Will The Pandemic Increase the Risk of Opportunity Zones?

Opportunity zones were almost immediately popular among investors. The hearty tax benefits and robust economy made the investment model of investing in disenfranchised communities attractive. But will that change now due to the pandemic? The low-income communities that make up opportunity zones—the communities in need of capital investment—could also be more exposed to the negative impacts of the pandemic.

There is no doubt that at the heart of opportunity zones are low-income distressed communities that will see a disproportionate negative impact through community income disparity, which is an issue that government, non-profit and philanthropy is focused on,” Soua Vang, interim economic development director for San Bernardino County, tells GlobeSt.com. “Additionally, the focus on minority communities assists in prioritizing investments into disadvantaged census tracts, which is another way communities’ can leverage OZ to structure their place-based goals to accelerate asset development.”

However, opportunity zones still provide a solution for many investors looking to avoid capital gains taxes. “The COVID-19 pandemic created an interesting dynamic. On one hand it increased perceived risk on certain investments, especially in real estate asset classes that might trade below replacement value,” says Vang. “The OZ incentive requires substantial improvement which means construction in most real estate projects. When assets trade below replacement cost, construction becomes harder to underwrite. On the other hand, because of investors’ panic stock market selling, many are now facing a capital gains tax liability that they need to address. This presents an opportunity for OZ investment.”

In San Bernardino County, opportunity zones investments are an important driver of growth, and leadership believes that these opportunities will actually help to offset the economic impact from the pandemic. RevZone, for example, is developing an 11,325-square-foot medical office building in San Bernardino County. “The San Bernardino development shows how underserved communities can leverage OZ benefits to provide community benefits and returns to investors,” says Vang.

Housing is another crucial need for communities like San Bernardino, and opportunity zones can help to create that supply. “Housing remains a major issue in California and with cost of land and construction very high in coastal areas we remain an attractive alternative to driving profitable and impactful Public Private Partnerships that deliver timely results,” says Vang. “We are involved in pilot discussions on modular and prefab construction as well as creative uses of federal funding and are seeing ongoing successes in our quest to attract the players that create an ecosystem of capital absorption- from investors, to funds, to lenders, to developers, and ultimately to qualified Opportunity Zone businesses.”