OZ Summit’s QOF-y Talk Panel Discusses Multifamily Properties, Impact Investing and More

Published by Nick DeCicco on Wednesday, December 6, 2023

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Building multifamily properties that function as touch points in a larger community ecosystem drive investing in qualified opportunity funds (QOFs), said participants in the QOF-y Talk panel Nov. 1 at the Novogradac 2023 Fall Opportunity Zones Summit.

The summit was a single-day event in Washington, D.C., to gather industry leaders and policy experts in the opportunity zones (OZ) community to discuss current issues, share ideas, provide networking opportunities and more.

The QOF-y Talk panel, moderated by Novogradac principal Jason Watkins, covered multiple issues relevant to QOFs, including the target industries investors seek for their capital.

Jason Cross, managing director and head of investor relations for Washington, D.C.-based Redbrick LMD and one of the panelists, said that a mix of incomes and uses is attractive to investors when it comes to multifamily housing as it creates a “whole ecosystem where someone can live in and get all the services that they need right downstairs.” Cross said examples of amenities that investors find attractive include grocers and medical services.

Calling on his familiarity with the summit’s and Redbrick LMD’s locale, Cross recalled the words of the late Marion Barry, who served two stints as mayor of the District of Columbia.

“Marion Berry was famous for having said–our mayor for four terms here in town–he’s famous for having said here, 'I live on this side of town. I shouldn’t have to drive an hour or leave the city to go get a pair of shoes,'” Cross said.

That thinking drives investing in mixed-use properties. Jason Ross, a director at Cresset Real Estate Partners and a fellow panelist, noted that a mixture of incomes and amenities creates jobs during construction as well as opportunities for longer-term from the retailers put in place.

Trends in OZ Fundraising

Ross said that trends in OZ fundraising aren’t so distinct from other areas, finding fundraising volume increases in times of tax debt as well as the end of the calendar year. Ross said it isn’t uncommon for investors to wait until the last second to make decisions. 

“It seems that investors follow the human psychology and wait until the last minute to make a decision,” Ross said.

Cross called this style of investing “deadline-driven investment.” Cross and Ross said they have seen a decline in OZ investing as fewer investors have capital gains. Both agreed that merger-and-acquisition transactions have slowed, too.

Ross said he’s seeing gains in cryptocurrency space as investors are selling their crypto to diversify.

Cross said he’s seen business sales by the likes of dentists and doctors to private equity firms as an avenue that generates capital gains. 

“It’s just fascinating to see where the flows are,” Cross said.

Types of Investors

Ross said that as the OZ incentive matures, the number of retail investors declines and more sophisticated, ultra-high net worth groups and family offices focused on generational wealth planning are participating.

“It’s still an educational process, but as we continue to creep closer to that 2026 date, we started to see a different profile,” Ross said.

Cross and Coleen Danaher, regional vice president of business development for JTC Americas and one of the panelists, said educating investors is important. “Deferral is a huge important benefit for OZs,” Danaher said.

1031 vs. OZs?

Cross said educating investors on the value of the OZ incentive as opposed to Internal Revenue Code (IRC) Section 1031 exchanges can provide the family offices with a light-bulb moment.

Ross said part of his strategy when appealing to investors is to ask what they’re trying to sell for, such as a tax shelter, a tax efficient investment strategy or building generational wealth. 

“What we’ve seen, when investors decide to go the 1031 route [versus the qualified opportunity zone] route, it’s because they’re looking for current yield,” Ross said. “With [qualified opportunity zones], most investments tend to be in development or have the repositioning value add, and so the first couple years of that investment, you’re not going to see a distribution, just by the nature of the strategy.”

Ross said the goals of investors drive the path, as well as whether the larger tax savings benefits of the qualified opportunity zones program outweigh the need for immediate current yield.

Impact Investing

In March, JTC Americas issued a report in collaboration with OpportunityDb on environmental, social and governance (ESG) and impact investing. Danaher said some were surprised that the perception of ESG investing was positive.

“We have all this negative connotation in the industry for ESG, that it’s bad, it’s a climate agenda, an environmental agenda, that it’s viewed as a corporate mandate, that it’s rich people putting money into areas that aren’t going to do any good, but outside of that, we’re really surprised that there was a positive response to that,” Danaher said.

Danaher said most people use the terms “impact investing” and “ESG” interchangeably.

Cross said Redbrick LMD has worked with two banks that found Community Reinvestment Act overlap with OZ financing. Cross said investors primary focus is preserving their profits and their capital. 

“It doesn’t have to be one or the other, from what we’ve realized,” Cross said. “It’s being stewards of our investors’ capital, but also at the same time, investing with a lens of impact, and not letting that be the tail that wags the dog, from a return standpoint.”

Ross piggybacked on these comments, adding that long-term value creation and impact do not have to be mutually exclusive.

Reporting Requirements

Multiple bills introduced in the U.S. House of Representatives this year would introduce or expand reporting requirements for OZ investing.

Cross said Redbrick LMD already collects and uses data for its own research to better improve its own business strategy, so introducing reporting requirements is a nonissue. 

“If you’re actually doing the work, then you’re happy to actually do the reporting,” Cross said. “The more data that there is, the more proof that can be shown that this is actually serving its purpose is just better for the overall program.”

Fundraising Strategies

As the 2026 deadline for the OZ incentive looms, Ross noted the incentive’s bipartisan support and called an extension significant. Ross said reports such as the aforementioned JTC Americas one are demonstrating the impact of the incentive.

“I also believe that these reports and the data that is starting to come out is going to be helpful when it comes to [getting an extension],” Ross said.

When the conversation turned to strategies for raising additional equity investment, Cross said Redbrick LMB favors a low-leverage approach. “We’ve been focused on coming in with heavy equity” because they have no tolerance for loss of capital, Cross said.

Ross noted the rise in creating noncapital gains sidecar funds that can contribute to endeavors to fill financing gaps. Ross said these funds are helpful because opening a QOF after it's closed restarts the investors' 10-year hold clock.

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