Origin launched its first QOZ fund in 2018 and has committed $100 million of the $265 million it raised to five apartment projects, including one recently completed in Pilsen. Origin plans to use the remaining money from the first fund for another four or five multifamily projects and has already lined up $130 million in equity commitments from other investors for opportunity zone projects it will pursue using its second fund, said Origin Co-CEO Michael Episcope.
“If you like real estate right now as an asset class and you have capital gains, there’s nothing that comes close to investing in a QOZ fund because of the after-tax benefit,” Episcope said. “The amount of people looking for a QOZ fund is so much more today than it was a few years ago.”
Investors as of April had pumped more than $16.3 billion into QOZ funds nationwide, according to data tracked by San Francisco-based tax advisory and consulting firm Novogradac. That’s a sharp increase from the $790 million raised by such funds two years before, Novogradac research shows, a boost likely driven by tax benefits that wane the longer an investor waits to put capital gains into a fund. Investment in QOZ funds has also grown as investors seek tax shelters amid expectations of higher taxes on the horizon under the Biden administration, Episcope said.
Origin’s first fund is among the top 2 percent largest QOZ funds nationwide, according to Novogradac data, and Episcope said the second fund will target around $300 million. Chicago is also home to another one of the largest QOZ funds, which was launched by Chicago real estate investor Larry Levy and Cresset Capital Management and closed a $465 million fund for opportunity zones just before the start of the COVID-19 pandemic.
Episcope said he considers the Pilsen project—a $65 million, 202-unit complex called “the Rosie” that it developed along Blue Island Avenue and 15th Street in partnership with Chicago apartment developer Cedar Street—an early success for Origin, having leased more than a quarter of the units since it opened in the spring.
But the development was one Origin would likely have backed even without the opportunity zone benefit, Episcope said, and the firm is pursuing projects in other fast-growing markets—not in Chicago—where opportunity zones are in more up-and-coming neighborhoods with fewer regulatory obstacles for apartment projects.
“We can’t make deals pencil (out) here between taxes and the affordable (housing) requirement and the fiscal situation in Chicago and Illinois,” he said, citing the Chicago City Council’s recent move to beef up its ordinance requiring a certain amount of affordable units in new apartment buildings, as well as Cook County’s ongoing reassessment of downtown properties that is likely to put more of the local tax burden on commercial landlords.
“It’s hard to make the argument right now to invest here versus places like Nashville or Raleigh or Charlotte or Tampa,” Episcope said. “My heart is here, but my dollars are elsewhere.”
That opinion squares with one of the long-standing challenges for Chicago in luring investment into its opportunity zones: There are more attractive projects in other markets, whose opportunity zones are in areas that aren’t suffering from as much disinvestment as those in Chicago. Under criteria determined by each state on where to designate the zones, luxury apartment and condo buildings in downtown Houston and Portland, Ore., are eligible for funds, for example, while Chicago’s zones are mostly located in areas of extreme need. That disparity has been a source of controversy for the entire program, which some critics have called a tax dodge that mostly helps projects that don’t need help landing financing.
Origin itself is backing opportunity zone projects in Phoenix, Houston, Charlotte and Colorado Springs in areas that are “in transition” from a possibly blighted past, Episcope said.
Some high-profile projects have materialized in Chicago opportunity zones, including the pending redevelopment of the former Michael Reese hospital site, a $50 million redevelopment of old warehouses into creative offices called “the Terminal” in Humboldt Park and the $200 million Ogden Commons mixed-use complex in North Lawndale.
But a portion of the local opportunity zone investment has been at a smaller level from funds that were meant to back local businesses or smaller real estate projects, said Robin Schabes, director of the Chicagoland Opportunity Zones Consortium, a charitable foundation-backed group that provides education and other resources to help encourage investment in local opportunity zones.
“The trend has been more toward smaller-sized funds,” Schabes said. One example she cites: RiseKit, a startup whose software is meant to help people in underserved communities find jobs, is based out of an office in an opportunity zone on the city’s Near West Side and raised capital last year from College Park, Md.-based Verte Opportunity Zone Fund.
“If folks only think about (larger) funds…we’re missing out on all the diversity of funds in communities and certainly in Chicago,” Schabes said.