How Will Opportunity Zones Impact the Seniors Housing Market?
Investors are starting to pay attention to the Opportunity Zones Act, which went into effect this past April. It’s part of the greater Tax Cuts and Jobs Acts of 2017, and it offers preferential tax treatment for those investing in economically distressed communities throughout the United States.
Today, there are about 9,000 census-designated zones that are part of the program. How will the zones impact seniors housing investing? Some believe it will lead to a crowded seniors housing market. Others hope it will lead to an increase in affordable senior housing, which the industry needs.
Understanding Opportunity Zone Investing
Opportunity Zones work similarly to a 1031 Exchange, but they are not limited to capital gains earned through real estate.
Investors can reinvest the gains from any appreciated asset — stocks, bonds, real estate — into an Opportunity Zone investment to avoid capital gains taxes. If an investor holds the new Opportunity Zone asset for five years, they reduce their gains taxes by 10 percent.
To experience the full benefit of the Opportunity Zone investment, investors must hold the asset for 10 years. At that time, the investor is exempt from paying taxes on any gains accrued after the investment. For example, if you invest $2 million in 2019 and your investment’s value grows to $4 million by 2029, you will not pay federal income tax on proceeds in excess of the original $2 million.
Clearly, opportunity zones hold tremendous potential.
How Opportunity Zones Will Impact Seniors Housing
Opportunity Zone investment is not limited to real estate. Investors can select any “income-producing business” to gain the tax benefits. As with many tax laws, the definition of “income-producing business” is nebulous. Still, it means investors have more than one sandbox to play in. Not everyone will be fighting over the affordable housing or seniors housing spaces.
As a fund manager in the seniors housing space, the question is not whether there will be opportunities for seniors housing investing in opportunity zones; the question is whether a seniors housing investment in an opportunity zone will pay off.
On one hand, affordable seniors housing is desperately needed. On the other hand, the same issues that impact the greater seniors housing industry — recruitment, cost, a lack of quality operator partners — will also impact opportunity zone investments. And in opportunity zones, where affordability is key, the margins will likely be much slimmer, at least for those operators seeking to serve the residents of these economically distressed communities.
The following are some points to keep in mind before investing in senior housing in a qualified Opportunity Zone:
Tax breaks don’t always equate to good investments.
Tax breaks are enticing, but investors must remember that there are reasons these areas need development incentives. Risk is a part of any investment, and it needs to be weighed just as heavily as the potential gain, if not more so, with Opportunity Zone investing.
Knowledge of the industry is essential.Many crowdfunding opportunities are springing up to invest in Opportunity Zone businesses. Be discerning about where you put your money. Just as I noted above, the same elements that impact the greater seniors housing industry will impact a seniors housing investment in an Opportunity Zone, but to an even higher degree. Choose a fund manager or operator partner who understands the industry.
Choose an investment partner you trust. To qualify as an Opportunity Zone Fund, the fund must meet strict criteria, such as investing 90 percent of capital into Opportunity Zone businesses and maintaining incredibly low overhead. When researching an Opportunity Zone fund, make sure you feel comfortable the fund manager or project operator will hold these standards for the duration of your investment.
Opportunity Zones were designed to spur economic development. The economics of these communities may or may not be sufficient to satisfy a profitable seniors housing investment. As with any seniors housing investment, the unique circumstances of each deal must be carefully considered.
Remember: a great opportunity is not a guaranteed win. It’s important look beyond the tax incentive when making an Opportunity Zone investment.
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Dan Brewer is chief fund manager of Senior Living Fund, a private equity company investing in seniors housing communities nationwide. Dan has more than 25 years of business development and real estate investment experience, including 15 years in commercial real estate, and is a frequent speaker and panelist at industry conferences throughout the country.