In September, Urban Catalyst Founder and CEO Erik Hayden participated in the Opportunity Zones 2.0: Community Readiness and Project Development Workshop in the Sacramento area.
Presented in partnership with the U.S. Department of Housing and Urban Development, the workshop brought together developers, government officials, economic development professionals, community stakeholders and capital providers to discuss how communities can prepare for the next phase of the Opportunity Zone program.
Erik joined a panel focused on investor readiness and capital formation. The discussion examined a fundamental question: What characteristics help position a development project to attract capital?
Erik’s perspective was straightforward:
Capital can only fund projects that can actually be built.
From Tract Selection to Project Readiness
Our previous article examined why development feasibility matters when states select Opportunity Zone tracts. Erik’s discussion in Sacramento addressed the next question: Once a tract is designated, what helps position a specific project to move from concept toward construction?
An Opportunity Zone designation may affect the potential federal tax treatment of a qualifying investment, depending on individual circumstances and compliance with applicable requirements. It does not replace the fundamentals of real estate development.
Designation alone does not establish market demand, secure control of a site, obtain entitlements, provide infrastructure or resolve a financing gap. It also does not guarantee that a project will be completed, generate returns or produce a particular community outcome.
Before capital can move, a project still needs an experienced team, evidence of market demand, control of an appropriate site, a viable approval path, sufficient infrastructure and a realistic capital structure.
The Development Team and Execution Plan
Project readiness begins with the team responsible for executing the development.
Relevant experience may include:
- Site acquisition and due diligence
- Design and entitlement processes
- Construction oversight
- Financing and capital formation
- Leasing and operations
- Risk management
Experience does not eliminate development risk or guarantee a successful outcome. It can help demonstrate whether a team understands the challenges involved and has established processes for addressing them.
A credible execution plan should also identify who is responsible for each part of the project, how decisions will be made and how potential conflicts will be managed.
The strength of a concept matters, but execution ultimately depends on the people responsible for turning that concept into a completed development.
Market Demand, Site Control and Approvals
A project needs more than a compelling concept. It also needs a supportable market use and control of a suitable property.
For a multifamily development, market analysis may include:
- Population and employment trends
- Household formation
- Existing housing supply
- Vacancy and rental rates
- Competing developments
- The future construction pipeline
For a commercial, hospitality or mixed-use project, the relevant indicators may differ. In every case, the central question is whether the proposed development responds to a supportable market need.
Market conditions can change, and projections may not be realized. A well-supported demand analysis nevertheless provides a more informed foundation for assessing the proposed development.
Site control may take the form of ownership, a purchase contract or another enforceable agreement. The terms of that control can affect whether the property remains available throughout the entitlement and financing process.
The development plan should also identify which zoning, land-use, environmental, utility and other governmental approvals have been obtained, which remain outstanding and what factors could affect the proposed schedule.
Opportunity Zone designation does not override those requirements.
Construction Readiness and Capital Formation
A project may have an experienced team, site control and appropriate zoning but still face practical barriers to construction.
Infrastructure capacity, utility access, environmental conditions, demolition requirements, construction costs and contractor availability can all affect timing and feasibility.
A construction-readiness assessment may address:
- What work remains before construction can begin
- Which agencies or third parties control the remaining steps
- How long those steps are expected to take
- Whether infrastructure improvements are required
- How delays or cost increases could affect the project
Unexpected delays and expenses may still occur. Clearly identifying known requirements allows those risks to be considered as part of the overall development plan.
Real estate development also frequently relies on several sources of capital. These may include sponsor equity, outside equity, construction financing and other public or private funding sources.
A capital plan may address:
- The project’s total anticipated cost
- The amount and timing of equity contributions
- The availability and terms of debt financing
- Construction and interest reserves
- Contingencies for delays or cost increases
- The assumptions supporting potential project revenue
A projected capital structure does not guarantee that financing will be obtained or remain available. It should provide a credible explanation of how the project is expected to move from planning through construction and operation.
Community Readiness Requires Coordination
For communities seeking to attract Opportunity Zone investment, the work begins before a project enters the capital formation process.
Creating an environment in which projects can advance often requires coordination among:
- Developers
- Property owners
- Local government
- Planning and building departments
- Community stakeholders
- Infrastructure providers
- Lenders and other capital providers
Each participant controls a different part of the process.
Property owners control sites. Local agencies oversee zoning, entitlements and permits. Infrastructure providers influence capacity and timing. Developers assemble the plan, team and financing strategy. Capital decisions depend on the objectives, constraints and risk considerations associated with each funding source.
No single participant can independently create a construction-ready project.
That is why community readiness and project readiness are closely connected. A community may want new investment, housing or economic activity, but capital formation depends on specific opportunities supported by credible information and a practical execution plan.
A Developer’s Perspective From Downtown San Jose
Urban Catalyst’s work in downtown San Jose has required navigating many of these steps, including assembling development sites, working through entitlement processes, evaluating market demand, arranging financing and advancing projects toward construction.
That experience has reinforced the distinction between identifying an opportunity and executing a development plan.
An Opportunity Zone designation can be relevant to the financing discussion. It cannot substitute for the work required to prepare a site, obtain approvals, establish a capital plan and manage development risk.
This principle applies beyond San Jose.
Communities seeking Opportunity Zone investment may be better positioned when they can present more than a designated census tract. They need specific projects supported by credible information, clearly identified requirements and a practical path toward execution.
What Comes Next for Opportunity Zones 2.0
As Opportunity Zones 2.0 takes shape, much of the public discussion has focused on census tract selection and the program’s updated federal tax provisions.
Those issues matter, but the long-term activity associated with the program will also depend on what happens after the map is finalized.
Communities will need to identify potential sites, determine appropriate uses, understand infrastructure and approval requirements and build a pipeline of projects capable of supporting customary due diligence.
Each opportunity will still be evaluated based on its own terms, risks, fees, conflicts and underlying economics.
The Opportunity Zone incentive is one component of that analysis. It is not the investment thesis by itself.
Creating a Credible Path to Construction
Erik’s perspective from the Sacramento workshop can be summarized in one sentence:
Attracting capital begins with creating projects that have a credible path to being built.
For communities, that means preparing more than a map of eligible census tracts. It means creating the conditions in which specific projects can move through due diligence, approvals, financing and construction.
Urban Catalyst is an Opportunity Zone fund manager and ground-up real estate developer based in downtown San Jose, California.
Important disclosures
This article is for general educational purposes and is not tax, legal or investment advice, an offer to sell securities, or a solicitation to buy securities. Any future offering would be made only through its definitive offering documents. Consult independent tax, legal and financial professionals about your circumstances before acting.
Opportunity Zone investments are speculative and may involve substantial risk, including loss of the entire investment. Private real estate funds may be illiquid, have limited or no secondary market, and involve construction, operating, valuation, financing and concentration risks. Leverage can magnify losses. Fees, expenses and conflicts of interest may affect results, and distributions or exit opportunities are not assured. Potential tax benefits depend on eligibility, elections, holding periods, compliance and applicable law; they are not guaranteed. State and local treatment may differ. Laws, regulations and guidance may change. Tax liabilities may arise without corresponding cash distributions. Evaluate the underlying investment independently of potential tax treatment and review all applicable offering documents.
The contents of this communication: (i) do not constitute an offer of securities or a solicitation of an offer to buy securities, (ii) offers can be made only by the confidential Private Placement Memorandum (the “PPM”) which is available upon request, (iii) do not and cannot replace the PPM and is qualified in its entirety by the PPM, and (iv) may not be relied upon in making an investment decision related to any investment offering by an issuer, or any affiliate, or partner thereof ("Issuer").
All potential investors must read the PPM and no person may invest without acknowledging receipt and complete review of the PPM.
With respect to any performance levels outlined herein, these do not constitute a promise of performance, nor is there any assurance that the investment objectives of any program will be attained. All investments carry the risk of loss of some or all of the principal invested. Assumptions are more fully outlined in the Offering Documents/ PPM for the respective offering. Consult the PPM for investment conditions, risk factors, minimum requirements, fees and expenses and other pertinent information with respect to any investment.
These investment opportunities have not been registered under the Securities Act of 1933 and are being offered pursuant to an exemption therefrom and from applicable state securities laws. All offerings are intended only for accredited investors unless otherwise specified.
Past performance are no guarantee of future results. All information is subject to change. You should always consult a tax professional prior to investing. Investment offerings and investment decisions may only be made on the basis of a confidential private placement memorandum issued by Issuer, or one of its partner/issuers. Issuer does not warrant the accuracy or completeness of the information contained herein. Thank you for your cooperation.
Real Estate Risk Disclosure:
- There is no guarantee that any strategy will be successful or achieve investment objectives including, among other things, profits, distributions, tax benefits, exit strategy, etc.;
- Potential for property value loss – All real estate investments have the potential to lose value during the life of the investments;
- Change of tax status – The income stream and depreciation schedule for any investment property may affect the property owner’s income bracket and/or tax status. An unfavorable tax ruling may cancel deferral of capital gains and result in immediate tax liabilities;
- Potential for foreclosure – All financed real estate investments have potential for foreclosure;
- Illiquidity – These assets are commonly offered through private placement offerings and are illiquid securities. There is no secondary market for these investments.
- Reduction or Elimination of Monthly Cash Flow Distributions – Like any investment in real estate, if a property unexpectedly loses tenants or sustains substantial damage, there is potential for suspension of cash flow distributions;
- Impact of fees/expenses – Costs associated with the transaction may impact investors’ returns and may outweigh the tax benefits
- Stated tax benefits – Any stated tax benefits are not guaranteed and are subject to changes in the tax code. Speak to your tax professional prior to investing.
Opportunity Zone Disclosures
- Investing in opportunity zones is speculative. Opportunity zones are newly formed entities with no operating history. There is no assurance of investment return, property appreciation, or profits. The ability to resell the fund’s underlying investment properties or businesses is not guaranteed. Investing in opportunity zone funds may involve a higher level of risk than investing in other established real estate offerings.
- Long-term investment. Opportunity zone funds have illiquid underlying investments that may not be easy to sell and the return of capital and realization of gains, if any, from an investment will generally occur only upon the partial or complete disposition or refinancing of such investments.
- Limited secondary market for redemption. Although secondary markets may provide a liquidity option in limited circumstances, the amount you will receive typically is discounted to current valuations.
- Difficult valuation assessment. The portfolio holdings in opportunity zone funds may be difficult to value because financial markets or exchanges do not usually quote or trade the holdings. As such, market prices for most of a fund’s holdings will not be readily available.
- Capital call default consequences. Meeting capital calls to provide managers with the pledged capital is a contractual obligation of each investor. Failure to meet this requirement in a timely manner could elicit significant adverse consequences, including, without limitation, the forfeiture of your interest in the fund.
- Opportunity zone funds may use leverage in connection with certain investments or participate in investments with highly leveraged capital structures. Leverage involves a high degree of financial risk and may increase the exposure of such investments to factors such as rising interest rates, downturns in the economy or deterioration in the condition of the assets underlying such investments.
- Unregistered investment. As with other unregistered investments, the regulatory protections of the Investment Company Act of 1940 are not available with unregistered securities.
- It is possible, due to tax, regulatory, or investment decisions, that a fund, or its investors, are unable realize any tax benefits. You should evaluate the merits of the underlying investment and not solely invest in an opportunity zone fund for any potential tax advantage.
The above material cannot be altered, revised, and/or modified without the express written consent of Urban Catalyst.