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Tracey Nichols
Construction: How to Move Projects Forward in Today’s Economy
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Economic Factors & Real Estate Projects
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Materials Prices
Trade Wars: Impact on Construction Materials?
Critical Workforce Shortage for Construction
Interest Rates
General Pushback on Incentives Nationally
Tax Bill & Opportunity Zones
DESPITE these factors, construction is strong in 2019
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July 1, 2019
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Will mark longest expansion in history (ongoing since 2009)
Recovery & Growth Uneven Half of GDP growth went to top 1% of households
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Construction Materials Prices
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2018 saw materials prices increase 10%, increasing fear of inflation and recession Crude petroleum up 49%
Iron & Steel up 14%
Softwood Lumber 23%
2019 saw materials prices level off, with cost reductions in the areas above
A lot of uncertainty about the future
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Construction Materials Prices 2019
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Trade Wars
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Canada Mexico agreement is a positive, but not much impact on the economy
China has the top 10 largest steel mills; trade wars caused steel prices to increase…What’s next?
Uncertainty causes 2nd thoughts about large projects Inflation Fears
Rising Interest Rates
Less Discretionary Spending
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Demand for Construction Workers Outpaces Supply
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2018-2019 Demand grew in 250 of 358 Metros; unchanged in 55
Demand could have been higher if some areas found skilled workers
Largest Increase: Phoenix, Dallas, LA, Atlanta, Vegas
Potential Solutions:
Immigration: Allow skilled workers to come to US
Additional schools for construction trades
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Interest Rates: 10-Year Treasuries
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Source: www.macrotrends.net
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Amazon HQ2 brought attention to an issue that was brewing across the nation Large Incentives to “a company owned by the richest man in
the world”
Lack of transparency
Largely due to uneven recovery
More push for a “Living Wage”
Local governments following national trends
Incentives: Pushback hurts weaker markets
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Non-Residential Construction Growth
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Opportunity Zones
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Response to uneven recovery Long term unemployment Lack of investment Low levels of business starts Geographic and economic disparity
Distressed Communities: declining private activity and falling tax base leading to a drop in public investment and infrastructure, which in turn makes it difficult to attract private capital
Estimated that investors had unrealized capital gains of $2.25 trillion at the end of 2014 (1031 Exchanges)
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Cuyahoga County QOZs
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Northeast Ohio QOZs
Source: Economic Future
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Opportunity Zones: How do you receive a tax benefit?
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Capital Gains realized, 180 days to invest in fund Temporary Deferral
Time Value of Money - you don’t pay Capital Gains Tax for 5-7 years
Reduction in Capital Gains Tax that is Due After 5 years, reduction of 10% After 7 years, reduction of an additional 5% (15% total)
Permanent Exclusion of Appreciation (Gain) on QOZ Investment Sale or Exchange of an investment in an Opportunity Fund Must hold for 10 years; only gain accrued after investment in
QOZ Can hold until 12/31/2047 and still get exclusion
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QOZ Basic Mechanics
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Sell an investment that results in a Capital Gain
Invest the Gain in a Fund
The Fund invests in a qualified “QOZ Business”
Business can be a Real Estate Investment or an Operating Business
Regulations released in October 2018 and April 2019
12/31/2019: Last day to get 15% reduction in gain (7-year hold must be completed by 12/31/2026)
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QOZ for Real Estate
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Qualified Opportunity Zone (QOZ) Business Property: Property in a QOZ acquired after December 31, 2017 Acquired from an unrelated party- defined as 20% or less
common ownership Original use in the QOZ commenced with the QOZ Fund, or
the QOZ Fund “substantially improves” the property “Substantially improves” means that the investment over a
30-month period must at least equal the basis in the acquired property (not including basis in land)
If QOZ Fund invests in a QOZ Business whose purpose is to acquire, rehab, or construct real estate, there is a 31-month safe harbor period to complete a project - as long as there is a plan that is followed
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What are QOZ investors looking for?
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Seeking projects in areas where appreciation is expected to be highest
Some developers will invest locally being civic minded and to shore up other previous investments
Some Social Impact Funds are being established to insure benefit to low income residents
Investment locations have been unevenly distributed
The Coasts, Texas, Southwest and Vegas lead the investment areas
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State of Ohio QOZ Support
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SB 8 Passed the Senate and is now in the House
2nd Hearing May 8th - Lots of positive testimony
3rd hearing held in June
DeWine placed the 10% Non-Refundable Credit in the Budget
Budget must be passed by June 30th
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Multi-Family Stats in QOZ for Cleveland
Brooklyn, NY (32%), Portland, OR (23%) and Cleveland (22%) have the highest proportion of in-place units in opportunity zones.
Metros with the highest percentage of units in the pipeline in opportunity zones are Cleveland (70%), Detroit (57%), Brooklyn (41%) and East Los Angeles (40%).
Market Units % of Market Total
Miami 27,341 29.8% Metro Los Angeles 25,426 35.4% Washington DC 24,492 24.8% Northern New Jersey 20,520 26.1% Bay Area–East Bay 14,256 33.3% Phoenix 12,023 30.2% Brooklyn 11,925 40.7% Boston 10,586 20.6% Seattle 9,339 14.7% Eastern Los Angeles 9,195 40.3% Bridgeport–New Haven 8,553 32.6% Tampa–St Pete 8,356 24.0% Detroit 7,898 56.9% Baltimore 7,835 26.7% Cleveland–Akron 7,265 69.9% Urban Atlanta 7,212 21.1%
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Source: Yardi Matrix (as of March 2019)
Most Planned/Prospective MF Units in OZs
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For Up-to-Date Information: The Thompson Hine QOZ Website provides a great deal of resources: ThompsonHine.com
Services
Qualified Opportunity Zones
(Or: https://www.thompsonhine. com/services/qualified-opportunity-zones)
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Getting Projects Done in Legacy Cities
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Includes Cleveland, Pittsburgh, Detroit, Cincinnati, Gary, Buffalo and other manufacturing hubs that have lost manufacturing jobs and population
Communities that have invested through the last recession are generally doing better; especially if they have diversified their economies
While these communities have lower costs (rents and building purchase prices are lower), the costs to build new or renovate are the same or more than other cities
This creates a financing gap for projects
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Financing Tools to Fill Gaps
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Tax Abatement vs. TIF Tax Abatement lowers costs going forward but will not really
fill a financing gap
TIF can be monetized to fill a financing gap
Local Grants Most of these communities have some local funds to push a
project forward
Federal Funds: HUD, EDA, EPA can help (but have restrictions)
Off Balance Sheet Financing: Port Authorities can own the building, eliminating sales tax on materials
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Financing Tools to Fill Gaps
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State Financing/Grants
Obscure Grants and Loans
Examples
Ohio Water Development Authority
Department of Agriculture
Northeast Ohio Regional Sewer District
Tennessee Valley Authority
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Helping Clients Fill the Gap
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Almost every funding source is tied to NEW jobs and payroll; companies should have at least 3 years of revenues (start-ups are not easy to fund)
Must be a for-profit company (for non-profits and institutions there is not much help)
Generally no help for retail or housing-only projects
Before offering to help, find out if your for-profit client will create jobs
Most states and cities have websites for economic development that detail programs
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Financial Assistance Process
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Most companies contemplate a big construction project every 20 years or so; negotiating financing is not their main business
Consultants often provide a service that results in higher deliverables
The process generally takes 2-3 months and the company cannot commit to a lease or a site until initial approval is made
The process includes applications, meetings and sometimes appearances in front of legislative bodies
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CONTACT INFORMATION Tracey A. Nichols Director of Financial Services Project Management Consultants LLC 216.566.5825 [email protected]
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