Thursday, May 9, 2019

Lending Shoots Up in Opportunity Zones

In the latest sign of investor interest in federal opportunity zones, the Federal Home Loan Mortgage Corp., known as Freddie Mac, had a nearly 180% increase in the amount of multifamily loan origination in these areas designated as economically distressed in 2018, the first year that new tax breaks kicked in under the program.

Of the 630,000 conventional multifamily units. including apartments, mobile homes, senior and student housing, that Freddie Mac financed last year, 71,000, or 11.3%, were located in areas that are now designated as opportunity zones, according to a new Freddie Mac analysis.

The increase escalates a trend that surfaced in 2015, the year Freddie Mac launched a small-balance loan program. Prior to 2015, there were very few small-balance loan properties in Freddie Mac's lending portfolio. Following the creation of this program, financing activity in this market segment increased tremendously, and the effect was seen acutely in opportunity zones.

"The research shows that Freddie Mac financing for affordable housing in economically distressed areas predated the creation of opportunity zones," said Steve Guggenmos, vice president of research and modeling for Freddie Mac Multifamily, in a statement. "Our financing in these areas has far outpaced our work elsewhere, consistent with our mission to seek out the areas most in need of affordable housing."

Census tracts identified as opportunity zones are found in each state and are characterized by high poverty and subpar employment opportunities. Tax provisions enacted in December 2017 allow for the preferential tax treatment of capital gains if these gains are placed into opportunity funds that are invested in these zones.

While Guggenmos said the ultimate impact of additional and tax-advantaged investments remains to be seen, other research shows that investors are clearly targeting multifamily investments in opportunity zones.

Multifamily rental housing is expected to be a key target for opportunity funds.

[See latest list of all the Opportunity Zones funds that have been created.]

Of the funds identified by the National Council of State Housing Agencies, 70 have an investment focus of multifamily residential development, with estimated funds totaling between $14.9 billion to $15.2 billion.

Funds range in size from $1 million to $3 billion, with an average fund size of $215 million, James Tassos, deputy director of tax policy and strategic initiatives of NCSHA, reported this week.

Commercial real estate is a strong focus of opportunity funds, with 91% reporting investment in multifamily residential, student housing, mixed-use, hospitality, or other development.

The number of funds planning to invest in community revitalization, affordable housing, or workforce housing make up about 58%, Tassos said.

Freddie Mac's research found that affordable rental housing for very low-income households is more than twice as common in opportunity zones, where median incomes are lower and poverty rates are higher than the national average.

Freddie Mac found that opportunity zones have historically contained a large number of multifamily rental units that are affordable to very low-income households. These areas often have a higher proportion of small- to medium-sized multifamily properties, which tend to cater more to lower-income renters.

"Investor interest in this initiative is already high and will likely continue to grow as more investors become aware of the opportunities for financial gain and social impact. If success is measured by the effectiveness of bringing new capital to these neighborhoods, then this initiative appears to be moving in that direction," Freddie Mac concluded.
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