The second half of 2020 has brought several new real estate investment trusts (REITs) to the public market. One of the newest focuses specifically on opportunity zones, the more than 8,700 areas around the United States designated for specific tax incentives for investors. Opportunity zones have been particularly attractive to real estate investors because they allow them to defer capital gains and invest in value-add and ground-up development around the country.
Aspire Real Estate Investors is a multifamily REIT being created out of Avanath Capital Management through a partnership between Avanath Capital and MacFarlane Partners, two California-based minority-owned real estate firms. The company first announced plans to form a REIT in early 2020, but it only recently filed documentation with the Securities and Exchange Commission (SEC) to raise up to $100 million in an initial public offering.
In its filing with the SEC, Aspire Real Estate Investors noted it intends to qualify as an qualified opportunity zone fund (OZF) and believes it will be the first OZF listed for trading on a national securities exchange. It plans to list on the New York Stock Exchange but hasn't announced a ticker symbol yet.
A focus on multifamily properties
The new REIT will acquire existing affordable and workforce multifamily properties, beginning with nine multifamily projects in six states. Avanath Capital owns these properties and will transfer them to Aspire. Three of the properties are stabilized and located outside of opportunity zones. These are all large communities, between 93 and 360 units each.
Six properties are located in opportunity zones. Of those six, five will be redevelopment projects, and one is a ground-up development. Several properties are a mix of income-restricted and market-rate units, and one is a senior housing community.
In addition to the nine initial properties, the REIT is evaluating other properties both inside and outside of opportunity zones. It will spend approximately $582.4 million on the first nine properties and expects to spend $1.1 billion on new acquisitions.
With advantages come rules
Both REITs and opportunity zones offer tax advantages for their creators and shareholders, but they also must adhere to many rules. As a REIT, the company must pay out 90% of its taxable income to shareholders in the form of dividends or capital gains distributions. Because the REIT will be invested in opportunity zones, it will need to be able to demonstrate the properties are substantially improved during a 30-month period, beginning after the property is acquired. Also, as an opportunity zone fund, it must hold at least 90% of its assets in qualified property.
The company has not yet qualified as an opportunity zone fund, but if it does, investors will be able to receive the tax benefits of an OZF, including capital gains tax deferment. However, one requirement of opportunity zone investing is that properties must be held for a long time to receive the full tax benefits. In order to pay no capital gains taxes on any gains realized by investing in the OZF, the investment must be held for 10 years.
The bottom line
Workforce housing is one of the most in-demand sectors of multifamily development, but it has faced a serious supply shortage. The REIT's focus on opportunity zones will appeal to both ESG investors as well as those looking for tax breaks. This REIT has an ambitious scope and some experienced managers behind it, but it will need to satisfy a lot of regulations in order to deliver tax benefits for investors. We will be keeping an eye out for the official IPO announcement.