“Opportunity Zones Seen as Bonus Rather Than Driving Force on Deals,” Daily Business Review

“Opportunity Zones Seen as Bonus Rather Than Driving Force on Deals,” Daily Business Review

An aerial graphic showing the 3-acre site, located in an opportunity zone at 17th Street and Biscayne Boulevard, that’s being sold (foreground) and existing high-rises to the east.

Real estate in opportunity zones across South Florida has been springing up for sale offering development potential to investors along with a tax break.

The special designation pushed up asking prices for some sites, said a broker listing some of the properties. An attorney who isn’t working on any of the deals said his clients generally aren’t setting out to pursue OZ sites but consider it a bonus.

“If a deal is a fair deal, they say, ‘It’s OK. I am not jumping to do the transaction.’ But if it’s in an opportunity zone and they factor in some tax benefits, they say, ‘Well, it went from being an OK deal to a pretty good deal.’ They may pursue it but not that vigorously,” said Philip​ Rosen, a Becker shareholder in Fort Lauderdale. “If it was a really good deal to begin with, they are going to pursue it and the opportunity zone will be the cherry on top.”

At least five OZ sites went on the market in recent weeks, including 3 acres on Biscayne Boulevard in Miami’s Omni area, a 30,664-square-foot fully lease industrial building west of Hialeah, 1.63 vacant acres approved for an 11-story office building in Aventura, 19.6 industrial acres along Interstate 95 in Pompano Beach and a 43,797-square-foot medical office building In West Palm Beach.

OZs, created by the 2017 federal tax overhaul, aim to promote redevelopment of economically struggling areas by giving tax breaks in exchange for investments. A developer can take capital gains from any venture and defer paying taxes by investing in a business or real estate in an OZ. Eventually, he benefit from the tax break and appreciation on the OZ project.

Generally, that’s driven interest in available property, said broker Larry Genet, who is listing two of the South Florida sites.

“Properties that are in opportunity zones are getting additional interest generally from a lot of different companies that would have never looked at it before,” said Genet, a CBRE Inc. senior vice president in Fort Lauderdale. He said an OZ location also tends to raise asking prices.

Options

Yet, that doesn’t hold true across the board.

While the $3.4 million asking price for the industrial building near Hialeah wasn’t significantly increased because the property is in an OZ, the $20.2 million asking price for the Pompano Beach site went up, said Genet, who is marketing both.

The OZ benefit plays some role in driving interest.

“It’s been half and half. Some people want to pursue it and some people, it’s just not part of their business plan,” Genet said, referring to the buyer pool for the Pompano Beach site.

Exactly how a developer structures OZ investments varies from deal to deal. Some buy properties betting OZ investors will come in, and others plan to invest their capital gains in their own development. Others aren’t pursuing real estate projects but are moving their companies to OZs as a way to get tax beaks.

The industrial building at 3580 NW 52nd St. would lend itself well to such business relocation, Genet said.

“You could take taxable income and move your business into an opportunity zone and cash in on the benefit that way. You don’t necessarily have to demolish the real estate and rebuild. You could just move your company within one, and this property is something that could potentially work for a group like that,” he said.

Businesses must follow the regulations to get tax breaks, including at least half of their staff working at the OZ site as well as half of the payroll and revenue generated from there.

The Pompano Beach property at 1001 and 1021 NW 12th Terrace is likely to be redeveloped, Genet said. The three lots have three tenants occupying most of the property, but 5.5 acres is vacant.

“You could develop the 5.5 acres by paving it and building a building on it, and you could also do that on the northern parcel. The lease is rolling there, so you could also develop that piece as well. So you’d have roughly 11 acres to develop in the near term,” Genet said.

A buyer also could wait for leases to run out and redevelop the entire site.

“We’ve had multiple offers and more than 100 confidentiality agreements,” Genet said.

Building Higher

Even without the OZ tax benefit, the sites on the market offer a lot of potential. Developers can build bigger, taller and denser that what’s there now.

The Omni acreage, from Biscayne Boulevard west to Northeast Second Avenue and from Northeast 17th Street to 17th Terrace, are home to a Burger King, an office and a retail building, none of which go over two stories. A mixed-use project with residences and a hotel could rise up to 60 stories.

The approved plan allows up to 1.6 million square feet, excluding garages, in three towers of 40 to 55 stories, according to Avison Young, which is marketing the property.

Alternatively, a developer could build a nearly 4 million-square-foot project including garages and reach 60 stories. These maximums can be achieved only by working the city to provide public benefits like open space or infrastructure improvements in exchange for a bigger project, Avison Young said.

The site allows up to 500 residential units, condos or apartments or 1,000 hotel rooms per acre. This means a developer could build 1,500 residential units, 1,000 residential units on two acres and a 1,000-room hotel on the third acre, or mix and match in other ways.

The Aventura site at 21291 NE 28th Ave. has city approval for a 142,114-square-foot building with a five-story garage and six-story office building.

If a developer opted out of the approved plans, an assisted living facility or hotel are other options, said Peter Messina, a CBRE first vice president who is marketing the property. He echoed Rosen in saying the OZ location is a bonus for the buyer.

“We think that that enhances the opportunity in that you have just one more asset to this project that should make it attractive to potential buyers. So now there’s an opportunity to save money that normally would be paid in taxes and could yield a higher profit for the developer,” said Messina, based in Fort Lauderdale.

There is no asking price for the Aventura and Omni properties.

OZs

The amount of a tax break a developer gets depends on how long he keeps his capital gains invested. A five-year investment means 10% of the capital gains won’t be taxed, and a seven-year investment means 15% of the capital gains won’t be taxed. A 10-year investment means the capital gains from the OZ project itself won’t be taxed.

Rosen said the OZ vehicle might be something that helps clients offset rising construction costs, including more expensive concrete and steel. He mainly represents opportunistic investors, or those who see potential in untapped areas.

Still, he reiterated the OZ is something developers consider after other aspects of a deal have been weighed.

“They don’t pigeonhole themselves saying, ‘We need to be in an opportunity zone.’ That could pigeonhole them,” Rosen said.

Reprinted with permission from the Daily Business Review.