Created by the 2017 Tax Cuts and Jobs Act, “opportunity zones” hold immense promise for senior housing investment and development, particularly for more affordable options. However, senior housing appears to be an overlooked asset class so far, when it comes to opportunity zone funds and projects in the works.
The 2017 law created qualified opportunity zones offering tax incentives for certain investment in lower income urban, suburban and rural Census tracts across the country. Opportunity zones hold the probability to offer significant tax benefits to investors who re-invest capital gains earnings into new investments, without having to pay taxes on the gains. There are over 8,700 opportunity zones in the U.S.
For investors and sponsors, the most exciting aspect of opportunity zones is, unlike a Section 1031 exchange where capital gains must be reinvested into similar assets in order to defer paying taxes, the gains may be invested in different asset classes, so long as the investor is willing to hold on to the investment long term.
This could further drive senior housing investment, at a time when this asset class is increasingly recognized as institutional-grade. Similarly, it could spur development, particularly in low-density areas of the country where the aging population is growing and there is a lack of senior housing supply, RealCrowd CEO Adam Hooper told Senior Housing News. Palo Alto, California-based RealCrowd is an online commercial real estate investment platform that is positioning itself to take advantage of opportunity zones.
Last year, the Treasury Department and Internal Revenue Service issued proposed regulations and further guidance on how opportunity zones may be used. It is still too early in the process to see any notable projects under development. But there has been an explosion in firms launching opportunity zone funds, raising capital to find projects.
A handful of funds with a senior housing component
With most of the opportunity zone fund capital being raised chasing real estate that is perceived to be sexier, the landscape for senior housing investment is only beginning to take shape.
The National Council of State Housing Agencies (NCSHA), a nonprofit housing advocacy group in Washington, D.C., lists 78 opportunity zone funds seeking investment in multiple product types. Only three specify senior housing as a target of investment. One of those, Brooklyn, New York-based Midtown Opportunity Fund, wants to make senior housing development a fundamental component of its investment strategy, managing member Rucker Culpepper told SHN.
“We believe senior housing is the sexiest sector out there,” Culpepper said.
Midtown is looking to raise $35 million for senior housing and multifamily projects led by experienced development teams in secondary and tertiary markets in the southeastern U.S. The Southeast may be the most attractive area of the country for leveraging opportunity funds for senior housing. Four of the top five U.S. senior living opportunity zones are in the region, according to research from Stratodem Analytics, a real estate data science firm. Those markets are:
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- Arlington, Virginia
- Charleston, South Carolina
- Miami, Florida
- Fairfax, Virginia
The other top senior housing opportunity zone market is Brooklyn, New York.
Propel Opportunity Fund, a Macon, Georgia-based opportunity zone fund, wants to allocate as much as $100 million to senior housing projects across the Southeast, founder, Chairman and CEO Frank Austin told SHN. Opportunity zones can be used to capitalize on the demand for senior housing, particularly affordable options, across this part of the country.
“We studied the poverty levels in opportunity zones,” Austin said. “There is a tremendous need for this kind of housing, and the Southeast has a high concentration of opportunity zones.”
A disconnect in deal flow
As it stands, senior housing is currently an afterthought to investors seeking opportunity zone plays in more popular asset classes such as multifamily, office, hotels and industrial, Hooper said.
“We know senior housing is gaining awareness among investors,” he said. “But it still lags behind the Big Four.”
Midtown and Propel are actively seeking senior housing developments for investment, and finding the opportunities lacking. Austin believes the reason for this is a disconnect in the market.
“A lot of the managers of these funds, and developers, lack the experience of working in distressed communities,” he said. “I’ve been working in this space for the past decade. I understand it and think affordable senior housing needs more attention.”
Midtown has drawn interest from several multifamily, office, hotel and mixed-use developments, but not a single senior housing developer has reached out to pitch, Culpepper said.
Hooper believes the scant guidance offered by the Treasury Department on how opportunity zones will work is a contributing factor.
“I’m not convinced the majority of real estate developers fully understand how they work or how to comply with the requirements,” he said.
The IRS was supposed to release further guidance next month, Culpepper said. But that may be further delayed by the recent government shutdown and the beginning of tax season.
Creative approaches to fundraising
Midtown’s investor pool includes institutional money and high net worth private investors, Culpepper said. Propel’s pool includes institutional, high private net worth and family office investors, Austin said.
Opportunity zones also hold the potential to expand investor pools. One avenue is through crowdfunding platforms such as RealCrowd. The platform lists two opportunity zone funds among its current offerings.
Another opportunity fund, Detroit-based HeroHomes, is looking to leverage government loans for investment properties, founder and CEO Reed Benet told SHN. With over 22 million military veterans in the U.S., Benet believes HeroHomes can combine veterans who qualify for VA loans with institutional capital, and fund senior housing and mixed-use opportunities.
“I call it ‘Groupon on steroids,’” Benet said. “We want to bring concentrated demand to an opportunity zone with an abundance of supply.”