At Origin Investments, we believe that if you have capital gains and want to invest those gains in private real estate, few investments have the tax efficiency of a Qualified Opportunity Zone (QOZ) fund. And even though this type of program has been around since 2017—and the investing environment has changed significantly over the intervening years—the criteria, and more importantly, the Opportunity Zone tax benefits, of investing remain the same. As we build on the success of our first two QOZ Funds with our upcoming Qualified Opportunity Zone Fund III, we believe that many high-potential sites are still available for investing. The five deals in our current pipeline, including one we’ll highlight below, reflect this.
Our Strategy Uncovers Deals with Potential
We are establishing QOZ Fund III to invest in, develop and manage a portfolio of multifamily projects with long-term growth potential located in areas designated as Opportunity Zones. We don’t stray from what we’re good at: We focus only on the multifamily asset class, and the total investment size of our QOZ Funds is consistent: QOZ I was $260 million; QOZ II was $310 million; and our newest Fund is targeting $300 million to $350 million in investments. Our strategy is to develop Class A ground-up multifamily buildings in business-friendly, tax-friendly target markets—the “smile” states of the Sunbelt.
Our QOZ Funds comprise two different business models in private real estate. The first is the development phase: It typically takes three to five years to develop and lease a multifamily real estate asset. The second is the core phase: The asset is stabilized, cash flowing and operating. Because we develop those properties with the intention of holding them for cash flow and appreciation, an investor’s 10-year minimum hold period encompasses the development process from groundbreaking well into stabilization.
Origin’s QOZ Fund III: Consistent Strategy Amid Market Challenges
The Fund intends to invest in projects that we believe will likely produce risk-adjusted returns before factoring in the QOZ tax incentives. That means we don’t change, or lower, our investment standards simply because a project lies within an Opportunity Zone. And we continue to seek properties in fast-growing markets in already transforming neighborhoods.
The investing environment has shifted dramatically since we closed our previous Funds, and we are looking at the world through a different lens and a different set of financial assumptions than we did in past years. Since early 2020, we have been operating amid market volatility, high construction pricing and supply chain issues, among other challenges. Now, inflation is coming down, construction costs are softening, and we see the private real estate market normalizing. That includes cooling rental rates and a higher cost of capital. In this environment, we are applying our knowledge and expertise with Opportunity Zone investments as we build our portfolio. The good news for investors is that Opportunity Zone tax benefits remain the same no matter the market environment.
Deal Spotlight: Developing Potential in Arizona
Currently, we have five potential deals that we are underwriting, in Phoenix, Nashville, Charlotte and Atlanta. One such deal, Anton Ballpark in suburban Phoenix, is a great example of how we strive to maximize the potential of carefully vetted sites.
We first looked at the deal that became Anton Ballpark in early 2021. Anton Ballpark is in the Phoenix submarket of Goodyear, a market that has outpaced Phoenix in population growth and which we believe will continue to grow, not just in population but in rent, in the future. Initially, the project was pitched as a traditional garden multifamily development—that is, a development of several smaller buildings, generally no more than four stories high, set amid natural spaces. While we liked the area, the combination of rents and building costs at the time didn’t meet our criteria for potential returns.
Part of being a disciplined investor means only doing deals that meet those criteria, so we didn’t do the deal as it was proposed—but we didn’t give up on it, either, because we saw potential. Based on our knowledge of the market and insights gained from , our proprietary suite of machine-learning models for forecasting rent growth, we believed there was a real opportunity to integrate townhomes and build-for-rent housing. The proposal was adopted, and Anton Ballpark is on track to break ground later this year, as a two-phase development: first as 269 three- and four-story garden units, and then as 221 single-family cottages and townhomes. The sponsor in this development, which is in one of two Opportunity Zones in Goodyear, is Anton Development, a vertically integrated builder that has completed more than 10,000 units in the Southwest U.S.
QOZ Investors Receive Key Long-Term Tax Benefits
Investors who recognize capital gains can receive three key Opportunity Zone tax benefits by investing in Origin’s QOZ Fund III: First, the deferral of federal income tax on eligible capital gains realized from the sale of a previous investment. Second, by holding the investment for 10 or more years, they will pay zero federal taxes on capital gains earned on the QOZ Fund III investment. And third, once its assets are developed, the Fund is expected to hold a portfolio of Class A cash-flowing properties and retain the benefit of depreciation.
The chart below shows how an investor’s $1 million investment is managed from a federal tax perspective over the 10-year hold period of Origin’s QOZ Fund III.
Hypothetical Federal Tax Benefits
We Build Long-Term Relationships with Investors
A 10-year holding period for an investment requires a long-term relationship between an investor and a fund manager. It takes experience, and expertise—not just to find and develop high-potential properties but to manage financing, compliance and fund details. Our proven development experience and stringent criteria for site selection speak for themselves in previous QOZ Funds. And Origin’s co-CEOs align themselves in Fund investments along with investors. In this way, Origin, its partners and investors, and communities all benefit.