With the recent buzz surrounding the “Opportunity Zones” section of the Tax Cuts and Jobs Act of 2017 reports have flooded in highlighting the tax advantages and intricacies of how the program works. While it is no secret that this is one of the greatest capital gains tax reduction programs of a generation, less has been discussed regarding the specifics of the more than 8,700 designated census tracts within the program – or, the potential they hold for both investors and communities.
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Opportunity Zones: What, Where, and Why?
Opportunity Zones are communities, typically economically-distressed, that have been designated by state and federal governments where new investments aimed at improving these areas are incentivized with preferential tax benefits.
There are over 8,700 designated census tracts eligible for these investments across all 50 states, however they are primarily in major metropolitan areas. With these designated Opportunity Zones in place, the potential impact is substantial for both those within the communities as well as investors.
With Opportunity Zones across the country the potential is high, however we chose to focus our investments in our own backyard – Southwest Growth Markets.
We like Arizona, Colorado, Texas, Nevada & Utah and in this article, we make the case for Arizona. A map of the opportunity zones can be found here for reference.
Arizona’s Foundation of Growth
Economic conditions in Arizona have grown dramatically over the past 11 years, with the state finishing the first quarter of 2018 as the fourth fastest-growing economy in the US. The population, specifically in the greater Phoenix area, is growing rapidly adding close to 25,000 new residents each year. Accompanying this growth, we have seen steady increases in single family and multi-family real estate values with no signs of slowing.
In addition to the increased population, BMO Capital Markets Economics stated that "The state averaged 3.2 percent real (gross domestic product) growth last year, and 2018 should do even better”. With reports predicting a 3.4% growth this year and similar numbers in upcoming years, Arizona has laid a solid foundation for Opportunity Zones.
With the rapid economic growth, the state has also seen its lowest unemployment rate in years, with a 4.9% unemployment rate across Arizona and a rate of 4.1% in Phoenix according to the Bureau of Labor Statistics.
Where are the Arizona Opportunity Zones?
The are 168 Opportunity Zones throughout Arizona, with 681,000 residing within these zones. While there are many areas throughout Arizona, three major cities currently hold the largest number of zones. These cities include Phoenix, Tucson, and Mesa – markets in which Caliber already has heavy involvement.
Not only are these the cities with the largest number of designated zones, but they also offer promising near-term growth potential.
Zones to Watch: Phoenix
As mentioned earlier, Phoenix has seen dramatic economic improvements, including decreased unemployment, increases in population, and rising real estate values. Opportunity Zones within Phoenix contributing to its high potential include
- Most of Downtown Phoenix, which is home to Chase Field, Talking Stick Resort Arena, and a thriving entertainment district.
- Areas along the new light rail and future light rail expansion sites.
- Grand Canyon University area, an opportunity zone in which Caliber has already completed a project which meets the Opportunity Zone requirements – GC Square Apartments.
- South Scottsdale and the Salt River Reservation – home to one of Caliber’s successful investments, the Hampton Inn & Suites, located adjacent to Talking Stick Resort.
- Areas surrounding Phoenix Sky Harbor International Airport – the 9th busiest airport in the United States, and also home to three additional Caliber assets, the Crowne Plaza Phoenix Airport, The Holiday Inn & Suites Phoenix Airport, and the Hilton Phoenix Airport.
In addition to the obvious potential within these areas, downtown Phoenix is also home to an Arizona State University campus, one that has now expanded to over 10,000 students with increases in enrollment expected to continue. Grand Canyon University is also rapidly growing, and with it’s recent non-profit status experts have predicted the University, as well as the areas surrounding, will continue to thrive.
These Universities will be advantageous in the area to continue attracting young talent nationwide, ultimately opening the demand for greater housing and business options. In addition, the planned light rail extension will further drive development along its course.
Zones to Watch: Tucson
Tucson, home to the University of Arizona and Raytheon, has been quietly expanding its economic growth and development over the past few years as well. Offering substantial potential, Caliber began investing in the Tucson market several years ago.
Most of the Opportunity Zones in Tucson are focused around Interstate 10 and 19, covering the city of Tucson from north to south. Some notable zones within the city include
- Downtown Tucson, which is home to the Tucson Convention Center. This is an area where Caliber is currently working with the support of the local government to build a much needed hotel attached to the convention center.
- Most of South Tucson
- Areas West of the University of Arizona
- The Pascua Yaqui Reservation and the San Xavier District of the Tohono O’odham nation
Many of the areas designated as Opportunity Zones are home to, or near, existing Caliber investments. In addition to Caliber’s Tucson Convention Center hotel development, the firm acquired and renovated a multi-family community located just moments from the University of Arizona, Treehouse Apartments. This project was similar to the recent GC Square Apartments project where Caliber successfully transformed a Class C workforce apartment community to a safe, clean and comfortable Class A housing option.
Other Caliber investment activity near the Tucson Opportunity Zone areas include the acquisition and complete renovation of the Hilton Tucson East.
Zones to Watch: Mesa
Housing 11 census tracts, Mesa made headlines throughout 2017 and has continued to create buzz well throughout 2018 with the announcement of the city’s downtown revitalization. The downtown core had already grown traction for redevelopment after the completion of major projects including the light rail and Mesa Arts Center. The hidden potential of Main Street caught the eye of Caliber and several other like-minded developers, leading to Caliber’s acquisition of 8 historical buildings in the downtown core in late 2017.
Backed with local government support and like-minded investors, Caliber had already begun renovations and plans for revitalization when the downtown core was named a designated Opportunity Zone in early 2018. Mesa Government officials have been committed to the improvement of the downtown core making it an obvious opportunity for substantial investment success.
In addition to the exciting downtown revitalization, Mesa is a strong Opportunity Zone for numerous reasons, including
- The light rail development, which has shown 15-50% increases in property value for properties situated directly along the route or within walking distance.
- Innovation – The city has seen Smart City Improvements, has become a hub for Autonomous Vehicle testing, new business concepts, and the Mesa Center for the Arts.
- Spring training home to the Chicago Cubs & Oakland Athletics as well as home to major employers including Boeing and Banner, the Mesa Amphitheatre, and the LDS Arizona Temple district.
- Arizona State University Campus making its way to Mesa.
- Embracing a strategy to make Mesa the city of art, music and culture – a title which no city has yet to claim.
What it all Means
With more than 8,700 designated zones, there are bound to be substantial improvements seen across the country. The expansive reach of the program offers many opportunities for investors to take advantage of the tax benefits that accompany investments in qualified zones, however, choosing the right market can create substantial long term, and immediate, potential.
Post by Conor Donohue
Caliber Associate Vice President
To learn more about the Caliber Tax Advantaged Opportunity Fund, LP feel free to reach out me directly at Conor.Donohue@CaliberCo.com.