How Can a Grantee Find Potential OZ Investors Who Might Be Motivated to Invest in HOME or HTF Projects?
Grantees can identify and recruit any high wealth individual or corporations with a capital gain to invest in the OZ(s) in their jurisdictions. For many jurisdictions, however, identifying specific individuals and companies may be a challenge. Many investors have already pooled their capital gains in QOFs. Most grantees will find it easiest to work through these established QOFs.
Grantees can use a variety of databases to identify organized QOFs as a starting point, including:
- NCSHA OZ Fund Directory is a database of publicly announced QOFs formed to attract investment in OZs.
- Opportunity Zone Database is a private entity that lists all QOFs that choose to register and provides a variety of resources for its users.
In seeking out potential OZ partners, grantees should consider what motivates the OZ investors. OZ investors share only one thing in common: they have capital gains and want to invest these gains in OZs to write off the tax burden the gains would otherwise generate. Beyond this, these high-net-worth individuals and companies are a varied group and may be motivated by many different purposes. Investors have many project types to choose from—commercial, industrial, operating funds, or real estate. In terms of motive, however, investors are typically motivated by profit, mission, or a combination of both.
Most investors are likely to seek to maximize the financial return on their investment. To maximize their return and benefit from favorable capital gains provisions associated with an OZ project, an investor needs to remain in a partnership for minimum of 10 years.
Profit-driven investors typically want to be bought out as soon as this minimum period is complete. For rental housing projects with affordability or compliance periods of more than 10 years, grantees and developers will need to consider an investor’s exit strategy in the project underwriting phase. This issue is discussed later in this Guidebook in the section HOME/HTF Affordability Period Differs from OZ Investment Period.
OZ and LIHTC investors are both motivated by earning a market return, though their expectations may be substantially different. Grantees with experience in working on LIHTC projects should not expect OZ investors to be willing to accept the same rates of return. Affordable housing developments that include the use of LIHTCs have an excellent reputation for performance in the investment industry. The solid performance of the LIHTC means that the investor takes less risk, and therefore is willing to accept lower return rates. LIHTC’s track record evolved over time. Because the OZ is a new program, and these investors are new to HOME and HTF, it is likely that OZ investors will require higher returns than LIHTC investors are willing to accept. OZ investors will also either remain in a partnership for the duration of the applicable compliance period or alternatively be presented with a viable exit strategy at a point in time after the initial 10-year period of the investment. Grantees minimize their own risk of project failure through sustainable underwriting and active monitoring during the affordability period. Grantees should review these risk reduction measures with potential investors, as these efforts may have significant value to them.
Grantees may have more success identifying potential investors if they seek out mission-minded investors. These investors may already have knowledge of affordable housing programs or may have ties to a particular investment area. There likely are many advantages of working with these investors, including:
- Although the IRS does not require OZs to involve the community in their planning or investment decisions, many local or national mission-minded investors will have expertise and experience in community involvement.
- Active mission-minded investors can bring knowledge and experience to the community. More specifically, these investors often have experience in community-based investments and revitalization, and some may have experience in OZs, tax credit financing, and federal affordable housing programs.
- Mission-minded investors are often willing to stay in a deal for longer than the IRS’s requisite 10-year period required to maximize their return. For projects with longer affordability periods (for many HOME projects and all HTF projects), it may be important for grantees to find investors that are willing to make a long-term commitment.
Grantees can seek out mission-minded OZ investors and QOFs that work nationally or locally/regionally. There are multiple local or regional mission based QOFs that can be identified in the databases listed above. Examples of two national mission-based organizations are:
Both LISC, through an affiliate organization, the National Equity Fund, and Enterprise Community Partners are organizations that invest in LIHTC and other mission-minded projects. Specifically, the National Equity Fund and Enterprise buy limited partnership interests that result from the credits or provide other equity/financing for developers of affordable housing properties. Both LISC and Enterprise have dedicated staff and have allocated resources to promote capital investment for community development purposes in OZs.