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Opportunity Zones News

Opportunity Zones' Social Impact On California's Housing Market

November 7, 2019- Forbes

California is positioned to take full advantage of an opportunity to breathe life into low-income neighborhoods throughout the state. An economic impact of hundreds of millions of dollars could significantly improve conditions in the state's 879 federally designated opportunity zones in low-income communities. 

With more opportunity zones than any other state, California is in prime position to stabilize its economy, thanks to socially conscious investors looking to make a difference while maximizing their returns.

Through the initiative, investors are allowed to defer federal taxes on capital gains by investing the proceeds in qualified opportunity funds. Details aside — investments must create positive economic activity in the area and must be held long-term — it’s caused socially aware investors to take notice.

As investors, we always want to maximize our return, and as humans, we want to do good and make a positive impact in our communities. Opportunity zones give investors the chance to do well financially while also contributing to the betterment of local communities that desperately need economic improvement.

An Answer To The Affordable Housing Crisis

In our real estate market, opportunity zone investing allows us to make a significant social and economic impact. The current affordable housing crisis in California is impacting both renters and prospective home buyers — we are almost 1 million units short of meeting the existing demand for affordable housing in Southern California alone.

There are several factors contributing to the affordable housing shortage:

• Sky-high cost of raw, buildable land:The price of buildable land is at an all-time high, and there is no sign of the rising prices dropping, let alone stabilizing, anytime soon. Builders and developers need to mitigate their risk by building projects that have a high likelihood of being profitable.

• High land cost leads to high-end development: Due to the high cost of land, the communities and developments being built are high-end, as it’s the only way to see a return. Social impact aside, the deal has to make financial sense — we can’t expect developers to lose money or “hope” to break even.

• Land entitlement and approval takes too long: The process to get land approved to build is full of hoops to jump through and can be dragged out over a long period of time, which just adds to the overall cost of building.

• Long carry time results in higher overall financing cost: The longer a developer has to carry a note for the land, the higher the total project financing becomes. This discourages developments geared toward low-income homes, as the numbers simply don’t make sense.

A Change To The Landscape

While the housing crisis remains a major hurdle to overcome, opportunity zones create an opening for investors to not only make a major social impact, but also deliver a great return and benefits, which will help snowball the interest and capital injection from investors.

As an investor myself, I’m attracted to the social impact potential as much as I am the financial return — and I know I’m not alone. Investors can be part of the solution and opportunity zones are the perfect vehicle. Some key points of interest include:

• Long-term hold strategy: In order to receive the full tax benefit, the investment must be held for a period of 10 years. I believe the long-term planning will result in long-term benefits for these financially devastated areas.

• Land prices force development where it’s needed: Land costs are extremely high now, so it’s forcing developers to secure land for communities in the outskirts where there is a major demand for more affordable housing options.

• Alternative building processes are cost-friendlier: In an effort to bring project costs down, it’s giving builders and developers reason to experiment with modular and prefabricated home communities. I believe as these methodologies are proven cost-friendly, we will see a greater shift toward the use and acceptance of modular housing.

• Nontaxed exit gains eliminates price-gauging: When the profit isn’t taxed, it removes the need to squeeze every last penny out of the buyer on the front end. The opportunity exists to create a business that doesn’t have to price-gauge because back-end profits remain intact.

How To Address Opportunity Zones

A multistep opportunity zone success formula enables investors to make noticeable differences in local communities and contribute to solving the affordable housing crisis, while also providing an attractive mechanism for their capital contribution.

The steps that should be included in your winning formula are:

• Buy multifamily land lots in core markets such as Los Angeles, Oakland and Costa Mesa that currently have single-family property that requires improvements. Outside these core markets, look for vacant land opportunities.

• Entitle the land for optimal multifamily land use.

• Design an aesthetically pleasing final product that can be constructed at both speed and scale using today's available advanced technologies.

• Construct communities, staying on predictable timelines and budgets and finishing construction faster than traditional single-home builds.

• Build an overall more sustainable and environmentally friendly product by utilizing water consumption technology, solar and battery technology, green materials, etc.

• Rent properties at 75% of the area median income to achieve a fixed margin over the 10-year hold period required for maximum tax advantage.

• Deliver healthy and stable returns to investors while making a strong social impact within the local communities.

The California real estate industry looks brighter, thanks to the second round of opportunity zone regulations that were released and made public by the IRS this year. I believe we have a truly win-win opportunity: one that benefits both the investors and the local communities.

Post Written By: Ridaa Murad

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