An entirely new asset class is forming around investing in Qualified Opportunity Zones, but few funds have actually managed to capitalize on it and get money in the ground. Ron Beit, chief executive of developer RBH Group, says his is one of the first funds to do so. He explains what it is doing.
The back story. A provision tucked into the December 2017 tax bill allows holders of capital gains to shelter them from taxes for years by putting them in Qualified Opportunity Funds, which then buy property or business equity in designated low-income Qualified Opportunity Zones. If the buyer holds that investment for 10 years, the buyer has to pay taxes on only 85% of the capital gains, at year seven, and then pay no taxes on whatever gains the capital-gains generated.
It would be an enormous tax incentive—if investors holding capital gains could figure out how to capitalize on it. Half of the potential investment type has been stymied by a lack of clarity around the actual rules. The real estate side is pretty clear, but investors have been unable to move forward on investing in business equity because of the confusion. That has scared off some would-be participants.
What’s new. RBH started its Qualified Opportunity Fund in August, with $40 million from entrepreneurs David and Leila Centner, and closed on its first acquisition the next month. The Teachers Village Opportunity Zone Fund will build housing for teachers and other social-impact-related projects, across the country.
The fund was able to move fast because it was basically already doing it: RBH recently completed the Teachers Village in downtown Newark, N.J. Beit says he worked with then-mayor Cory Booker, now a senator and the co-sponsor of the legislation that created Opportunity Zones. The Teachers Village consists of six buildings, with more than 200 apartments, market-rate and “affordable,” and is nearly 70% occupied, with teachers’ apartments, three schools, and 18 retail outlets, Beit says.
A similar project is slated to open in Hartford, Conn., on May 1. RBH has acquired a site in Chicago, where it plans to break ground by the end of the year, another one in Miami, and is closing on another in Atlanta any minute.
The site in Chicago isn’t in an Opportunity Zone, but the legislation allows for 10% of a Qualified Opportunity Fund to be outside designated zones, so it fits within that exemption.
Looking ahead. Those long-awaited rule-clarifications should arrive any minute now; Beit expects them toward the end of this month.
And at that time, he thinks the spigot will open.
“Everyone knows that once there is clarity, there will be this deluge of activity, and there’ll be a rush to get things done,” he says.
“Folks like us, that have been in the social impact ecosystem, [have] moved ahead, doing projects,” he says. “You’re seeing high-net-worth family offices writing checks. Where the rubber meets the road is when institutions start doing it.”
The Teachers Village Newark was a $150 million public/private partnership, which is also why it worked, Beit says: “public-private partnerships are really the only way to get things done.”
“It’s very rare these days that the public [sector] is doing something on its own, without a public-private partnership,” he says. Teachers Village was the first ground-up residential building in downtown Newark in 40 or more years, he says, “so we had every level of government involved in getting that out of the ground. So these public-private partnerships are how we’re going to build infrastructure, how we’re going to build community development.”
RBH is scouting sites in Oakland, Los Angeles, Denver, Baltimore, and Boston, he says, and is raising money for the next eight Teachers Villages. RBH is seeking up to $150 million, alongside the existing $40 million, for expected project costs of $700 million.
If that sounds ambitious, Beit would assure you it isn’t.
“We’ll fill up that pipeline in 24 months,” he says. “We can continue to raise capital because we really feel like there is a need in every municipality across the country.”
“Teachers Village is a solution for cities like Newark where we’re the first ones to start a neighborhood, if you will, or redevelop a neighborhood. But it’s also the same solution for cities like San Francisco.” Anywhere where there’s a dearth of housing supply—due to a lack of development, or because teachers are priced out of the housing market—Beit sees these Villages as the solution.
With a robust supply of affordable housing, Beit says, “municipalities can recruit and retain the best teachers for their schools.”