Plus the Appeal and Challenges of Recognized Opportunity Zones
On January 22, 2019, the Los Angeles Business Journal held a half-day 2019 Economic Forecast & Trends Summit, introduced by Anna Magazanyan, Publisher and CEO. The summit included three panels:
- Federal Tax Reform
- Real Estate
- Economic Markets and Access to Capital
One theme that emerged was the case for Recognized Opportunity Zone investment in Los Angeles. This federal program gives preferential tax treatment to economically-distressed areas and was added to the tax code by the Tax Cuts and Jobs Act on December 22, 2017.
Another economic highlight for Los Angeles was the current “unprecedented” access to capital for investment, despite talk of a slowdown or recession.
Federal Tax Reform Brings Both Tax Cuts and Complications
The morning began with a panel on Tax Reform. The panel was moderated by Michael Arnerio of Lucas Hornsfall with four expert panelists: Craig Morris of KPMG, Kenneth Tindall of CBIZ MHM, Dean Joaquin of RSM US, and David Erard of Armanino LLP.
In general, many lower- and middle-income people are receiving tax cuts, and domestic companies are enjoying a windfall. This is a stimulus to the economy. However, some areas are more complicated and the guidance is still in process. For instance, the 1040 postcard format may appear visually simple, but it is supported by six schedules and 118 pages. Also, California has not adopted any of the federal rules.
Also cited was the ability to reinvest capital gains into Recognized Opportunity Zones. As explained by EIG:
“Opportunity Zones are low income census tracts nominated by governors and certified by the U.S. Department of the Treasury into which investors can now put capital to work financing new projects and enterprises in exchange for certain federal capital gains tax advantages. The country now has over 8,700 Opportunity Zones in every state and territory.”
Will Real Estate Investors Be Able to Take Advantage of Recognized Opportunity Zones in Time?
The summit moved on to Real Estate with Jim Kruse of DPI Retail moderating, and three expert panelists: James Malone of Colliers International, Laurie Lustig-Bower of CBRE, and Martin Griffiths of KPMG.
Opportunity Zones are appealing, but present a practical challenge to secure approvals and get the work complete within the time limit. Designations last for 10 years. Local municipalities aren’t necessarily aligned to move at the pace required.
With 274 Opportunity Zone census tracts in LA County alone, this is a major opportunity, if the timing works out.
Comments from participants indicated attitudes surrounding Opportunity Zones, including:
- “This is not a city of LA project. It’s a Federal project.”
- “It is a federal program. All I can say is it’s an education process – our best efforts will be to try to get the timing down to 30 months.”
Real Estate Products to Watch
The Real Estate panel also provided insight into specific product types, and which offer the most favorable factors. These include:
- Industrial still has a lot of activity and is not slowing down, especially in the Inland Empire and East.
- Office has many submarkets that are positive, e.g., DTLA, Glendale, Pasadena, Irvine. Overall, people want to work closer to home, and that is driving demand in those areas.
- Multifamily continues to have strong demand, but rents are flattening out in 2019 and 2020 with increases expected in 2021 and 2022.
Challenges to LA Real Estate Development
The panel identified two major challenges to development:
- Construction costs are increasing 20%. This has caused some issues with land values
- Linkage fee for affordable housing. If no affordable housing is built, then there will be a 10% linkage fee. This has a huge impact on project economics.
LA Economic Markets Enjoy a Positive Outlook, with ‘Unprecedented’ Access to Capital
The closing panel moderator was Jennifer Paul of Thompson Coburn. Expert panelists were Paul Rahimian of Parkview Financial, Brent Williams of City National Bank and Todd Walklett of Covington Capital Management.
This panel closed on a strong note and positive outlook for continued investment:
- The panel finds that access to capital is at unprecedented levels, and if anything, there is almost too much liquidity.
- Customer conversations are around growth, specifically increasing capacity on revolving loans, additional capital investment, and additional investment in real estate.
- We’re entering and seeing a slowdown in some areas, not a recession.
- When it comes to tech, we are not seeing any slowdown. Tech investment continues to have a strong outlook.
I was pleased to learn from the summit that LA is in a strong economic position, with plenty of opportunity for growth. While it’s always wise to watch for clouds on the horizon, the future is mostly sunny in Los Angeles.