Big Stock Windfall? New Rule Defers Taxes With Real Estate Investment

Big Stock Windfall? New Rule Defers Taxes With Real Estate Investment – WSJ

U.S. aiming to attract $100 billion in development with ‘opportunity zones’ created by tax overhaul 

 Billions of dollars have started piling into new real-estate funds targeting disadvantaged U.S. neighborhoods, as investors line up to capitalize on a section of last year’s tax overhaul. 

The tax bill created more than 8,000 tax-advantaged “opportunity zones.” They range from parts of New York, Los Angeles and Washington, D.C., to rural areas and the entire U.S. territory of Puerto Rico. On Thursday, Treasury Secretary Steven Mnuchin predicted the zones will attract over $100 billion in private capital. 

Opportunity-zone investments could be “the biggest thing to hit the real-estate world in perhaps the past 30 or even more years,” says Bruce Stachenfeld of law firm Duval & Stachenfeld. 

Treasury Secretary Mnuchin speaks during a working session on opportunity zones in February. On Thursday, Mr. Mnuchin predicted the zones will draw more than $100 billion in private capital to disadvantaged areas.  

The zones have multiple tax benefits. Anyone with capital gains—from real estate, Amazon shares or most any other source—can defer taxes on them until 2026 if they roll those gains into investments in these designated zones. Investors can also get a discount of up to 15% on those taxes when they eventually pay them. And capital gains from qualified investments in the zones that are held for at least 10 years won’t be taxed at all. 

“Billions of dollars, maybe more, will be coming into the market, with the investors saying, ‘We only want to put this money into these communities because of these tax benefits,’” said Seth Pinsky, executive vice president of New York developer RXR Realty, which is exploring creating an opportunity-zone fund. 

So many investors are expected to take advantage of the tax break and invest in these zones that it will cost the government $7.7 billion between 2018 and 2022. The cost will shrink to $1.6 billion over 10 years as deferred taxes are paid, according to the Joint Committee on Taxation. Unrealized capital gains on stocks and mutual funds held by U.S. households alone total about $2.3 trillion, according to a report by the Milken Institute’s Center for Financial Markets, citing research from the Economic Innovation Group. 

 

The tax benefits apply to most equity investments in the zones, including real-estate development and operating businesses such as restaurants, stores and technology startups. But most of the initial investments are expected to be in real estate, partly because opportunity-zone tax law provides the most benefits to investors who can quickly deploy a lot of capital. 

“Doing a $300-million real-estate development project is so much easier than 300 different $1-million operating-company investments,” said Aron Betru, managing director with the Milken center. 

Developers and investors say there are still many unanswered questions, including whether the tax breaks will produce the intended benefits for targeted neighborhoods. They’re hoping for more clarity when the Internal Revenue Service issues further guidance, which is expected to happen any day. 

The program—which was partly conceived by Sean Parker, the entrepreneur who helped launch Facebook and Napster—has raised concerns among community groups about the impact on existing residents of low-income areas. “There’s a tipping point where the people who were there before get pushed out, and the people who come in are the people who are benefitting,” said Mr. Pinksy. 

But real-estate investment firms, developers and others are already vying for positions at the starting line. Mr. Betru says he has heard about close to 20 firms that have either started raising or are planning to raise funds ranging from $100 million to $500 million. 

James Lang, a tax attorney in Greenberg Traurig’s Tampa, Fla., office, says he has fielded 10 to 15 calls each day on the topic since July and his firm has assembled about 45 lawyers to focus on opportunity-zone investing. 

Some developers that happen to be working on projects inside zones already find themselves in prime positions. Florida-based firm Waypoint Residential was planning a 250-unit rental apartment project in the suburbs of Louisville, Ky., before the area was designated an opportunity zone. 

Raising capital turned out to be a breeze, said Scott Lawlor, Waypoint’s chief executive. “We were 50% oversubscribed within two weeks.” 

Developers are aware that opportunity-zone investments will be risky despite the tax benefits. To qualify, real-estate investments have to be ground-up projects or major rehabilitations. 

“When this much dough forms this quickly with this much of a buzz around it, you just have to step back” and be careful, said Mr. Lawlor. 

The zones could be a major boon for real-estate fundraising, which has been getting tougher. A total of 48 private real-estate funds closed globally in the second quarter of 2018 for a combined $23 billion, down from $38 billion raised by 75 funds in the first quarter, according to data firm Preqin. 

Small-to-midsize firms with experience investing in disadvantaged areas have largely been the first movers in the opportunity-zone business. Firms that announced plans to raise funds include Youngwoo & Associates, of New York, whose current projects include redeveloping the historic Bronx Post Office into a retail and office project, and Washington, D.C.–based Fundrise, which is considering possible investments in Los Angeles, Oakland, Dallas and Seattle. 

Jessica Millett, co-chair of Duval & Stachenfeld’s Tax Practice, said that in addition to real-estate developers, she has also received interest in opportunity zones from investment bankers, advisers representing technology executives and other investors. 

Some large banks already involved in economic development have also become active in the zones. For example, Goldman Sachs Group Inc.’s urban investment group has already made $70 million worth of deals in opportunity zones in 2018 and has over $1 billion of possible transactions in the pipeline, according to Margaret Anadu, the group’s head. 

Other big names in real-estate investment, such as Blackstone Group ,KKR and Apollo Global Management LLC, are expected to sit on the sidelines for now, according to people close to the firms. These firms tend to make larger investments than the deals that will likely be made in opportunity zones. 

“Deals will happen, but I don’t think it will be billions of dollars of equity from one manager,” said Ralph Rosenberg, KKR’s global head of real estate. 

By Peter Grant and Gregory Zuckerman WSJ Updated Oct. 2, 2018 11:43 a.m. ET

Ruth Simon contributed to this article. 

Undaunted By Puerto Rico’s Financial Mess, Hospitality Industry Blazes Ahead

Bisnow Article by deirdra.funcheon@bisnow.com July 24

“As you can imagine, things are a bit crazy here,” said Emilio Colón-Zavala, president of ECZ Group and head of the Puerto Rico Builders’ Association, this month — even though it has been almost a year since Hurricane Maria slammed his homeland.Puerto Rico is still recovering from hurricane-related infrastructure failures (the water system was long-neglected and the electric company has had five CEOs in a year) as well as a decade-plus financial crisis.

The commonwealth owes creditors a whopping $124B, and bondholders are fighting over who will be repaid. Investors are looking to scoop up distressed properties or take advantage of generous tax incentives, and cryptocurrency entrepreneurs have invaded with a vision to remake the island and run it on bitcoin. Meanwhile, residents still struggle; the average family income is about $20K.  Amid these challenges, the hospitality industry is putting on its best face and charging sunnily ahead. Most hotels in the commonwealth are back open or will resume operations by the time high season begins in September; some already had record occupancy for spring break.  Colón-Zavala and other experts will discuss these converging factors — and the state of the hospitality industry throughout the Caribbean — at Bisnow’s Caribbean Hospitality and Investment Summit in Miami Aug. 23.

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Carla Campos, executive director of the Puerto Rico Tourism Company (a government agency), said the hospitality industry was seizing this moment to come back better and stronger. As of May, she told Travel Weekly, 12,000 of Puerto Rico’s 15,000 hotel rooms were operational and the other 3,000 were being remodeled. She said the reopening of the St. Regis, El San Juan and the Ritz-Carlton in October would be recovery milestones. The hurricane made Americans more aware that Puerto Rico is “a U.S. territory and you don’t need a passport to go there, that there is easy access from U.S. cities,” Campos said. “That puts us in this position to seize the opportunity to capitalize on this increased awareness and convert it into awareness in travel.” In addition to her agency, a Destination Marketing Organization — a private nonprofit corporation responsible for the promotion abroad of Puerto Rico as a tourist destination — was established with legislation last year and will be funded with $25M annually. Brad Dean, the former head of Myrtle Beach Chamber of Commerce, will run the DMO and recruit both leisure and business travelers. 

Colón-Zavala said in addition to remodels, new construction is on tap. A JW Marriott, Aloft San Juan Convention Center, Aloft Ponce and Four Seasons Cayo Largo are all in the works. “We have already like $1.9B in projects in the pipeline,” Colón-Zavala said. “It’s going to be like a 4,000-room increase — like 5% of hotel inventory. We have 15,000 hotel rooms in Puerto Rico and the pipeline is almost 25% more.” That means builders are in high demand — “You get proposals left and right,” Colón-Zavala said — but contractors are being selective about which jobs to take for fear of not getting paid in a timely manner. Private insurance has been slow to pay claims, and some government agencies don’t have funds due to the commonwealth’s financial crisis. FEMA is still active, and is siphoning workers from other jobs by paying 25% to 50% more, Colón-Zavala said.From an investment standpoint, Colón-Zavala said people from around the world have been interested in Puerto Rico; there is a lot of interest from China. Investors should look not just at hotels and resorts, but also at public-private partnerships in infrastructure, Colón-Zavala said. He said private companies have recently been awarded concessions to run a ferry service, a major highway and airport operations. 

Numerous solar companies have also descended on the region. “A year ago, people would not buy solar with batteries because of the expense that it represented,” he said. “This year, it’s the other way around — you would be crazy not to buy a battery with your solar panels.”    Sion Capital founder Jonathan Kracer, who advises real estate investors and will also speak at next month’s event, wrote recently that there is forward momentum pulsing through the 30 major Caribbean islands. All-inclusive resorts are doing brisk business, and low-cost airlines from all around the world have increased flights to the region. Kracer told Bisnow that following last year’s hurricanes, “I was surprised by the lack of a cohesive communications strategy to change traveler misconceptions about the conditions in the Caribbean. Only about eight islands of the [about] 30 in the Caribbean were most impacted by Hurricane Irma, and the perception of damage impacted demand volumes in the whole region.” Ultimately, though, he said that better construction techniques and stricter building standards would bode well for the region. Right now, he said the best move for investors would probably be “acquiring older independent assets or damaged properties from the recent hurricanes, and renovating and professionally managing them … As tourism is the most important economic driver for the region, the Caribbean is very resilient and will bounce back.”  

Another panelist, Rogerio Basso, principal investment officer for multilateral development bank IDB Invest, said “We have a heightened appetite to explore greenfield operations in the Caribbean and are also seeing growing interest from regional banks to fund hospitality transactions. Rising interest rates, however, are putting pressure on developers to not overextend themselves on debt and ensuring projects have sound fundamentals to withstand market trepidations.”

Hear more about tourism, hotels and investment in the Caribbean at Bisnow’s Caribbean Hospitality and Investment Summit Aug. 23. 

Follow the Money: Paulson Compares Puerto Rico Today to Miami in the 1980s

Hedge fund billionaire John Paulson has been buying a lot of sand lately — specifically, Puerto Rican sand. Despite Puerto Rico’s massive debt crisis, Paulson sees big profits ahead. He has plowed “quite a bit” — an estimated $1.5 billion — of his personal wealth into buying hotels, a resort and office buildings on the island. Paulson compares Puerto Rico today to Miami in the 1980s.”It’s similar to that period in Miami’s history,” Paulson said Thursday at the Puerto Rico Investment Summit. “There was a lot of real estate on the beach, lots of abandoned buildings and vacant lots. That was definitely the best time to buy [in Miami].”

Below are some selected articles: 

http://caribbeanbusiness.com/paulson-buys-harbour-lakes-in-palmas-del-mar/

Paulson & Co. Inc., a New York-based investment firm, has acquired Harbour Lakes in the Palmas del Mar resort community located in the municipality of Humacao, Puerto Rico, the firm announced Thursday. The acquisition consists of 149 condominium units offered for sale, from 1,637 square feet (sq. ft.) to 2,045 sq. ft., 3 bedrooms, 2.5 bathrooms.

http://money.cnn.com/2016/02/12/investing/puerto-rico-john-paulson/

Despite Puerto Rico’s massive debt crisis, Paulson sees big profits ahead. He has plowed “quite a bit” — an estimated $1.5 billion — of his personal wealth into buying hotels, a resort and office buildings on the island. Paulson compares Puerto Rico today to Miami in the 1980s. “It’s similar to that period in Miami’s history,” Paulson said Thursday at the Puerto Rico Investment Summit. “There was a lot of real estate on the beach, lots of abandoned buildings and vacant lots. That was definitely the best time to buy [in Miami].” 

The hedge-fund manager said he’s still considering moving to the Caribbean island from New York after flirting with the idea in 2013. Beautiful weather, real-estate opportunities and tax breaks have resulted in Paulson buying luxury hotels and a 326,000 square-foot (30,286 square-meter) office building in San Juan’s financial district, he said during the 2016 Puerto Rico Investment Summit in San Juan on Thursday. He plans to expand his St. Regis Bahia Beach Resort and develop new condominiums in the Condado neighborhood of San Juan. He already owns a home and an apartment on the island.

http://www.bloomberg.com/news/articles/2016-02-11/john-paulson-says-he-s-still-considering-move-to-puerto-rico-ikiv6c1w

“I came here because I think they’ve hit bottom,” said Tennenbaum, 80, who manages assets of over $6 billion and moved to the island two months ago on Paulson’s urging. “In a democracy, it takes a crisis for change to take place.”Tennenbaum plans to form a corporation under Puerto Rico’s Act 20, which gives businesses that move to the island a 4 percent corporate tax rate and exemptions on dividends and property taxes. He also plans to create a merchant bank. On Thursday, the island received a lift from one of its biggest cheerleaders, John A. Paulson, the billionaire hedge fund manager, who is investing $20 million for the San Juan Beach Hotel.

http://www.nytimes.com/2014/09/07/realestate/puerto-rico-luring-buyers-with-tax-breaks.html

And it is true that Puerto Rico is a bargain. At the St. Regis Bahia Beach, for example, arguably some of the most expensive real estate in Puerto Rico, condos with oceanfront views are priced at around $600 a square foot; in Miami, a similar unit would cost around $2,000 a square foot.Over the last 10 months, the St. Regis Bahia Beach sold nine condos, priced at $800,000 to $1.6 million, all to American buyers, according to Paulson & Company. The resort is also constructing six oceanfront villas, priced at $10 million to $12 million; two have already sold.

http://www.nytimes.com/2015/07/24/business/dealbook/john-paulsons-hedge-fund-to-buy-another-puerto-rico-hotel.html?_r=0

Paulson & Company, Mr. Paulson’s $20 billion hedge fund, has agreed to renovate the San Juan Beach Hotel and turn it into an “ultraluxury boutique hotel” over the next few months, the Puerto Rico Department of Commerce and Economic Development said. Mr. Paulson has been buying real estate on the island for years. He is building a home there and has acquired some of the island’s most exclusive hotels, including the Condado Vanderbilt Hotel, La Concha Renaissance Hotel and Tower, and the St. Regis Bahia Beach Resort.

http://www.wsj.com/articles/some-investors-bet-on-puerto-rico-hotels-1438092464

Some Investors Bet on Puerto Rico Hotels. Fund manager John Paulson boosts his stakes; Blackstone cuts back. Puerto Rico’s worsening debt crisis only seems to whet the appetite of a small but devoted group of distressed investors.

http://www.bloomberg.com/news/articles/2014-06-26/paulson-s-puerto-rico-paradise-lures-rich-fleeing-taxes

Paulson is betting that millionaires will come in droves. In his presentation, in which he forecast that Puerto Rico would become “the Singapore of the Caribbean,” he said he plans to develop residential and office properties to go beyond the current high-end offerings. Since the first homes were built in 2007 by BBP Partners (BBP) – a joint venture between two of Puerto Rico’s leading real estate developers, Interlink Group and Muñoz Holdings – more than $125 million worth of residences have been sold at the resort and the $150 million St. Regis Bahia Beach Resort opened in 2010. Paulson is acquiring a majority interest in Bahia Beach through a comprehensive recapitalization. The firm has roughly $18 billion under management and has offices in New York, London and Hong Kong.

http://www.reuters.com/article/usa-puertorico-paulson-idUSL2N0QL20Q20140815

U.S. hedge fund Paulson & Co is upping its bet in Puerto Rico real estate with the purchase of an office building in San Juan’s financial district from American International Group Inc .The 326,000 square-foot building is the latest real estate purchase for the $23 billion hedge fund on the Caribbean island where Paulson & Co is betting on an economic turnaround. He owns 8.6% of Banco Popular, the island’s largest bank.