Wednesday, August 28, 2019

Investors Line Up for New Opportunity Zone Hotel Projects

Investors are flocking to hotels, a property type in high demand across the United States and in the federal Opportunity Zone program that offers tax benefits.

Hotel sales in the program were up 51% last year over 2017, according to CoStar data. That’s in part because the federally designated areas enable investors to reap tax advantages from the real estate as well as investing in the hotel business.

Now investors are stepping up to buy new hotels nearing completion in Opportunity Zones. These include projects begun last year that were largely spurred by the program. Tax breaks are available on newly constructed properties as long as the money is invested before the property has been previously placed in service.

Overall hotel occupancy rates remain high as U.S. tourism surges, another draw for investors. New York and Chicago both reached records last year for numbers of visitors.

Virtua Partners of Scottsdale, Arizona, agreed last week to buy a 126-room Courtyard by Marriott under construction in downtown Winston-Salem, North Carolina, for an undisclosed price.

The Courtyard by Marriott deal is significant because it is among the first hospitality projects in the country to be built as an Opportunity Zone development, of which there is a growing number. CoStar data shows 120 hotel projects totaling more than 16,000 rooms now under construction or completed this year in the more than 8,000 designated Opportunity Zones across the country.

The Opportunities Zone program, enacted under the Tax Cuts and Jobs Act of 2017, is designed to stimulate the economies of overlooked, low-income communities through long-term investment from private capital. Investors can receive capital gains tax deferments or tax forgiveness for investments in real estate or companies within the zones.

"There is an incredible amount of upside for this project," Quinn Palomino, chief executive of Virtua, said in announcing the Courtyard by Marriott agreement. "Whether it be to the Winston-Salem community, the people who will be employed through construction and full-time hospitality jobs, or the investors who chose to finance this project."

Dedicated Fund

Virtua created a qualified opportunity fund as a one-off vehicle for investing in the Courtyard by Marriott. It raised $7.8 million in equity for the project.

The property’s internal rate of return is projected to be 18%, the official said.

Courtyard by Marriott is one of Virtua's favorite flags for Opportunity Zone investing. The company has three more such projects in its pipeline.

Virtua has about 100 Opportunity Zone projects overall, including hospitality, multifamily and single-family rental subdivisions.

Atlanta-based Hotel Equities will manage the Courtyard by Marriott when it opens in the first quarter of 2020.

Hotel Equities and Virtua joined forces last year to expand upon their current hospitality portfolio through new development and acquisition opportunities. Hotel Equities is providing development services for the Courtyard by Marriott through the construction process and plans to see it through completion.

Other firms are also developing hotels in Opportunity Zones.

In Atlanta, Peachtree Hotel Group, one of the nation's fastest-growing hotel investment and management firms, is targeting several Opportunity Zone developments. Projects range from an urban, dual-branded hotel in Atlanta to multiple ground-up hotels in the designated areas across the country.

Global alternative asset manager EJF Capital is developing a Marriott Moxy hotel in the Uptown neighborhood of Oakland, California.

"This is exactly the type of investment the Opportunity Zone program is intended to generate," said Neal Wilson, EJF's co-founder and chief operating officer, in a statement earlier this year. "This is the right time to invest in Oakland, a dynamic, expanding city that welcomes growth capital."

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