News, Analysis and Commentary On Affordable Housing, Community Development and Renewable Energy Tax Credits

July 2019 • Volume X • Issue VII Published by Novogradac & Company LLP

‘It’s Been a Mixed Bag’:

Opportunity Fund Managers
Share their Experience

A
BRAD STANHOPE, SENIOR EDITOR, NOVOGRADAC

As the federal opportunity zones (OZ) incentive reaches the midway point of
its second year, attracting investors is still an issue for qualified opportunity
funds (QOFs).

Unless it isn’t. At the other end of the spectrum is Sean Lyons of

“I think most people don’t know about investUS
and our fund,” said Deborah Burns of investUS
Opportunity Fund, which had commitments of less
than $5 million of a targeted $100 million as of mid-
June. “For most people here [in New Mexico and
other rural states], I’m the first person to tell them
about [the OZ incentive] and it sounds too good to
be true. Another reason we have been slow to raise
capital is we think the best returns for investors will
be a diversified pool of opportunity zones projects
and businesses in a fund that seeks to redeploy
capital within the 10-year holding period. But now,
interest is really picking up because, unlike most
funds, we have a $1.1 billion deal pipeline with 42
deals in need of more than $250 million in QOF
equity.”
Jackson Dearborn Partners (JDP) in Chicago. JDP
formed its Campustown Opportunity Zone Fund
in Champaign, Ill, at the University of Illinois. The
fund reached its target of $10 million in six weeks
and intends to replicate that.
“Honestly, I was completely blown away,” Lyons said.
“I’ve been in real estate since ’03. [After launch of
the fund], people started calling us out of nowhere.
They didn’t know what we were, but we were getting
calls from all over, from investment bankers, wealth
advisors. I’d never had that level of incoming interest.”
Then there are those in the middle, such as Mark
Elliott of the South Carolina Opportunity Fund, a
state-specific fund based in Greenville, S.C.

continued on page 2
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OPPORTUNITY ZONES

“It’s been a mixed bag,” Elliott said. “There was the start passed. The area for the housing was included in an OZ,
and then the new regulations and then another set of so his group established their QOF.
regulations. Three times, we had to become the expert.
It doesn’t seem stable when that happens, but we feel “The big question [for investors] is whether it’s a good
comfortable with the latest regulations, especially the deal or not,” Lyons said. “Would you invest in it if
business part.” it wasn’t in an opportunity zone? What made ours
attractive was that the deals pencil out on their own
Those reactions are reflective of an informal survey merit.”
of QOFs listed on the Novogradac Opportunity Fund
listing. Those who responded to the survey showed Lyons has been involved in student housing and
that as of late May, the funds had raised 12.3 percent of market-rate multifamily housing in university cities for
their capacity, although just one–Lyons’ Campustown more than a decade, collaborating with management
Opportunity Zone company Green Street
Fund–reached its Realty since 2014.
capacity. The capacity
Percentage of capacity raised
of funds on the “Our story checks all the
Capacity of QOFs surveyed: $6.25 billion
Novogradac QOF list boxes–student housing
ranges from less than $1 at the University of
million to $3 billion. Illinois, which has
50,000 students and
Among those who the owner-operator is
responded to the survey, established,” Lyons said.
53.7 percent indicated “If someone looked at a
their top target for (QOF) directory, this
the QOF financing one stood out. I can’t
Equity raised:
was market-rate $870 million (13.9 percent) take personal credit,
multifamily housing. because to a somewhat
A vast majority of the savvy investor, ours is a
Source: Novogradac
survey participants sexy investment.”
www.novoco.com

(81 percent) said they

intended to mix other tax incentive programs with the
OZ funds.
For QOF managers, the response from investors has
varied and is largely dictated by geography and project

Lyons plans to repeat the strategy that succeeded in
Illinois–and that he has about $400 million worth of
similar projects in his pipeline.
“We have four or five other projects teed up,” Lyons

type. said. “They’re all student or multifamily property in

student-driven markets. Our plan is to do three or four
Junly 2019

An Attractive Incentive in succession on individual opportunity funds with

Lyons’ group already planned to build student housing about a $10 million to $25 million raise for each. We’ll
at the University of Illinois when the OZ legislation

continued on page 3
2
 continued from page 2
do three or four, have success and then go for a big one,
maybe $200 million.”
‘Opportunity Zones Fit in Well’
Tony Barkan, whose Allagash Opportunity Zone
Partners manages the Allagash Opportunity Zone
CRE Fund I, also has a pipeline of properties ready
to go. Barkan and his partners, each with 30 years of
experience in commercial real estate and investment
management, planned to form a commercial real estate
investment firm focused on inexpensive properties in
low and moderate income communities before the OZ
legislation passed.
“We had an investment thesis and a process that we
thought could provide outsized returns without
increasing risk,” Barkan said. “Then the opportunity
zone incentive was announced. It fit perfectly with our
investment focus and the added tax benefits allowed us
to form a really compelling offering.”
However, Barkan emphasizes that investor interest is
being driven primarily by the quality of the commercial
real estate returns, the abilities of the manager to
realize those returns and the fund’s positive impact on
low and moderate-income communities, rather than
the program’s tax benefits.
While marketing began as early as January, Allagash
didn’t finalize their fund details and offering
documents until after the second tranche of guidelines
was released in April.
“We believed we should wait,” Barkan said. “We wanted
investors to feel comfortable that we had addressed all
of their concerns.”
Once things were settled, Allagash launched. Barkan
said he expected $20 million to $50 million to be
committed by the end of June and he expects to be fully
funded at $500 million by the end of the year.
OPPORTUNITY ZONES
Non-Metro Struggles
Burns, meanwhile, has two decades of experience as
an institutional investor and is finding it difficult to
get investors in her fund, which has the $100 million
goal and targets investments in metropolitan statistical
areas with populations of 1 million and less.
“Ours is a story of non-major-city zones,” Burns said.
“Because of my former role in private placement, I know
the best value is in less-efficient, less-competitive cities
and not in major markets.”
She was approached by state officials when the OZ
incentive became law.
“When the opportunity zones were created, the
economic development people from the state said we
needed to start a fund,” Burns said. “They said ‘we’ve
created great zones, but nobody can figure out how to
do a QOF.’ ” So she did.
“It appears that all of the capital is being invested in
major markets,” Burns said. “There are structural
barriers that keep it that way.”
Novogradac Journal of Tax Credits 
Her location also works against her, from a capital-
raising perspective. Burns shared a story of being told
investors will “collide” with her because her QOF is an
attractive option–but that hasn’t happened.
“I’d be colliding with investors if I wasn’t in Albuquerque,”
she said. “We have projects in California, New
Hampshire, Florida, Oregon. These are all deals that
have good market demand characteristics and in some
cases phenomenal returns, but they’re off the radar of
family offices and others.”
July 2019
Burns has a pipeline worth more than $1 billion in
projects. She said she gets 10 to 12 proposals a day and
adds one or two projects to her pipeline each week.
continued on page 4
3
 continued from page 3
OPPORTUNITY ZONES
As an example, she cited a development in Portales,
N.M., where a $1 million investment in a senior care
facility would have a catalytic effect of helping seniors
age in place, keep local businesses open, the local
hospital staffed and provide jobs for students at nearby
Eastern New Mexico University.
“If we can invest $1 million alongside a proven developer
of assisted living or rehabilitation facilities, we can
stabilize the population,” she said. “It’s a little drip that
has ripples.”
South Carolina Pipeline
Elliott said his South Carolina-based QOF has been
patient–focused on state-specific transactions and
raising $3 million of the targeted $50 million.
“We haven’t actively been seeking funding yet,” Elliott
said. “We’ve been actively getting a pipeline built.”
Elliott said the fact that his QOF is state-specific brings
some restrictions. “We’re trying to get people to invest
in some rural counties and cities that they’ve maybe
never heard of in their lives,” he said.
Elliott would like to do OZ deals in all 46 counties in
the state. He acknowledges that all aren’t high-return
developments, especially some government-backed
municipality projects, but still are worthwhile.
www.novoco.com
“You’re not going to be able to knock it out of the park
every time, but it’s a safe investment,” Elliott said.
Keys: Education, ‘Gravy’
The QOF managers said that one of the most significant
issues is educating potential investors and the people

who handle their money.
Junly 2019
Burns went to a major investor event with 4,000
attendees and said that 98 percent of the people she
met had not heard of the benefits of OZs.
4
“I wonder how many family offices have even heard of
it,” Burns said. “I am concerned. I know nobody in New
Mexico knows about it until I talk to them. Probably
less than 1 percent of the market understand it.”
Some managers insist the best OZ deal is already a
good deal.
“Basically, the opportunity zone benefits are gravy
on what should be a good deal anyway,” Lyons said,
acknowledging that student housing in college cities
wasn’t the ultimate target of the original legislation.
“My opinion is that it will be this way for the first couple
of years of the cycle before we see if it does what it was
intended for.”
Elliott said people are often looking for developments
that have a significant community benefit.
“I think the tax benefit brings them to the table, but the
project gets them over the edge,” Elliott said. “People
are interested in projects that have a positive effect
on their community. People want to make money, but
want to make it while making their community better.”
Elliott said the looming deadline to get the entire 10-
year benefit of the incentive–which currently means
investments must be made by the end of 2019–is not
an area of huge concern.
“We’ve been hearing that they’re going to extend it and
give us a two-year time frame,” he said.
That theory was backed by reports in mid-June that Sens.
Tim Scott, R-S.C., and Cory Booker, D-N.J., planned to
introduce legislation extending the investment period.
Barkan is bullish on the OZ incentive.
“The first thing we tell people is that no one who can
afford to lock up money for an extended period should
continued on page 5
continued from page 4

pay capital gains taxes in the year those gains were
generated,” he said. “There is still a lot to be wary
of, but there are now enough good offerings that
investors should be able to find a fund that enables
them to generate significant after-tax wealth while also
providing a positive impact on [low- and moderate-
income] communities.”
OPPORTUNITY ZONES
Ultimately, Elliott said QOFs are learning lessons that
will make a difference in the future.
“I was talking to another manager the other day,” Elliott
said. “I told him that we would pay a lot of money if we
could talk to a version of ourselves from two years in
the future and get advice on what to do now.” ;

This article first appeared in the July 2019 issue of the Novogradac Journal of Tax Credits.

© Novogradac 2019 - All Rights Reserved

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Novogradac Journal of Tax Credits 

July 2019

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