Opportunity zones have quickly become one of the most popular investment models, and it isn't surprising. The model has the potential to completely avoid capital gains tax—but with a trade off. Investment has to target communities in need of economic growth and investment. However, does the model actually work in action, and will it help in bringing more affordable housing supply to the market in Southern California. Experts say yes.
"We certainly believe that this tax legislation will aid in encouraging more affordable development across Southern California," Richard Lara, president and CEO of RAAM Construction, tells GlobeSt.com. "There are more than 879 opportunity zones across the region, many of which are regions where demand for affordable housing is high."
However, it isn't market-rate developers who are scrambling to build affordable projects in opportunity zones, but rather experienced affordable housing developers. "Affordable developers and investors are well positioned to leverage opportunity zones because they already have experience working in underserved markets without this tax legislation," says Lara. "They understand these markets and the legislation aids in making more investment possible in the space."
One of the benefits of the model is that the capital investment doesn't necessarily need to be ground-up development. Lara is seeing a lot of opportunity to augment existing apartment properties. :In addition to ground up development, we may also see affordable housing owners or developers increase density at certain communities," he says. "Because of the substantial improvement clause, many owners or investors may be able to add additional units to properties they already own in opportunity zone markets. This type of renovation may not have made financial sense in the past, but the new tax legislation opens the door to this."
While all of the ingredients are there to improve the affordable hosing supply in Southern California, a market badly in need of more housing options, the state may not participate in the tax benefits. "The only remaining question is whether California will participate in opportunity zones," says Lara. "California is one of four states who have not yet adopted the legislation. Currently, at a Federal level investors or developers could receive the tax benefits associated with these opportunities but may still be required to pay state capital gains in California."
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Kelsi Maree Borland
