Opportunity Zone funding outpaces good projects right now

By Tom Ballard, Chief Alliance Officer, PYA

“There’s way more capital than projects,” Peter Truog, Founder of The Opportunity Exchange, told a group of local individuals who attended a Pathway Lending luncheon on Wednesday at Elkmont Exchange.

He was referencing a mismatch between funds established under the “Tax Cuts and Jobs Act” passed by Congress in late 2017 and viable real estate deals across the country that are proposed for Opportunity Zones (OZ) enabled by that federal legislation.

The luncheon and Truog’s presentation were part of the rollout of Pathway Lending’s “OZ Toolkit” that Tennessee’s largest Community Development Financial Institution developed with funding from the Appalachian Regional Commission.

As we noted in this November 2018 teknovation.biz article, the 2017 federal act was designed as a tax incentive for investors to re-invest their unrealized capital gains into Opportunity Funds that are dedicated to investing in Opportunity Zones designated by the chief executives of every U.S. state and territory. Those investments could be made in real estate or in operating companies and are targeted for economically-distressed areas.

Truog acknowledged that the federal government shutdown earlier this year had delayed release of the final regulations, and that fact is particularly troublesome for those interested in the possibility of operating investments. In fact, there are more hurdles to address and overcome in those regs than there are in those covering real estate transactions. As such, both Truog and Hank Helton, Executive Vice President at Pathway Lending, were not optimistic that start-ups in OZs could expect significant investments under the program when the final regs are promulgated.

The key message that Truog delivered at the luncheon was to encourage communities to get moving soon and do so in an organized, strategic way. In the case of a community-led effort, leadership can come from the local government, a non-profit, or other organization. The key is being able to bring people together.

“There are a lot of people talking about Opportunity Zones, but it’s not clear to communities how to get started,” he said. That’s where the just released “Toolkit” comes in handy.

As one might expect, there are a number of stakeholders that have to come to the table – community leaders, investors, project sponsors, and institutional partners. “Having a strong local coalition is incredibly important,” Truog advised. “Without doing step 1 (building a coalition), it’s almost impossible to do the next ones.”

Step 2 involves completing a community prospectus and building a project and investor pipeline, while the latter steps involve helping with deal execution and documenting impact.

“Communities need to get their projects seen,” reaching out to those who have already established funds, Truog advised the attendees. “There’s a scarcity of (viable) projects in the market nationally.”

One of the attendees was Todd Napier, President and Chief Executive Officer of The Development Corporation of Knox County, who observed that three key parts of the community – downtown, industrial parks, and the University of Tennessee’s Research Park at Cherokee Farm – are all in OZ-designated areas.

That’s certainly an important attribute for the community. That said, he also observed, “In the end, it still has to be a good deal.”

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