Best Practices for O-Zone Capital Raises

While Opportunity Zones have been developed with benefits to investors in mind, it’s up to developers and owners to package appropriate funds and deals to attract those investors in the first place. OpportunityDb’s Jimmy Atkinson recently interviewed New York real estate investment manager Gabriel Fernandez to determine best practices for raising capital from investors, while also focusing on examples of “good” and “bad” deals.

Fernandez indicated, for example, that a “bad” deal was one in which the sponsor hasn’t thought through the risks. The example he used was a potential deal in a New York City that, on the surface, seemed to be a great opportunity. It was a multifamily development, located near a transit hub. The problem, however, was what Fernandez dubbed “a robust pipeline of competing projects . . . that would compete with the subject property.” Even worse was that the risk of competing project and more supply coming online weren’t accounted for in the investment materials. He noted that, in addition to the attributes of an O-Zone property itself, what’s also needed are 1) an analysis that makes the project viable and 2) how that project is positioned, compared to the competition.

As such, Fernandez noted, “good” deals are those in which “there is a clear runway for value creation, and where risks are understood and answered, and/or mitigated.” The risks, he went on to say, include construction, permitting and delivery, along with lease-up and asset-management risk. The asset management phase is hugely important, given the long holding period of Qualified Opportunity Funds, he added.

Fernandez’s advice for QOF sponsors and O-Zone developers was two-fold. First, he said, do your homework.” And second, be honest with investors. “You want to build trust, and also, bad-deal attributes will come out,” he said. He also suggested that investors should allow sponsors to exit a project once that project is completed, and on a stabilized track. Meanwhile, as for the investors, “with the OZ program, they have the option, but not the obligation, to sell at year 10,” he said. “For assets located in markets that have favorable long-term tailwinds . . . going long is a good way to go.”

Connect National Investment & Finance is coming to New York on Oct. 23. For more information, or to register, click here.

Connect Opportunity Zones will be presented for the first time on Oct. 23 in New York. For more information, or to register, click here.

For comments, questions or concerns, please contact Amy Sorter