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June 30, 2020

How Opportunity Zone Funds Drive Our Nation Forward

By Chris Loeffler, CaliberCos Inc.

As our nation hurdles toward a November 2020 election, special interest groups and political parties are working hard to define and “sell” their vision of what is best for America. These ideas are often at odds, yet there is renewed interest in a prior year’s collaboration that brought legislators from both sides of the aisle together to create an important economic development tool – Opportunity Zone Funds.

As my 83-year-old uncle recently told me, our country was always at its best when we stood together, unified, against a great threat, as we did in World War II. He sees the COVID-19 pandemic and its resulting economic damage as a similar opportunity for Americans to stand united and fight the headwinds facing us all.

When I think about how Opportunity Zones can provide the engine for part of that fight, I see a rare opportunity for disparate parties to move forward in a way that is both productive at the local community level and therapeutic for our Nation. 

What are some key drivers to rebuild America’s economy in a post-COVID-19 environment?

  1. Invest in our infrastructure
  2. Make critical products in America, again
  3. Enhance access to actionable education

Infrastructure, manufacturing and education – each of these themes have unifying characteristics:

  • Long-term capital is needed; long-term rewards are generated
  • Private and public sector participants must work together
  • Each of the three drives its remaining counterparts

Clearly, the Opportunity Zone program was crafted to meet the needs of these times. It creates an incentive for investors with an estimated $6+ trillion dollars in “dormant capital gains” – meaning capital gains they control in assets they do not want to sell or plan to sell – to invest in the growth and strength of American communities.

This investment could create a trade school in an area struggling with high unemployment, could further spur a new manufacturing opportunity for personal protective equipment (PPE) and could lead to an expansion of public transportation. The possibilities are limited only by our creativity and ambition.

Cases Tell the Story Best

For some concrete examples, consider the following:

Phoenix Medical-Behavioral Hospital: An abandoned assisted living facility boarded up by the previous owners is now being transformed to a 96-bed, acute care behavioral health hospital. This $22 million opportunity-zone funded project was recently featured in the White House OZ Best Practices Report. Fully developed, the project offers a 10.5% cap rate, a leveraged cash-flow return in excess of 15% and an expected total gain on investment over 10 years of 2.5x all while delivering 80 high-income jobs to the community for nurses, doctors and support staff, as well as capacity to serve approximately 20,000 patients annually.

Downtown Mesa Redevelopment: Long passed over by freeway systems, Downtown Mesa, Arizona mirrored what “Main Street” has become in many cities across the United States – very little vitality, activity, business. City leadership secured opportunity zone designation, added public infrastructure through light rail, funded a $100m+ performing arts center and created a new campus for Arizona State University. These public investments attracted opportunity fund investment – acquisition of Main Street buildings and redevelopment of historic assets. The developer expects an excess of 2x return on investment. The community realizes the return of a walkable, vibrant downtown, attracting entrepreneurship and venture investment.

Financial Advisors Guide Investors on the Opportunity

The above examples, and hundreds more across the country, represent the more than $7 billion already invested in opportunity zone funds and assets. By explaining the complex nuances of this program to clients and projecting their fit with investment goals, professional service providers like CPAs, financial advisors, tax specialists, tax attorneys and estate planning attorneys contribute significantly to the success of this program. The tax-favored nature of these investments contribute to a win-win scenario. Educated investors may well choose a proactive contribution to the revitalization of small business and American communities over of an offshore tax shelter or simple inaction.

In this way investors themselves play a critical role, as they take 10+ year risks on places like Tucson, Phoenix, Salt Lake City, Reno, San Antonio, etc. instead of making seemingly less risky bets on traditional Wall Street options. Layer in small business owners, real estate developers, general contractors, local, city, state and federal government officials, community leaders and representatives, non-profits, public and private education providers, and faith-based organizations and something beautiful occurs – unity.

While all parties may not agree on the direction a community should or could take, the fact that they are speaking together for the combined benefit of the group is remarkable. Prior to the advent of this program, investors would have continued on as they always had – either avoiding incurring capital gains taxes or investing gains they could not avoid into less impactful options – and remaining program participants would have continued as they had – working in silos somewhat unaware of the greater value they could create together.

With the rules now set in stone for Opportunity Zone Fund investing, I expect to see the creativity and unity of a new coalition of parties working together to improve economic conditions, grow access to better education and better jobs, and bet on America.

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Chris Loeffler is Chairman, CEO and co-founder of CaliberCos Inc., a Scottsdale-based real estate investment firm with a focus in the Greater Southwest growth markets. You can connect with Chris at (480) 295-7600 x 1808 or chris.loeffler@caliberco.com.

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