Post written by
DJ Van Keuren
DJ Van Keuren is the Vice President for the Hayman Family Office/Hayman Properties & is a graduate of Harvard University.
Just today I received a call from a potential syndicator who asked for my opinion about family offices investing in Opportunity Zones and what my thought was about which of these markets seemed like the best place to invest. The initial premise of his question was, “Do you think families will embrace this opportunity?” I told him that yes, I do. I think a lot of families will look to take advantage of the Opportunity Zone program, but I also believe that many family offices will make investments into Opportunity Zones that will not produce the results that they expect.
Why? Because unlike the SEC or FINRA, which want to put parameters on who can raise money or sell securities, the government has put no limitation on who could start and operate an Opportunity Zone Fund. I believe this will lead to many people selling the sizzle and the tax benefits of the program, rather than the real estate investment itself. As I have said in the past, regardless of the tax benefits, you still have to have an excellent investment opportunity that is being managed by a proven operator. These are the fundamentals of real estate investing.
The second question he asked me was if I thought there were more opportunities in secondary and tertiary markets than the major markets. It was an excellent question. If you look at New York City right now, there are many real estate investment opportunities that are selling at a high price relative to other markets, like Boise, Idaho or Nashville, Tennessee. Although these capitalization rates are quite low in NYC, they are in a city that keeps gentrifying — and that has pushed from beyond lower Manhattan and into Brooklyn for quite some time now, and I believe it will head up through Harlem like a wave.
If there are Opportunity Zones that butt up against a major city, then there could be some excellent opportunities, but regardless, you have to take a good, hard look at a market demand analysis. Is the population in that area shrinking or growing? What is the current income like in that area? Is it close to public transportation? Is the “wave” of gentrification coming that way? These are just a few of the questions outside the investment you should look at, and if your operator can not provide this information, then I would start looking elsewhere. This type of nonmarket information happens quite a bit when the market is doing very well and people are hopping into the market to become “the next big developer.” This could easily happen with Opportunity Zone properties.
Location, location, location is still the most important thing to consider in any real estate investment. So what about secondary markets? Let’s look at Las Vegas for example. I was there with a good friend from another family office, and we were in the old part of Las Vegas where it all started. Apparently, that area has already begun to gentrify with the help of the Zappos CEO Tony Hsieh, who has been pouring money into that area since well before the Opportunity Zone program came about. Do I think this is a “good” Opportunity Zone? Well, yes! Why? Because it is close enough to the central part of the city, and the gentrification process had already begun prior to the announcement of the Opportunity Zone program.
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Personally, if I were to look for an operator to work within an Opportunity Zone, what I would look for would be pretty simple. I would find an operator who has experience in low-income housing or working with Historic Tax Credits that have already been working in these types of locations and properties. They will not only be able to provide a track record that will include actual working knowledge of real estate investment in those areas, but they will also provide proven results. If this operator were getting 8% returns from past projects, being able to use the benefits of the Opportunity Zone will only increase your returns well into the teens. Now that would be a good Opportunity Zone investment.
DJ Van Keuren is the Vice President for Hayman Family Office/Hayman Properties & a graduate of Harvard University.