B)
*Most
*38%funds include
of funds multiple
b y numb product
er and 58% oftypes
fundswithin theirtargeted
b y capital investment consideration
include set,investment
office in their so percentages do not add to 100%.
strategy Source: Cushman & Wakefield Research

DEFINED TERMS
QOF = Qualified Opportunity Fund OZB = Opportunity Zone Business

How It Works In addition, the property investment needs to meet one of

The program allows for tax on any capital gains to be two tests:
deferred provided those gains are invested in “qualified (1) Real estate needs to be put to “original use” with the
opportunity funds” (QOF) within 180 days. 5 After reaching QOF investment. I.e., the building was put into service for
holding period requirements—at five and seven years— the first time for purposes of depreciation or amortization
the basis for the original capital gain is adjusted upward, at the start of the QOF investment. The latest guidance
thereby deferring and reducing tax liability by up to 15%. provides an exception for buildings that have been vacant
The balance of the deferred gain will be recognized in
for at least five years prior to purchase.
2026 or on disposal if earlier. If the opportunity zone
investment is held for at least 10 years, there is no capital (2) The fund needs to “substantially improve” the
gains tax on the QOF investment itself. property. I.e., QOF needs to more than double its basis
in the property within 30 months of acquisition. These
Ninety percent of QOF assets must be invested in
requirements apply only to the building and not to the
designated opportunity zones. Opportunity zone funds
land.
can either hold qualifying real estate directly or in
equity investments in qualifying businesses. To qualify, a Development and capital-intensive repositioning projects
business must: are likely to qualify. Newly constructed property or
projects currently under construction acquired prior
• Derive at least 50% of its gross income from an active
to being placed in service (i.e. receiving a certificate
trade or business located in one opportunity zone
of occupancy) also qualify and are likely the main path
• Have at least 70% of its tangible assets be qualifying through which cash-flow-oriented investors could
opportunity zone property6 participate in the program.
• Have been established after December 31, 2017 For details on how this works reference page 3 of our
November 2018 report.
5 There are some exceptions. For example, section 1231 gains and gains booked by a partnership can be reinvested within 180 days of the end of the applicable tax year.
6 Opportunity zone property includes all tangible assets, including everything from real estate to machinery to furniture. It also includes both owned and leased assets

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 CUSHMAN & WAKEFIELD RESEARCH

 The following investments in designated opportunity zones are likely to qualify:

INVEST IN BUSINESS
THAT LEASES PURCHASE AND
PURCHASE OF INDUSTRIAL SPACE REPURPOSE AN OFFICE OWNED/OPERATED
UNDEVELOPED LAND IN AN COMPLEX OFFICE BUILDING
OPPORTUNITY ZONE

Purchase of undeveloped land An opportunity zone business Purchase of an office complex An asset manager owns and
and building of affordable can lease real estate in an for $25 million (M). The operates an office building.
housing on the site. Low- opportunity zone and have it QOF converts the property The asset manager launches
Income Housing Tax Credits count towards the business’ to residential rental. The a QOF and uses the equity to
and debt financing may 70% asset test. Any purchase price is allocated launch a start-up accelerator
be used. Property is being improvements the business as $10M to land and $15M to located in the building. The
put to original use with makes to the leased property structure. Within 30 months QOF may also invest in the
the investment. QOF has would also qualify as of acquisition, the QOF has building’s other tenants
substantially improved the opportunity zone business deployed an additional $15M provided that they meet
property by doubling its basis property. This provision will (plus $1) into the property, the requirements. The QOF
within the 30-month period. make locating in opportunity thus more than doubling could also invest in any other
Land banking is prohibited. zones attractive to a wide the fund’s basis in the OZBs.
range of tenants, supporting building. This is an example
leasing demand. of the property having been
“substantially improved.”

 The following investments in designated opportunity zones would likely not qualify:

INVEST IN BUSINESS PURCHASE OF

PURCHASE AND THAT TRIPLE
CONVERSION OF MULTIFAMILY
OPERATE EXISTING NET LEASES OUT
EXISTING STRUCTURE PROPERTY TO
STRUCTURE PROPERTY RENOVATE

Purchase of a strip center Purchase of a power center. QOFs may choose to develop, Purchase of multifamily
and continuing to operate The building cost is valued own and operate their real property for $25M to renovate.
the property. The property is at $20M at the time of estate projects through an The purchase price is allocated
not being put to original use, investment. The QOF spends OZB. Once a property has as $10M to land and $15M
nor has it been substantially $5 million converting the space been developed or improved, to structure. Thirty months
improved. to industrial but does not should the OZB choose to after acquisition, the QOF has
engage in a full tear-down and operate the property by invested an additional $10
redevelopment. The property leasing it out to tenants, the million in the building. The
is not being put to original lease cannot be a triple net property is not being put to
use because the structure had lease because this is not original use, and while the fund
previously been in service, considered “conduct of an has increased its basis in the
nor has it been substantially active trade or business.” property, it does not fulfill the
improved. Double net leases are requirement for substantial
permitted. improvement.

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 CUSHMAN & WAKEFIELD RESEARCH

Critical Questions Mostly Addressed

The guidance issued on April 18, 2019 clarifies most issues, of which the most critical areas are discussed below.

Opportunity Zone Businesses

GUIDANCE IMPLICATIONS AND EXAMPLES
A wide range of businesses can now qualify as OZBs,
subject to different tests: • The labor costs test covers instances in which a firm’s engineering
• 50% of the hours worked by employees/ contractors operations is in an OZ but its call center where most hours are worked is
take place in an OZ not in an OZ.
• A landscaping business where the headquarters and management are
• 50% of labor costs are from services performed by
in an OZ but services are performed elsewhere would qualify under the
employees / contractors in an OZ
gross income test. This could also apply to consulting services firms.
• Property, management and/or operation functions
• A wide range of businesses qualify and even more could with minor
in opportunity zone are required to generate 50% of
restructuring.
gross income
• This covers OZB investment in startups.
• In addition, existing businesses can establish and capitalize new
subsidiaries as OZBs. This should expand private equity investment into
Investments can only be made in businesses
existing businesses.
established or purchased from an unrelated party after
December 31, 2017. • Corporations may consider forming their own QOFs to invest in newly
formed corporate subsidiaries that would qualify as OZBs. This would
tend to be attractive only in cases where the corporation expects
sizeable capital gains liabilities.

• Leases are not subject to the same stringent, related party rules as
asset sales.7
• The program could have a material impact on leasing market
fundamentals in certain opportunity zones.
Leases and improvements made to leased property • The greatest impacts are likely to be on the office, retail and industrial
count towards the 70% OZ business property test. markets; however, OZBs could also be formed to manage hospitality
and multifamily assets as well.
• The owner of a property in an opportunity zone could ground lease it to an
OZB created by a QOF partly or wholly owned by the property owner. The
OZB could then (re)develop or substantially improve the asset.

Working Capital
GUIDANCE IMPLICATIONS AND EXAMPLES
Working capital investments can be held in cash and
short-term debt securities for up to 31 months without • QOFs will choose to invest in real estate primarily through QOZBs.
being counted against the 70% asset test.
• This provision should facilitate real estate development and renovation
This provision applies to working capital held by a
projects as well as enable the function of a range of qualified
QOZB, not at the QOF level.
opportunity zone businesses.
The QOZB must have a written plan for how
working capital will be deployed, and the fund must
substantially comply with that plan.
• The extension should encourage opportunity zone investment in highly
Extends 31-month window if the project is delayed regulated markets, such as California. Even in development-friendly
awaiting governmental action. jurisdictions, prospective investments no longer need to be entirely
shovel-ready.

7 Requires only that the lease be market rate and that no prepayments more than 12 months are made.

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 CUSHMAN & WAKEFIELD RESEARCH

Investment
GUIDANCE IMPLICATIONS AND EXAMPLES
• This will give rise to a mixed-investment where the existing
Investors can contribute assets as well as cash to QOFs. basis in the contributed asset (e.g., land) would not be eligible
for tax benefits while the embedded gain would be eligible.
After a QOF has formed, newly contributed capital will be
exempted from the 90% asset test calculation for six months.
• This provides more flexibility in planning and investment.
Carried interests are not eligible for opportunity zone program
tax benefits.

Reinvestment and Interim Gain

GUIDANCE IMPLICATIONS AND EXAMPLES
If an investor disposes of his entire interest in a QOF on or
before December 31, 2026, the Investor may continue the
original deferral and defer any additional capital gains by
reinvesting the gain from such sale in another QOF within 180
days of such disposition. However, a new 10 year holding period • Investors will be unlikely to exit their initial opportunity zone
clock for purposes of the deferred tax liability begins with the fund investments in the first 10 years of the program, unless
new QOF investment. the QOF investment seems unlikely to generate capital gains.
If the investor only disposes of a portion of his interest in a QOF,
however, then there is no ability to continue the original deferral
by making a new QOF investment, although the additional (new)
gain could be deferred with a new QOF investment.
• This safe harbor is only for the purposes of the 90% asset
test and not for holding-period-dependent tax benefits. Sale
of an asset could generate taxable gain for the QOF itself or
its investors if the QOF and/or the investors have not been
If a QOF sells an asset, the fund has 12 months to reinvest the
invested for 10 years at the time of sale.
proceeds from the sale for purposes of the 90% asset test. 8 This
12-month period can be extended if the reinvestment is delayed • Any tax on interim gain could be deferred by either investing
in awaiting a governmental decision. that gain in the same or another QOF (so long as such gain
Although reinvestment by the QOF will not result in the end of was recognized on or before December 31, 2026) or potentially
the deferral for the original deferred capital gains, any new gain via a 1031 exchange.
recognized on the sale of the QOF’s assets will be allocated to • Interim gain taxation provisions currently prevent tax-free
the QOF’s members. If the gain is capital gain recognized on capital recycling in the first 10 years and are generally more
or before December 31, 2026, the QOF investor can defer such favorable to pass-through structures. The provisions also
gains and otherwise get Opportunity Zone benefits by investing create potential for conflicts of interest among investors that
such gains into a QOF within the relevant 180-day timeframe. enter a QOF at different times (when the 10-year period has
The original QOF investment will keep its original 10 year been reached for some but not all of the QOF investors). 9
holding period clock, while the new investment will have a new
• Asset sales and reinvestment are more likely to take place
10 year holding clock.
within QOFs rather than via QOF investors exiting one QOF
and reinvesting in another. In this case, there would still be
potential taxes on interim gain prior to the 10-year holding
period hurdle.

Debt
GUIDANCE IMPLICATIONS AND EXAMPLES
• Absent this guidance, program benefits for leveraged
investments would have been significantly reduced.

Debt incurred by an opportunity zone fund is not considered a • Investors can engage in debt recapitalizations after two year
separate investment, ineligible for tax benefits. at the QOF and asset level—for example, when moving from
construction bridge financing to permanent. This provides
a means to increase near-term cash flow and could help
investors pay their deferred tax liabilities.10

8 The proceeds are kept in cash or short-term debt securities.

9 If the QOF is taxed as a corporation and the asset was held for less than 10 years, then the QOF would be assessed capital gain tax. If the QOF is taxed on a pass-through basis,
then the tax impacts will vary for investors depending on how long they have been invested in the QOF. Gain passed through to an investor that has been invested for at least 10
years would be excluded even if the gain was generated by selling an asset that the QOF had held for less than 10 years. In contrast, a more recent investor in the QOF would be
taxable. This same investor would be taxable even if the asset had been held for at least 10 years (and therefore prior to its investment in the fund). On the one hand, this clarification
removes a key impediment to multi-asset funds. On the other, it creates potential for conflict among investors that enter the fund at different times. It also makes pass-through
structures more attractive in general. Finally, it means that at least in the first 10 years of the QOF’s life, funds will not be able to recycle capital from one project to another without
triggering tax consequences.
10 There are provisions intended to prevent “disguised sales” that could cause certain debt proceed distributions to have tax consequences. In general, distributions from debt
recapitalizations for investments that have been held for at least two years avoid this issue.
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 CUSHMAN & WAKEFIELD RESEARCH

product types, multifamily investment is by far the most

Areas for Further Clarification
prominent focus, with 71% of funds representing 82% of
• The original use and substantially improved
targeted capital. Many of these funds will be investing
requirements for business property of an OZB are
in senior, student, affordable and/or workforce housing.
applied on an asset-by-asset basis. This will cause
Office is the next most common target followed by
reporting complexities and could raise issues in cases
mixed-use. So far, fewer funds are targeting industrial
where there are multiple buildings within a facility
assets. We expect this will change, however, as
but not all of them are either newly built or will be
investors better appreciate the investment opportunity.
substantially improved. Further guidance is expected
on this. • Investment strategies: Most of the announced funds are
focused on real estate investment. Still, a number seeks
• It is currently unclear whether OZBs can reinvest the
to combine real estate investments with support of
proceeds from sales of OZB property in the same
local entrepreneurs. For example, Hypothesis Ventures
manner as QOFs. The downstream tax consequences
plans to invest in opportunity zone startups via
for QOF investors is similarly unclear. This is
accelerator programs that would be operated out of co-
problematic because QOFs would tend to wish to own
working spaces it develops. The most recent guidance
real property through an OZB.
clarified which businesses would qualify for investment
To read about investing in a 1031 reference page 6 of our and did so in ways uniformly friendly to investors.
November 2018 report. We expect opportunity zone fund activity to expand
beyond real estate going forward. OZB investments are
likely to positively impact leasing market fundamentals
On your market, get set, go!
in OZs.
While headline figures suggest the opportunity to tap
• Investors: Only taxable investors with significant
a potential $6T in unrealized capital gains through this
unrealized capital gains can benefit from this program.
program, the reality is that activity is likely to be more
This means that investors will ultimately consist of
modest but still significant. Estimates range from $40B
high-net-worth individuals (and family offices thereof)
to $100B of equity over the next years.11 With leverage,
and corporations. The opportunity zone program has
the dollars put to work could be twice these estimates.
visibility with high-net-worth investors, many of which
For perspective, about $66B in product traded in the
have been driving greater interest in social impact
New York metro during 2018 according to Real Capital
funds and calls for “socially responsible investing.”
Analytics.
Wealth management firms and private banking arms
Cushman & Wakefield Research is currently tracking 138 of various institutions will be critical to the fund
funds, each targeting over $100 million in equity for a distribution process. We expect these institutions
total of more than $44B in aggregate equity. The entire to build platforms that offer their clients the ability
opportunity zone fund universe is significantly larger. For to select from different QOFs. The development of
example, Costar Research has identified an additional 223 this investment infrastructure appears to still be in
smaller funds, targeting $5.7B in aggregate equity. its infancy, a result of which actual capital raised by
Surveying the funds in the Cushman & Wakefield QOFs is well short of announced targets. We expect
database leads to several observations: aggressive movement by both QOF managers and
intermediaries in the coming months ahead of the
• Geographic focus: Market targets range widely—from
expiration of one of the program’s tax benefits at the
Oakland, CA to the New York City boroughs to a
end of this year.
number of Sunbelt markets. Most funds (66%) and an
even larger share of total equity (85%) in the Cushman • Fund managers: The entities launching funds are
& Wakefield database intend to invest across multiple diverse; they include local developers, equity funds,
markets. Among single-market focus funds, New social impact funds and large asset managers (e.g.,
York is the most common target with over $1 billion in Goldman Sachs, PNC Financial Services Group,
dedicated capital. Starwood and Brookfield). Municipalities and other
non-profit groups across the country have been
• Product focus: Most funds plan to target multiple
organizing to partner or otherwise assist QOFs in
product types (52% of funds / 65% of equity). Among
investing in their communities.

11 https://thehill.com/hilltv/rising/408980-mnuchin-predicts-100b-in-cap-investment-from-new-opportunity-zones

cushmanwakefield.com 7
 To access details on the metrics reference the appendix in
Promising Metros With Economic
our November 2018 report.
Momentum at a Tipping Point
Cushman & Wakefield evaluated 45 office and multifamily Though the opportunity zone program is still in its
markets (containing 2,700 of the approximately 8,700 infancy, it has already begun to impact pricing in
opportunity zones) across a range of factors indicative the designated areas. A recent MIT study found that
of economic momentum. These factors were divided redevelopment properties in opportunity zones are
into three categories: tax and regulatory including State selling for 20% more than comparable properties outside
Tax Confirmation Status (Wharton Land-Use Regulation the zones while vacant development site prices have
Index), economic drivers (five-year forecasts for increased 14%.12 Existing property prices, however, show
population growth, employment growth and household little impact so far. Our metro ranking model suggests
income) and CRE fundamentals (2019 office and that price increases are likely to be even more significant
multifamily inventory, vacancy and growth.) in higher ranked areas. Moreover, these markets are the
most likely to experience increased economic dynamism
Sunbelt markets lead the group, as growing populations
as a result, benefiting existing properties as well. This
support economic and CRE fundamental outlooks and
effect is liable to be further enhanced as opportunity
the tax regulatory environments are generally favorable
zone investment extends to operating businesses and so
for development. Fast-growing markets in California
impacting the leasing market.
and the Mountain West also appear, including the San
Francisco Bay Area, Los Angeles, Portland (OR), Seattle
and Manhattan. The full scorings and model detail are
available in the appendix.

12 http://src.bna.com/Jsg Where is the Opportunity in Opportunity Zones?”, Sage, Langden, Van de Minne, June 2019

Economic
Economic Momentum
Momentum IndexIndex
Composite Z-Score (mean = 100)

160
160
147
147 139 136 132
139 136 126 126 123 122 121
132 119 118 114
126 126 123 122 121 111 110 108 108
119 118 114 104 104 103 103 102 97 96
111 110 108 108 91
104 104 103 103 102
97 96
91
Houston

Manhattan
San Jose

San Diego
Phoenix
Tampa

Atlanta

Seattle
Jacksonville Charlotte

San Diego Nashville

Los Angeles
Orlando

Raleigh/Durham

Miami
SF Peninsula

Ft. Lauderdale
W. Palm Beach

San Francisco

Jacksonville

MiamiSacramento
Dallas

DC Metro
Puget Sound
Austin

Salt Lake City

Austin

DC Metro
Puget Sound
Houston

Salt Lake City

Manhattan
San Jose

Phoenix
Tampa

Atlanta

Seattle
Nashville
Orlando

Charlotte

Los Angeles
SF Peninsula
Raleigh/Durham

Ft. Lauderdale
W. Palm Beach

San Francisco

Sacramento
Dallas

Source: Cushman & Wakefield Research

CONTRIBUTORS FOR MORE INFORMATION

David Bitner Revathi Greenwood Sara Gougarty
Vice President Americas Head of Research Managing Director – Industry and Specialty
Americas Head of Capital Market Research [email protected] Advisory Platform Lead, Americas
[email protected] @RevuGreenwood [email protected]
@Bitner_speaks
This document is not intended to provide tax advice. Any tax information provided in this document is not intended or written to be relied upon for tax planning purposes. You should seek advice
based on your particular circumstances from an independent tax advisor.

About Cushman & Wakefield

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valuation and other services. To learn more, visit www.cushmanwakefield.com or
follow @CushWake on Twitter.

©2019 Cushman & Wakefield. All rights reserved. The information contained within this report is gathered from multiple
sources believed to be reliable. The information may contain errors or omissions and is presented without any warranty
or representations as to its accuracy. cushmanwakefield.com