Federal Opportunity Zones are prime targets for multifamily lending by Freddie Mac, a new study by the government-sponsored enterprise has found.
Freddie Mac drew on its vast trove of unit-level data to analyze the multifamily markets in the more than 8,700 economically distressed areas designated as Opportunity Zones as part of the 2017 tax overhaul.
The analysis suggests that Freddie Mac’s financing efforts have targeted areas now classified as Opportunity Zones years before those particular census tracts were chosen to benefit from the federal tax incentive program. The agency found that its financing activity within the communities now labeled as Opportunity Zones grew more than 75 percent faster than its business in other areas, as measured by total unpaid principal balance, from 2010 to 2018.
Part of this was driven by the acceleration of Freddie Mac’s Small Balance Lending (SBL) program after 2015. Growth in this type of financing activity within Opportunity Zones outstripped that of other areas by a factor of 1.8 from 2014 to 2018.
Communities within Opportunity Zones are also a major source of business for Freddie Mac’s Affordable Housing (TAH) program, which finances multifamily properties that have rent restrictions on at least a portion of the units. Nearly 22 percent of the program’s business came from Opportunity Zones since 2013.
A hunger for affordability
Given that the zones have lower median incomes and higher poverty rates than other areas, it’s unsurprising that Freddie Mac-financed affordable rental housing for very low-income households has historically been more than twice as common in Opportunity Zones. Since 2010, 24.5 percent of the units funded in the zones have been affordable to households making no more than 50 percent of the area median income, compared to 11.2 percent of units elsewhere.
For perspective, about 11.3 percent of the conventional multifamily units that Freddie Mac financed in 2018 fell inside Opportunity Zones. This amounts to slightly more than 71,000 out of the total of 630,000 conventional multifamily units (which captures most, but not all, of the units financed by Freddie Mac).
While Opportunity Zones may spur capital infusion into communities that need it the most, the capital gains deferral benefits offered by the program can also allow shrewd investors to enhance returns on great real estate projects.