What’s the Deal With Opportunity Zones? Matthew Pestronk, Post Brothers, Lays it All Out for NJ Apartment Summit
by Josh Anderson
NEWARK, NJ — CapRE’s Eighth Annual New Jersey Apartment Summit was a full day of in-depth analysis and networking focusing on the most salient trends and topics in the Garden State’s multi-family arena. The crowning panel to close the day, CapRE Takeaway: The Impact of Smart Buildings in 2019, What Have We Learned Today? And, What Should We Know Going Forward? featured a roster of local movers and shakers synthesizing analyzing the major themes of the day. Among them was Matthew Pestronk, President of Post Brothers. Below, we highlight the part of a brief back-and-forth between Pestronk and Moderator Brian Klebash, Founder & CEO of CapRE.
Klebash: Tell me about the interest in New Jersey. You’re based in Philadelphia, a Pennsylvania company. So what attracted you to New Jersey?
Pestronk: We had kind of a head start by building best-in-class assets in markets that weren’t necessarily [major] locations. When we compete it’s with the product. So we started in Northwest Philadelphia, and we built the best product in the city at that time, even though it wasn’t in the best location. But we were still getting rents. It was a valuable proposition for renters who wanted something really nice but didn’t mind not being in the best part of the city.
So we looked at New Jersey as kind of, we’re not going to buy in Manhattan and pay top dollar to do that. But we can also buy, for instance, on the Gold Coast and offer that top-of-the-line product at a discount to Manhattan. And there’s a lot wealth in those areas. That’s how we kind of see New Jersey as a whole. There’s so much wealth in certain areas where you’re a little far from Manhattan but you can command rents that are not the same but if you’ve got a product that’s really nice, at a pretty good discount
Klebash: You touched briefly on the opportunity zone. This is a pretty hot topic. And some people are just beginning to grasp the opportunity of an opportunity zone. So tell us what your experience has been.
Pestronk: To be honest, I feel like there has been “opportunity zone fatigue” – it’s been all over real estate publication lately. And I think the truth of the matter is that no one really knows it yet. The framework is out there, but I’ve spoken to a number of funds that are bracing for opportunity zones, and it doesn’t seem like the market has really formed yet. We’re not quite sure what the prices will look like. But in a nutshell, if you’re not familiar, it allows you to defer you capital gains tax by investing in these neighborhoods. Until 2026, then you have to pay your capital gains on that investment…and then any appreciation on your investment as well, if you hold the property for ten years.
It’s a really attractive opportunity. The only thing from a development side is that some of the areas where the opportunity zones were nominated, the issue is that some of the zoning there is not necessarily what you need to be. So a lot of these zones are just industrial, they’re just run down. And investment there fifty years ago made sense. It doesn’t anymore. The zoning hasn’t been updated to account for that. Or they’re small parcels that you can’t really build these transformative developments without a zoning change. and sometimes it’s politically expedient for some people in charge of these areas to not change the zoning, because they don’t want to be accused of gentrifying those neighborhoods.
So there is more than going on just, here is a tax break, it’s going to make everyone wealth in these neighborhoods and will now change everything. In theory that’d be great if that’s what happens. But there’s going to be a little more friction both on the development front but also on the capital raising side. There are some issues here I’ve been sitting here mulling through over the last couple days. the final legislation will be out I think this spring, and that will really tell us what is going to happen. At this point we’re just getting the interest out there and once the legislation is out there, it’s going to be a frenzy just investing in these deals.
For more from Pestronk, check out an earlier CapRE Insider Report: Up-Close with Matthew Pestronk, Post Brothers at NJ Apartment Summit