Will Lenders Follow Real Estate Equity Out to Opportunity Zones?

Tim Milazzo
August 16, 2018

If you’re keeping up with commercial real estate trends, you may have heard some recent buzz about Opportunity Zones. Introduced by the Tax Cuts and Jobs Act of 2017, these zones are depressed economic areas where the government would like to spur business, jobs, and revitalization through the use of tax incentives for investors. Real estate developers have taken note, and we’ve seen a quick rise of several Opportunity Funds dedicated to taking advantage.

But how does this new trend affect a developer’s ability to get the debt financing that they may be accustomed to in core markets? Traditionally, banks have avoided lending aggressively in rural and low income areas due to the economic risks involved. There are still questions to be answered by the IRS through the end of the year and beyond, but we connected with a few lenders to talk about their outlook for financing these Opportunity Zone investments.

We wanted to hear straight from a lender on this topic, so we interviewed Mike Fishbein of Terra Capital Partners, a mid-market mezzanine lender, and Monica Shiwratan of Greystone, who focuses heavily on agency financing.

What is your impression on the Opportunity Zone phenomenon so far?

Mike Fishbein

Mike Fishbein

Opportunity Funds are competing with 1031 exchanges for tax-motivated investors looking for real estate, and I don’t think OZs have had enough publicity to get heavily involved yet. I do think it’s positive that asset classes can be mixed for this purpose. For instance, deferring capital gains from stock sales to buy real estate.

Are you more likely to lend in an economically depressed area if it is qualified as an Opportunity Zone? Is there a tax benefit to a lender for doing so?

Monica Shiwratan

As of right now Fannie Mae and Freddie Mac have not released any guide related updates that favor Opportunity Zones over other areas. Though it is important to note that the Agencies are more likely to approve guide related waivers that can result in higher proceeds when a property’s tenant base consists mostly of households with incomes at or below 80 percent of the area’s Annual Median Income. The metric used to determine if the property qualifies for such waivers is referred to as the property’s affordability percentage.

It should also be noted that Fannie Mae and Freddie Mac lenders are subject to an annual lending cap, which is set by the FHFA. Lending on properties with a high affordability percentage allows Agency lenders to technically increase their cap. This is because when a property has an acceptable affordability percentage, this allows lenders to exclude the loan provided on that particular property from their annual score card cap, which in turn has incentivized lenders to consider such properties over others.

Mike Fishbein

The benefit is really to the equity investor with a gain to defer. My understanding is that loans don’t qualify for tax incentives, so there really isn’t an advantage to being an OZ lender at this point. I would say that I’m going to be more careful underwriting a tax-motivated investor, because there is a component of irrationality among many investors when they look for ways to defer taxes.

I’d likely be more interested in the local investor that doesn’t have a tax-motivated benefit, but is instead focused on the macro-economic benefits of the incentive to invest in certain neighborhoods. The potential positive impact on jobs, incomes, and local spending will likely benefit fundamental focused real estate sponsors.

How does your underwriting differ within an Opportunity Zone vs a traditionally strong market?

Monica Shiwratan

Monica Shiwratan

The idea of Opportunity Zones, combined with Opportunity Funds is intended to encourage investment in low income neighborhoods by providing tax incentives to specifically the investors involved, not the property being constructed or substantially rehabilitated. Therefore the implementation of Opportunity Zones does not impact a property’s cash flow. Since the loan underwriting is mostly dependent on the cash flow of a property, Opportunity Zones and Opportunity Funds are not expected to impact Fannie Mae and Freddie Mac underwriting.

However, in certain circumstances market performance and outlook is used to determine how much leverage will be provided (i.e. 80% LTV vs. 65% LTV). If a property is located in an area that is considered highly volatile, leverage will most likely be less than 80%. Therefore, if the implementation of Opportunity Zones were to impact Fannie Mae and Freddie Mac multifamily transactions, it could potentially stabilize such volatile markets over the next several years to enable higher leverage from Fannie Mae and Freddie Mac.

Mike Fishbein

Underwriting the market isn’t going to change, but the OZ designation will provide for positive economic externalities in many circumstances. I’d be looking for areas where a short distance makes a difference — where investment is occurring a short walk away, and you benefit from being on one side of a street vs. the other. That’s where I view lending interest to be most significant. It’s also, unfortunately, going to mute the impact of tax incentives in areas that have further to go.

What else should an equity investor be aware of when looking to acquire and develop properties within an Opportunity Zone for the first time?

Mike Fishbein

The underwriting needs to work without the deferred capital gain (meaning that, for me at least, full capital stack leverage will be lower). That said, with a local, experienced operator, I would consider somewhat more pioneering commercial plays in these zones, such as low/mid-rise, high density office conversions, and I’d be more interested in retail in OZs than in many secondary markets. As a lender, I’m not going to underwrite pro-forma rents that are multiples of the current rents. Even with additional incentive to invest, not every OZ will be a winner.

I’d also be aware of the sunset on the capital gain deferral. If there’s no liquidity event in 2026, paying 85% of the original capital gain could still be difficult for investors with limited liquidity. The refinance wave necessary in 2026 will only be helpful if 7 years has been enough to generate substantial value. The biggest winners will likely be neighborhoods that have already been making gains and only need a little more investment, but instead receive a flood of new investment. Just looking at a map, many of the opportunity zones don’t appear to be areas that only need 5 to 7 years to bump into the next market tier, and that has the potential to burn some investors that need to cash out in order to make a big payment in 2026.

Monica Shiwratan

As we already know, Opportunity Zones are designed to spur economic development in distressed communities by providing tax benefits to investors. Opportunity Zones are nominated by each state governor and are certified by the U.S. Department of Treasury. Before an area can be nominated, it must qualify as a low income community, which is defined as an area with a poverty rate of at least 20 percent and median household income of no greater than 80 percent of the area median income. Areas that meet these requirements are identified by the most recent census data and selected by census tract number.

Over the years, Fannie Mae and Freddie Mac have used census tract data, along with area median income and in-place rents at properties being financed to determine what percentage of the property qualifies as low income households. If 50% or more of units at any given property qualify as low income, both agencies have offered pricing discounts. This not only resulted in lower annual debt service payments, but also higher proceeds when the loan is debt service constrained. Such borrower incentives, combined with FHFA score card exclusions for properties that meet or exceed this threshold, and newer tax incentives like Opportunity Zones, should continue to make multifamily investments in lower income tracts more appealing for investors.


  1. Opportunity Zones are a good opportunity to defer and even reduce capital gains taxes for an equity investor, but don’t directly affect lenders.
  2. Lenders expect your cash flow underwriting to still pencil out in the absence of OZ tax incentives.
  3. Some OZ markets will fare better than others, so don’t skip market research.
  4. The Opportunity Zone phenomenon is not the only carrot luring multifamily investors to lower-income census tracts. Use them all to your advantage!
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