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Opportunity Zones
Commercial Real Estate Feasibility Study Services

Qualified Opportunity Zones
Commercial Real Estate
Feasibility Study Services

For over 25 years, Wert-Berater, Inc. has been providing clients with expert commercial real estate feasibility studies.

 

We specialize in commercial real estate feasibility studies for: 

 

Our commercial real estate feasibility studies are designed to help developers and investors make informed decisions about projects.

 

Our expert team of professionals work closely with our clients every step of the way to ensure that our studies are based on accurate data and provide the information necessary to make informed decisions.

Qualified Opportunity Zones: The Real Estate Developer's Perspective

The market has reacted with excitement over the potential tax benefits offered under the "Opportunity Zone" tax incentive program introduced in the 2017 Tax Cuts Jobs Act and the proposed guidance issued by the Treasury Department and the IRS in October 2018. In general, the program offers a substantial opportunity to both (i) defer (and partially exempt) capital gains from income taxes by reinvesting the capital gains in specified low-income areas (i.e., the Opportunity Zones), and (ii) completely exclude from taxation capital gains with respect to the subsequent appreciation in the Opportunity Zone investment. In reaction to the program, a tremendous flow of investment is anticipated to be deployed into the various Opportunity Zones across the country over the next few years.

Many articles have detailed the potential tax benefits for investors under the Opportunity Zone program and the procedures for investors to adhere to in order to realize the tax benefits, and it has been difficult to go a day without coming across a new article on the subject. However, little has been written from the real estate developer’s perspective.

Although the program is not limited to investments in real estate, real estate is seen as the ideal fit for the program for several critical reasons, including:

(i) the ability to deploy a substantial amount of capital within the required time frames as compared to non-real estate investments,

 

(ii) the predictability of the capital needed to construct ground-up or value-add improvements in order to meet the "substantial improvement" test,

(iii) the time periods typically involved in ground-up and value-add real estate development align better with the required holding periods than most other investments,

 

(iv) the immobility of real estate (i.e., it is stuck in the Opportunity Zone), unlike other investments which could morph and grow outside of the Opportunity Zone (putting at risk its qualification as an Opportunity Zone investment), and

 

(v) the fact that many of the urban areas in the Opportunity Zones are areas of short supply of housing with high demand for new housing (and many of the rural areas in the Opportunity Zones have the potential for both industrial and clean-energy infrastructure investment).

Given the potential tax benefits available to investors, and the expected investor demand for real estate investments under the program, capital invested under the program may become one of the most attractive sources of financing available to real estate developers and sponsors.

With our focus turned to the perspective of the real estate developer, the following are key elements for the developer to consider under the program:

A. Joint Venture Equity Investments

Although some developers will have the ability to tap into this reinvestment of capital gains directly, and several larger real estate developers may have the wherewithal to establish their own investment funds, we expect the market to be dominated by Qualified Opportunity Funds (“QOFs”) established by investment banks and private equity and hedge funds.

 

It is these banks and funds that have the infrastructure to attract and aggregate investments of capital gains from multiple investors from various sources (from the sales of securities, to artwork, to real estate, and so on) and who, in turn, we expect will “be the bridge” between these investors and real estate developers. In addition, in order for the investment to qualify under the program, it must constitute an equity investment. Capital gains reinvested as debt do not qualify under the program.

Accordingly, we believe that real estate developers will, in most cases, access this capital through “joint venture” arrangements with QOFs; and many of the typical financial partner/development partner joint venture considerations will apply (such as management authority and consent rights, terms regarding required additional capital, dispute resolution, exit ability and transfer rights). In particular, under the program, there is no limitation on how the equity investment is structured, and preferred returns, variable waterfalls and promote equity structures are all permitted.

B. Opportunity Zone Designated Property

The real property to be developed must be located in one of the approximately 8,700 approved Opportunity Zones. The zones range from urban areas in New York City, Las Angeles and Washington, D.C. to rural areas throughout the country and all of Puerto Rico. The entire list of approved Opportunity Zones can be found at https://www.cdfifund.gov/Pages/Opportunity-Zones.aspx.

C. Multiple Uses Permitted

There are virtually no limitations on the type of real estate project that may qualify under the program. Multifamily, office, retail, hospitality, industrial/warehouse, and mixed use can all qualify.

 

The only uses that will not qualify are

(i) golf courses,

(ii) country clubs,

(iii) massage parlors,

(iv) hot-tub facilities,

(v) suntan facilities,

(vi) racetracks or gambling related facilities, and

(vii) any store the principal business of which is the sale of alcoholic beverages for off-premises consumption.

D. Acquired on or after December 31, 2017

The real property must be first acquired (whether by acquisition of the fee interest or by lease) on or after December 31, 2017 from an “unaffiliated party”. The Internal Revenue Code provides detailed rules for determining whether parties to a sales transaction are affiliated or unaffiliated, and the original owner may be able to retain a minority interest in the new owner of the property.

E. Substantial Improvements

The real property must be "substantially improved" in order to qualify under the program. The recent proposed regulations issued by the Treasury Department clarified that land value may be disregarded in calculating whether the substantial improvement test is met.

 

Accordingly, the developer is now required to make improvements to the property at least equal to the basis of the building only (i.e., the portion of the purchase price allocable to the building, as opposed to the aggregate purchase price inclusive of both the building and the land). So both value-add type projects, gut rehabs and ground-up development can all qualify, as long as the substantial improvement test is met. The substantial improvements must be made within 30 months after the date of acquisition of the property in order to qualify.

Given the risk of loss of the tax benefits in the event the substantial improvement test is not satisfied within the 30-month period, we anticipate that QOFs will attempt to require developers to satisfy them that the test will be met and require personal guarantees (and/or other security) to protect the QOF in the event the test is not satisfied.

It should be noted that some large-scale projects, involving the risk of zoning changes and change in market conditions, may be too risky for the program given the 30-month requirement. The program is more geared to “shovel-ready” projects (i.e., permits, plans and specifications, construction contract and contraction financing all in-place upon acquisition) that are more certain to meet the 30-month substantial improvement requirement.

It should also be noted that the Treasury Department has not yet provided rules for the substantial improvement of unimproved land. Hopefully, guidance will be forthcoming from the Treasury Department shortly.

F. Required Holding Periods

In order for a taxpayer to realize the tax benefits offered by the program, there are a few “holding periods” that must be complied with.

  • First, if a capital gain is invested in a QOF, so long as the taxpayer continues to hold its investment in the QOF, the tax due on the gain is deferred until December 31, 2026.

  • Second, if, upon the earlier of the taxpayer’s sale of its interest in the QOF or December 31, 2026, the taxpayer has then held the investment for at least 5 years, the amount of such gain to be taxed at such time will be reduced by 10%, and if the investment has then held for at least 7 years, the amount of such gain to be taxed at such time will be reduced by an additional 5% (i.e., a 15% aggregate reduction).

  • Third, if a capital gain is invested in a QOF prior to June 30, 2027, and the taxpayer holds the investment for at least 10 years (but not beyond December 31, 2047), ALL capital gains attributable to the appreciation in the QOF investment are NOT taxable.

Accordingly, in order to maximize the tax benefits of the program, the QOFs will very likely require that the property not be sold by the joint venture for a lengthy time period, which may be as long as 10 years following the date of acquisition of the property.

Furthermore, in order to avoid the risk of a pre-mature “sale” by reason of a mortgage foreclosure, the QOF may require limitations on the amount and terms of mortgage debt placed upon the project.

The developer’s time-horizon for its exit strategy and its debt financing needs, will need to be consistent with the holding period and mortgage limitations required by the QOF, and some projects may not fit within these requirements.

G. Phantom Income Risk

Under the program, if a taxpayer has not sold its investment in the QOF by December 31, 2026, the taxpayer will recognize its deferred capital gain (or applicable portion thereof, if the taxpayer has taken advantage of the 10% or 15% discount mentioned above) at that time, whether or not the taxpayer has liquated its investment.

Accordingly, it is possible that the QOFs will try to negotiate the right to require the sale of the property, or a refinancing of mortgage debt on the property, at or prior to December 31, 2026 in order to generate distributable cash for its investors to pay taxes on the recognized capital gains. Of course, this is somewhat inconsistent with the QOFs’ holding period objective described above, and we cannot be certain yet how these two requirements will work together in negotiating the joint venture agreement with the developer.

H. No Impact on Other Tax Incentives

The use of QOF equity financing has no impact on the ability of the real estate project to take advantage of most other tax benefits or incentives available under federal, state or local law, including New Market Tax Credit, Low-Income Housing Tax Credit, and local law tax benefits (such as the Affordable New Housing Program in New York).

Additional guidance is expected from the Treasury Department in the near future to address remaining open issues with the program, which will hopefully provide investors with more clarity and comfort in moving forward with funding Opportunity Zone investments. 

Opportunity Zone Feasibility Studies

Commercial Real Estate Feasibility Study

  • Executive Summary

  • Economic Feasibility

  • Market Feasibility

  • Technical Feasibility

  • Financial Feasibility

  • Management Feasibility

  • Depending on the project type, other sections may be required.  See specific project type pages for specific statement of work.

Popular Commercial Real Estate Types we provide Commercial Real Estate Feasibility Studies for:

Popular  Property Types

Commercial Real Estate Feasibility Studies

Commercial Real Estate Asset Classes

Commercial real estate is a complex industry, and investors need a partner they can trust to help navigate it.

 

Wert-Berater, Inc. is committed to providing our clients with expert advice and consultation by way of well developed and useful commercial real estate feasibility studies, ensuring that they have all the tools they need to make informed decisions.

 

We specialize in a variety of asset classes, including retail, office, hotel, industrial, and multifamily properties. With our extensive knowledge and experience, we are well-equipped to help our clients succeed in the competitive real estate market

The term multifamily real estate comprises all residential real estate, with the exception of single-family homes. This type of commercial real estate includes high-priority investments like apartments, co-ops, townhomes, and more.

 

Multifamily properties are often further subdivided into Class A, Class B, and Class C properties depending on their location, condition, and more.

Living spaces are essential, meaning multifamily buildings will always carry some degree of value, regardless of market conditions. Nonetheless, market factors influence the viability of opportunities across geographies. Investors also raise rent annually to balance net operating income with inflation.

Some of the most common types of buildings within the multifamily real estate asset class include:

  • Duplex, Triplex and Quadplex: Rental properties that are divided into two-unit, three-unit, and four-unit homes, respectively. These types of buildings are available in nearly every market.

  • Garden Apartments: Low-rise rental apartment buildings that typically offer tenants shared outdoor space, yards, or gardens. Garden apartments are typically located in the suburbs, but can be anywhere.

  • Mid-Rise Apartments: Multifamily rental apartment buildings with at least 5 or more stories and an elevator, which are generally located in urban areas.

  • High-Rise Apartments: Multifamily rental apartment buildings with at least 10 or more stories and an elevator, which are generally located in larger, more densely populated markets. Most high-rise apartments have over 100 units, with professional management overseeing leases and maintenance.

  • Walk-Up: An apartment building with 4-6 stories, and by definition, no elevator.

  • Student Housing: Properties built specifically for student use in areas close to colleges and corresponding downtown areas. Many have large common areas. 

  • Senior & Assisted Living: Properties built specifically for seniors, which are normally in neighborhoods where elderly populations reside.

Office buildings account for another major real estate asset class. Ranging from single-story suburban buildings to multi-story urban buildings, office buildings can be lucrative.

 

However, waning in-office attendance has created headwinds for office investors, even as companies prioritize quality space and employee experience.

Because most office buildings are developed for multiple tenants, investors can generate several revenue streams.

 

This structure provides a level of income diversity, helping investors to retain cash flow even in the event that a tenant terminates a lease. Compared to other types of commercial real estate properties, office leases tend to be longer, too.

 

As a result, office investors don’t take on as much risk. Preparing spaces for new tenants, though, can be capital-intensive. 

Office buildings are generally divided into three classes, based on the building’s age, condition, location, and more:

  • Class A Office Buildings: The highest quality office buildings available, with higher-than-average rents compared to neighboring buildings. Most are newly renovated, easily accessible in city areas, and offer tenants desirable amenities. Class A buildings are usually located in the central business district of the city.

  • Class B Office Buildings: Competitive buildings that are generally priced around standard market rates. While they tend not to be in highly sought-after locations, Class B buildings may be similar in quality to Class A buildings.

  • Class C Office Buildings: Less-than-ideal quality buildings that tend to be priced below average market rates. Class C office buildings may provide tenants with usable space, but without added perks like amenities and accessible locations. 

Industrial buildings are an attractive investment due to their long-term return and leases, as well as low overhead costs. 

Unlike other types of commercial real estate, industrial buildings are often located along interstate highways for added convenience in shipping and delivery. Especially as the eCommerce boom continues, and order fulfillment requires reimagined delivery infrastructure, industrial warehouses are in high demand.

There are a few different types of industrial buildings, which vary in size, layout, format, and in other ways:

  • Heavy Manufacturing: Buildings that have undergone significant transformation to cater to the manufacturer’s unique machinery and process, which can’t easily be occupied by another tenant.

  • Light Assembly: Buildings that are used for production and/or storage, but without tenant-specific floor plans. 

  • Bulk Warehouse: Large warehouses that are used for product distribution. Often, manufacturers will divide bulk warehouses by region, with strategic locations based on supply chains.

  • Flex Industrial: Buildings that contain industrial storage and/or production space, as well as office space for corporate personnel. 

In commercial real estate, the label retail applies to any buildings occupied by businesses offering products and services to customers, including stores, restaurants and more. The eCommerce boom has caused retail foot traffic to decline, but this type of commercial real estate still plays an important role in new ways within the retail business model.

Compared to other real estate asset classes, retail buildings tend to have longer leases. For investors, this means a stable source of cash flow, without questions about future income.

Retail properties are organized into several different categories, which vary significantly depending on the location, size, and other factors:

  • Strip Malls and Shopping Centers: Clusters of stores that are grouped together, often in one or several unified buildings, to provide a centralized shopping experience. Some may have anchor tenants, or more noteworthy businesses that drive customers in and lead them to other stores.

  • Community Retail Center: Complexes that generally have more than one anchor tenant and several smaller businesses, normally spanning 150,000-300,000 square feet. 

  • Power Center: A shopping center typically located near an interstate highway with at least one anchor tenant. Power centers typically have outparcels.

  • Regional Mall: A larger complex offering a variety of retail and restaurant options with several anchor tenants, such as big box retailers. Malls normally span 400,000 to 2,000,000 square feet, including higher-end shops, restaurants, and entertainment options.

  • Outparcel: Parcels of land within other larger plots leased to other tenants, such as shops, restaurants, fast food, chains, and more. Outparcels tend to rely on larger buildings for foot traffic.

The hotels and hospitality category comprises buildings offering both short-and long-term accommodations to travelers, both for leisure or business purposes.

 

Some hotels are owned by a corporation, operating as part of a chain.

 

Boutique hotels typically feature a unique and thematic design concept, and are typically privately owned.

 

These are some of the most common types of hotels:

  • Limited Service: Facilities where residents are left to their own devices, without room service, restaurants, or a concierge 

  • Full Service: Facilities offering residents both room service and a restaurant

  • Extended Stay: Hotels designed to accommodate guests for the long term, including service, a kitchen, and larger rooms 

  • Resort: Full-service facilities that generally include an entertainment element in addition to accommodations, such as an amusement park or beach 

Some properties fall into multiple real estate asset classes, making them mixed use properties.

 

Many downtown high-rises are considered mixed use, with retail stores located on the first few floors and apartments above.

Mixed use properties may include real estate asset classes like retail, industrial, office, and residential. 

Boasting low operating costs, minimal maintenance and high capacity, self storage has grown in popularity as people continue relocating in the pandemic’s wake. In the past ten years, spending on self-storage construction has increased by 926%

This simplicity also lends itself well to scale. Understanding migration patterns and job growth can allow investors to enter new markets with relative ease, while keeping maintenance and utility costs low. While market conditions influence migration, self storage is also relatively resistant to recession cycles.

Not all buildings align directly with the types of commercial real estate outlined above. Others are considered special-purpose real estate.

 

These buildings are typically more difficult to valuate, given that there normally aren’t comparable properties in the area:

 

Overall, any building that’s created for a highly specific activity or group of people fits under the umbrella of special purpose.

We have significant experience in Special Purpose Project Feasibility Studies.

Opportunity Zone
Commercial Real Estate
Feasibility Study
Cost and Completion Time

The cost of a Opportunity Zone Commercial Real Estate Feasibility Study generally starts at about $7,500 USD and up to $50,000 depending on the complexity of the project. 

The time to complete depends also on the complexity of the project yet from 10 to 20 business days.  

Opportunity Zone Feasibility Study Consultants

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Book a Meeting to Interview us. 

 

Strongly recommended.

Always interview an Opportunity Zone Commercial Real Estate Feasibility Study Consultant!

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