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A Shot in the Arm for Urban Development

December 12, 2018

Real estate investors flocking to opportunity zones; federal law providing a boost to Portland’s Central City

By Chuck Slothower, Daily Journal of Commerce

Downtown property owners and some of Portland’s wealthiest families are busily looking to form opportunity zone funds by taking advantage of a tax break in federal law.

Opportunity zones emanate from a federal tax bill that was enacted in December 2017. Seeking to encourage investment in blighted areas, the law allows for certain tax benefits for long-term real estate investors.

The opportunity zones are drawn from Census tracts. In Portland, that has yielded a curious situation that has made some very wealthy people very excited: Portland’s opportunity zone covers some of the city’s most expensive and desirable real estate, including downtown and portions of the Pearl District, South Waterfront District and Central Eastside Industrial District.

“Portland’s opportunity zone is a fabulous opportunity zone, and it’s getting a lot of attention nationally,” said Vanessa Sturgeon, a Portland developer who has formed a public opportunity fund.

Portland’s opportunity zone is home to recently constructed business hotels, multifamily developments and corporate office projects. Broadway Tower, soon to be home to Amazon, is in Portland’s opportunity zone. So is the new Woodlark Hotel on Alder Street. So is Portland’s largest building, the U.S. Bancorp Tower (better known as Big Pink), and its tallest building, the Wells Fargo Center.

Opportunity zones could also figure in major planned redevelopments. Both the Broadway Corridor and Oregon Museum of Science and Industry’s campus are within opportunity zones.

Sturgeon said she and two others who have formed Sturgeon Development Partners are considering a handful of sites for one or more major opportunity zone projects. Nick Fritel is chief financial officer and Robert Pile is vice president of construction. They’re seeking to raise about $328 million for the projects.

Sturgeon said she and her partners are considering sites on both sides of the Willamette River.

“We’re really working on four different tower sites,” she said. “So we’re in due diligence on several sites. We don’t know whether we’ll do one or two, but they’re sprinkled all over Portland.”

Sturgeon Development Partners is also using an opportunity zone fund to back a hotel project in Salem. The 126-room hotel would be built on the site of a condemned parking structure at 195 Commercial St. S.E.

“The Salem market, it’s really becoming part of the greater economic region of Portland, and it’s highly underserved right now,” Sturgeon said. Sturgeon was approached by Chris Duffin, president of LMC Construction, about redeveloping the property.

“It’s a block that is blighting downtown Salem, and the city is supportive of seeing something there,” she said. The offering period for Sturgeon Development’s opportunity zone funds began on Nov. 30 and ends March 31, 2019.

The Goodman family is also considering forming an opportunity zone fund with other investors to develop the Eleven West tower, said Greg Goodman, co-president of Downtown Development Group.

An opportunity zone fund will be used to develop Eleven West, and another one will be used at Downtown Development Group’s property at Southwest Second Avenue and Pine Street, Goodman said. Eleven West received design review approval in December 2017 but ground has not been broken yet.

Downtown Development Group will own half the opportunity fund at Eleven West, Goodman said. The Goodmans have hired Newmark Knight Frank to find and evaluate potential joint-venture partners.

“11-W will get capitalized,” Goodman said. “It will get done.”

The advent of opportunity zones has sparked bidding wars for highly desirable properties.

“You really have to pick your spots because you’re already seeing a bid-up for spots in opportunity zones,” said Todd Gooding, president of ScanlanKemperBard. SKB plans to use opportunity zone funds for at least two multifamily projects – one in Tigard and another in Vancouver, Washington.

The new developments will have 180 to 200 multifamily units each.

“Having the longer-term capital is extremely attractive for the stability of our portfolio and to create real, long-term wealth,” Gooding said.

For developers, opportunity zone benefits could push across the finish line some projects that have been on hold because of inclusionary housing regulations and escalating construction costs.

“Some of these projects that wouldn’t pencil might pencil,” Sturgeon said.

Interest in opportunity zones has been high locally, said Owen Blank, a real-estate attorney and partner at Tonkon Torp.

Opportunity zones have the advantages of deferring, reducing and eventually forgiving capital gains tax, he said. “It’s a far more flexible program than some of the other tax credit programs, (such as) like-kind exchange,” he said. “Any kind of capital gain could be invested in an opportunity zone fund. It doesn’t have to be from the sale of real estate, or even the sale of a business.”

Opportunity zone funds are beneficial for long-term investors. Merchant developers, or investors looking to quickly flip a property, will not realize many advantages from these tax treatments, Blank said.

Discounted tax rates kick in after five years and seven years. But the biggest benefit happens after 10 years.

“The benefit that has really caught people’s attention is if you hold the investment for 10 years, and then sell your stock in the fund; the appreciation in value escapes tax,” Blank said. “You can imagine why that’s caught some people’s attention.”

Opportunity funds are still new, and some questions remain to be resolved by future Internal Revenue Service guidance, Blank said. For example, how investors can exit, or what happens when an investor dies, remain unanswered.

“There are still some significant unanswered questions pertaining to the operational issues over those 10 years,” Blank said.

Other opportunity zones include areas around Portland International Airport, Gresham, Beaverton, Hillsboro, Forest Grove, Tigard, Tualatin, Wilsonville and Oregon City. Oregon has 86 opportunity zones, and there are about 9,000 scattered throughout the nation.