Landmark Links October 30th – Too Much of a Good Thing?

Lead Story: When tax reform was passed last year, among the biggest potentiality wins for real estate investors and developers was the creation of Qualified Opportunity Zones which instituted tax benefits in exchange for investment in certain neighborhoods. The program is fairly straight forward: those who invest in regions that neighborhoods that the designation would receive massive tax breaks, either deferring or avoiding capital gains taxes altogether depending on the term of the investment made in exchange for investing in and improving property.  The broad idea is to create incentives for investors to put their capital to work in neighborhoods that have been overlooked.  By and large, this is a solid concept in terms of incentivizing investment but there were a whole lot of questions about the specifics of the program that were not provided when it was initially rolled out.  In the past couple of weeks, the Treasury Department and IRS have issued long-awaited guidance on what the program will look like and it certainly appears to be generous towards developers.  For example, here is Bisnow’s summary of what qualifies as an Opportunity Fund or the vehicle used to invest in a Qualified Opportunity Zone:

One persistent question is what qualifies as an opportunity fund — the investment vehicle for an opportunity zone investment. Who can start one? What are the requirements?

All you need is to self-certify and fill out Form 8996 and attach it to your federal income tax return.

The proposed regulations generally permit any taxpayer that is a corporation or partnership for tax purposes to self-certify as a Qualified Opportunity Fund, provided that the entity self-certifying is statutorily eligible to do so,” the regulations state.

Kosmont Cos.’ founder Larry Kosmont likes that a qualified opportunity fund could be created as a limited liability company.

“This is a real estate developer’s dream,” Kosmont said. “They love LLCs in terms of the flexibility, structuring deals and easier administration of it.”

Starczewski said there is nothing in the regulations that requires an investor to be attached to a big fund run by a bank or a private equity firm.

“A fund could just be a two-person partnership,” Starczewski said. “It could be a real estate developer and a city or an investor who gets together and pool capital gains they have and decide they are going to these zones and purchase a property and renovate the building.”

This appears to be a positive since it means that an individual can us the capital gains from the sale of a company (for example) in order to invest in an opportunity zone directly rather than having to go through a larger fund.  In other words, there is no particular advantage for the big guys – at least on the placement of capital (sourcing the actual investment property is another matter entirely).  There is already pretty clear evidence that designated zones are attracting capital but the latest clarification raises a couple of concerns about a program that I otherwise like a lot:

  1. There is a high likelihood that the incentives will create inefficiencies in the market that cause an over-allocation of capital to a specific region due to a somewhat arbitrary tax designation alone.  This inefficiency can lead to increased risk of downside if the business plan isn’t executed properly.
  2. Upon closer review, some of the zones that received the designation seem dubious at best and should raise some serious eyebrows as to how the selection for was ultimately made.

The first point is troubling in that property in the zones will likely attract substantially more capital than property outside of the zone.  Since the boundaries are somewhat arbitrary, this could be as localized as adjacent properties having vastly different valuations since one gets favorable tax treatment and the other does not.  Want an example in the real world?  The Wall Street Journal already has one:

San Diego developer Moe Ebrahimi paid $720,000 late last year for a site where he planned to build apartments. He expected to own it for years, believing the Logan Heights neighborhood would gentrify.

That all changed earlier this year, when Mr. Ebrahimi put the land up for sale with an asking price of $1 million.

The developer shifted tactics after learning that anyone buying his property would be eligible for lucrative tax benefits. That’s because his land resides in one of the nearly 9,000 so-called “opportunity zones” across the U.S. intended to stoke economic development in low-income areas.

“My friends and I were high-fiving,” he said. “This was a jackpot.”


First off, good on the developer mentioned above for making a profit in a short amount of time.  That being said, it is an illustration of the type of distortions that can happen when an arbitrary policy is localized down to the block.  My concern is that the amount of capital that will want the beneficial tax treatment will dwarf the actionable opportunities available.  This will eventually lead to overvaluation of questionable opportunities (some of these zones are in the middle of nowhere) and ultimately big losses for investors who don’t really understand what they are getting in to.  In other words, the epitome of the phrase “too much money chasing too few deals.”

The second point above is that some of the zones seem curious at best.  For example, take a look at the Opportunity Zone map of California.  A couple of things initially jumped out at me.  Close to home, a large swath in the West Costa Mesa is included.  There are currently hundreds of homes within that zone that are being built and sold with starting prices around $800k.  In addition, it has a booming restaurant and bar scene.  There was enough activity in this zone (among others) that the city voted to pass an ordinance requiring projects that would increase trip counts by a certain amount to go to a city-wide referendum.  Maybe this are wasn’t receiving much investment in the early 2000s but that is far from the case now.  That part of the Westside is a lot of things but underinvested is not one of them.

Another curious feature of the map is that Five Point and Lennar somehow managed to get just about all of their big Bay Area projects included which I’m sure is nothing but a coincidence (end sarcasm here).  Why on earth do already active projects like Hunters Point, Candlestick, Treasure Island, etc need this designation to attract even more capital to what is already being invested?  The answer is that they don’t but some lobbyist clearly did his or her job well and Lennar / Five Point will now be able to bring in even more capital at a likely cheaper cost.

In closing, using tax policy to direct capital to underinvested neighborhoods seems like a good idea but I’m concerned about the long term implications once the money really starts flowing.  The big boys (Lennar and Five Point, for example) are going to do great and attract even more capital – as if they need it.  At the smaller scale, this designation will create some incredible opportunities – at least initially.  However, I have to question if the market is really prepared for the type of distortion that the coming tidal wave of capital will cause over time.


Causation: Faster government spending, particularly on military, accounted for nearly half of acceleration in economic growth since mid-2017.

Staying Power: America’s need for skilled immigrants isn’t going anywhere but our system for admitting educated workers needs major improvements.

Staying the Course: While investors are rattled by markets of late the Federal Reserve is giving no indication that they are losing their cool.


Fertile Ground: Conditions are getting increasingly favorable for more multi-story warehouses in densely populated cities.

Shifting Focus: Global CRE investors are increasingly pivoting from North America to Asia when it comes to investment.


And Now For Some Good News: Proposition 10, which would repeal Costa Hawkins and make rent control much easier to pass in California cities is getting walloped in polls with 60% of likely voters are opposed and just 25% support it.

Tipping Point? New home sales are tanking even faster in the high property tax northeast than elsewhere and the culprit may be reduced SALT deductionsSee Also: Buyers are hibernating in the housing market as spiking mortgage rates take a toll.

Inching Up: Apartment cap rates in San Francisco are creeping higher as increased borrowing costs may finally begin to sting.


Behind the Scenes: Uber Eats is using its customer data to create virtual restaurants with no storefronts that make food strictly for delivery and fill specific segments of demand.

Hiding in Plain Sight: A stadium at Boston University, the former home of the Braves (and for two World Series, the Red Sox), connects the sports-crazy city’s bountiful present to a glorious past.

Inside the Machine: Amazon has so much information about us that it’s become expert at shilling us things we didn’t even know we needed. No wonder its advertising business is booming.

Chart of the Day



Measured Response: A Fresno man lit his parents house on fire with a blowtorch while trying to kill spiders.

Grow Up: 25% of college students claim to have the early onset of PTSD because of the 2016 election.  Reminder: There are people still alive who stormed the beaches of Normandy (not to mention fought in Vietnam, Korea, Iraq and Afghanistan).  These kids are just wimps.

Stop Looking at Your Phone: A woman fell into a shark tank during feeding time at a Chinese shopping mall because apparently posting that meme on Instagram just couldn’t wait.

Kinky: A woman tried to bite off a certain body part on a man during a threesome because meth.  Also because heroin.

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