Entitlement is a drag
Some investors have been skittish about financing development funds because the entitlement process can drag on — especially in Southern California — and that uncertainty could also be what’s holding people back.
Under the new tax law, there’s a 30-month window of time during which the designated zone must show improvement. Sheppard Mullin Richter & Hampton attorney Pamela Westhoff, who is based downtown, said that in L.A. the entitlement process takes around 18 months — more if you are doing a large-scale project.
“That’s not just sticking the shovel in the ground but getting your money spent on development,” she said. Westhoff said she hasn’t seen any projects being cut back yet but thinks it will happen at some point.
DLA Piper’s Jerry Neuman, a partner based downtown, said some clients are asking the lawyers to review different types of entitlements in order to identify faster-moving options. As a result, “we’re seeing some of these properties be developed not to their highest and best-case use,” Neuman said.
Some lawyers said land that’s already entitled in opportunity zones could be sold for a premium to developers looking to have their time concerns alleviated.
“While it’s on the radar in L.A., they have not yet fully grappled with how to fit the opportunity zone regulations into the entitlement process,” Nahai said.
Many of the region’s law firms have directed substantial energy toward the program despite the tentative interest so far from clients.
Neuman said in L.A., the firm has six people working on opportunity zones. Three are “all in” while the other three do some work with the zones.
At Sheppard Mullin, Westhoff said the firm receives at least one call a day about opportunity zones, but many of them don’t go anywhere.
Allen Matkins Leck Gamble Mallory & Natsis attorney Matthew Ertman said some clarification to the regulations is expected soon, and that could bring a bigger boon for the legal industry.
“It certainly has generated a lot of discussion, a lot of phone calls, a lot of inquiries from clients and nonclients,” Ertman said. “People are still trying to figure it out and see if it is going to be worth the effort and cost.”
Ertman said one potential client was hoping to start a fund but backed down when he learned that the benefits only apply to capital gains.
Nahai at Lewis Brisbois said he has yet to do an opportunity zone deal. “What started as a fairly simple concept … has become very complicated,” Nahai said.
For reprint and licensing requests for this article, CLICK HERE.
Stories You May Also Be Interested In
- American Group Plans Opportunity Zone Fund
- CUSTOM CONTENT: How Los Angeles-Based Investments Can Cut Your Capital Gains Tax
- Neuman: At the Intersection of Land and Law
- Capital Gain Deferral Opportunities abound in Los Angeles
- CRE Awards 2019: A Closer Look at the Qualified Opportunity Zone Program
- Economic Forecast & Trends 2019: Opportunity Zones to Change the L.A. Landscape
- Opportunity Zones: What to Expect When You are Expecting Opportunity Zone Fund Results
- Leaders in Law 2018: Leave the Gun, Take the Cannoli: A Brief Primer on the Qualified Opportunity Zones Program