I recently had the opportunity to talk to Rob Woomer, President of Capital Markets at Peachtree Hotel Group to discuss Opportunity Zone Investments. Rob is responsible for developing and executing capital strategy for growth and serves as the primary contact with the investor community at Peachtree. In this Q and A with me, Rob shares an overview of Opportunity Zones, including history, potential tax benefits and challenges. Dan Raupp: What are Opportunity Zones and why were they created?
Rob Woomer: Opportunity Zones are economically-distressed communities where new investments, under certain conditions, may be eligible for preferential tax treatment. Opportunity Zones were created to incentivize long-term investments in low income communities, selected by state governors, as authorized by the Tax Cuts and Jobs Act of 2017. Many Opportunity Zones have characteristics attractive to hotel development.
DR: What types of investment gains are eligible and what entities are eligible to defer gains?
RW: Selling corporate stock, real estate, a business or an art collection are all examples of eligible forms of qualifying capital gains. The capital gain must stem from a sale or exchange with an unrelated party, and the investment must occur within 180 days from the transaction date. Qualifying taxpayers include individuals, C-corporations (such as RICs and REITs), S-corporations, partnerships and certain other pass-through entities.
DR: You mentioned 180 days, when does this period begin to reinvest gains?
RW: The 180-day period begins on the date when gain would be recognized as taxable by the IRS and an investor must be fully invested (meaning fully funded and admitted as a partner) in a Qualified Opportunity Zone at the end of the 180 days. For taxpayers receiving capital gains allocated from their investment in a partnership, the 180-day window may start one January 1st of the following tax year.
DR: What are the potential tax benefits to an investor who chooses to invest their realize gains in an Opportunity Zone Fund?
RW: There are 3 potential benefits to investing in Opportunity Zones, applicable only to U.S. taxpayers using a capital gain to invest which include:
1. Tax Deferral – the invested gain is deferred from inclusion in the taxpayer’s gross income until the earlier of the taxpayer selling the Opportunity Fund investment or December 31, 2026.
2. Permanent Exclusion of Taxable Gains – after a 5-year hold, the taxable amount of the original invested capital gain is reduced by 10% and after 7 years, reduced by an additional 5%, for a total of 15% permanently excluded from taxation.
3. Tax Free Growth – in our opinion the best benefit… After 10 years, the taxpayer is permanently exempt from paying capital gains tax on gain realized from the sale of the Opportunity Fund investment.
DR: As a developer of Premium Brand Select/Limited Service Hotels, what opportunities do you see in the designated Opportunity Zones?
RW: Peachtree Hotel Group has been developing premium branded select/limited service hotels from the ground up since the firm was established in 2007, long before the tax cut was created. To date, we have overseen or are currently in the building process of 29 deals. When we initially compared the Opportunity Zones map with our pipeline of deals, we realized several properties across the U.S. happened to fall into the zones. We feel the tax incentives will only enhance net, after-tax return potential for our existing developments.
DR: How are your investment criteria different for an Opportunity Zone transaction vs. a non-Opportunity Zone transaction?
RW: We underwrite every property, new construction or existing build through the same lenses. That is to protect our downside and generate attractive returns. Our Development and Acquisition teams have a rigorous process of identifying strategic locations with multiple revenue demand generators. Many Opportunity Zones are appropriate for hotel development, especially those that fall in central business districts, near universities, in and around the office/industrial parks and near airports. While these areas technically qualify as opportunity zones because residents have lower income, they tend to attract hotels seeking to benefit from the demand drivers bringing travelers to the market.
DR: Peachtree was one of the first-to-market with an Opportunity Zone transaction - can you share some of the challenges/nuances?
RW: The first transaction was a Fairfield Inn & Suites by Marriott in St. Louis, MO. We faced the expected challenges along the way with land leases, permitting and zoning, but nothing arose specifically from a deal perspective solely related to developing in an Opportunity Zone. When complete, we believe the hotel will benefit from proximity to downtown demand drivers, including Wells Fargo Securities, a regional FBI Headquarters, a Federal courthouse and multiple State government entities. It is a development project our team identified as economically viable, that now happens to fall within an opportunity zone.
DR: As a fund manager and sponsor, what are some of your biggest concerns going forward in developing & managing in Opportunity Zones?
RW: The numerous tax benefits created by the new legislation have generated increased interest in land parcels within Opportunity Zones (as the law intended), many of which we feel are locations suitable for hotel development. Although land is typically a small part of a hotels’ development budget, usually 10-15%, we are wary of sellers with unrealistic pricing expectations. To date we have not seen material movement in land prices but will continue to maintain discipline in our underwriting to meet our yield requirements on all-in development cost.
Do you have more questions about Opportunity Zones? Feel free to contact our team today.
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There are risks associated with investing in real estate properties including, but not limited to, loss of entire investment principal, declining market values, tenant vacancies and illiquidity. Diversification does not guarantee profits or guarantee protection against losses. Potential cash flows/returns/appreciation are not guaranteed and could be lower than anticipated. The information herein has been prepared for educational purposes only and does not constitute an offer to purchase or sell securitized real estate investments. Because investors situations and objectives vary this information is not intended to indicate suitability for any particular investor. This material is not to be interpreted as tax or legal advice. Please speak with your own tax and legal advisors for advice/guidance regarding your particular situation. Securities offered through Concorde Investment Services, LLC (CIS), member FINRA/SIPC. Advisory services offered through Concorde Asset Management, LLC (CAM), an SEC registered investment adviser. Insurance products offered through Concorde Insurance Agency, Inc. (CIA). Fortitude Investment Group is independent of CIS, CAM and CIA, all of whom are independent of PeachTree.