Does the opportunity zone tax benefit ever change what a buyer should pay for the dirt, or is that how people talk themselves into bad basis

Slow question. If the benefit only pays off after ten years, how does anyone put a present number on it at all? You'd have to guess the appreciation over a decade and then discount it back, and both of those seem like numbers you can make say anything.

@kevin_lombard that's exactly the objection. You can build the model and the answer moves 40 percent if you change the exit cap by 50 basis points. Which is why zero got my vote. Anything that can't be defended in year one shouldn't be paid for in year one.

Voted for the required return version because it is the only framing where the person underwriting can see themselves cheating and catch it.

Everyone votes zero and then bids like it's 5 percent. I've watched it happen at three auctions.

Looking at my own behavior, the benefit doesn't change my price and it does change whether I chase the deal at all. If there are two sites and I can only underwrite one this month, the one in the tract gets the weekend. That's a real premium, it just shows up as attention rather than dollars, and attention is how you end up emotionally committed and paying up on Tuesday.

The premium is not wrong in principle. It is wrong because of what you are buying when you pay it. The benefit is conditional on a ten year hold, on the tract being designated at the time the investment is made, on the fund passing its testing dates every six months, and on actually hitting the substantial improvement standard within the window. Each of those is a condition you can fail, and paying a premium up front converts a conditional benefit into an unconditional cost. Whether any particular fact pattern satisfies those conditions is a question for a tax professional looking at the documents, and plenty of offering material asserts things that turn out to depend on facts nobody checked. If a premium is going to be paid, the least bad way to structure it is as a price bump in the contract contingent on the tract appearing on the final designated list, with the deposit refundable if it does not. Sellers hate it. Some of them sign it anyway.

That contingent bump, @wendy_park48, is the structure that gets sketched far more often than it gets proposed. What is the actual language people use to define "appears on the final list" in a way a title company and an attorney will both accept? The designation is at census tract level and the parcel to tract mapping is not always obvious on a boundary lot.

On the passive side I see the premium already baked in before I ever get to vote on it. By the time a fund shows me a deal, the sponsor has bought the site and the price reflects whatever they were willing to pay for tract status.

So the diligence question I ask is what the site traded for and what comparable dirt outside the tract traded for in the same period. In a dozen or so states sale prices aren't public at all, which makes that check hard to run and is by itself a reason to ask the sponsor for the settlement statement rather than take their word for the basis.

Zero premium, and it is not a close call. The whole appeal of the structure is that it is a tax outcome sitting on top of an ordinary building that still has to work like an ordinary building. The moment a buyer pays extra for the treatment, that buyer has purchased a tax product.

Let me put numbers on it so the room can tell me what is wrong with them. Say a 1.9m all in project, 8.2 yield on cost, held ten years with an exit at a 7 cap on rents that grew 2.5 percent a year. Rough exit equity gain over basis of maybe 700k. If the ten year treatment applies and eliminates the tax on that appreciation, and the alternative is a combined rate somewhere in the mid twenties on it, that is something in the region of 175k of value, before any state treatment, which varies by state and in some places does not conform at all. Discount 175k back ten years at 10 percent and you get about 67k. On a 1.9m project that is 3.5 percent of total cost, and if the land is 280k of that, the same 67k is 24 percent of the land price. So the answer to bramble's question depends completely on whether you express the premium against land or against total cost. Both of those are real numbers, and they sound wildly different in a negotiation. The discount rate is the soft assumption, and there is a case for going higher than 10 given how many conditions @wendy_park48 just listed.

@hannah_west29 that framing is the most useful thing in the thread for me. Someone saying "I'll pay 20 percent more for the dirt" and someone saying "I'll pay 3 percent more for the project" can be the same person and they sound like opposites.

The bit nobody's priced is that a premium paid on land also raises the building basis you have to double under the improvement test if the allocation moves with it. Pay up for the dirt and your improvement number can go up too. Worth having whoever does your allocation say out loud how the extra dollars split before you agree to them.