apartment building under construction

© Imagenet - AdobeStock

How Strict Zoning Creates Commercial Challenges

One solution for building more affordable housing lies in “mini opportunity zones.”

August 19, 2020

Key takeaways:

  • Restrictions on small developers create a barrier to the construction of affordable housing.

  • Many communities reflect one type of use, whether residential or commercial, when neighborhoods need a range of options.

  • “Mini opportunity zones” give neighbors a chance to invest in community development together.

Local zoning laws can have an enormous impact on a neighborhood and its ability to offer economic inclusion, and in many areas, those restrictions may be forcing out smaller, local developers and contributing to the challenges to create more affordable housing.

That was the message of commercial developer James Huang, president of Sperry Commercial Global Affiliates in Irvine, Calif. “Where there is too much regulation, small companies can’t afford to compete. There is too much red tape, and they just don’t have the money,“ he said. “Only big players can play in California and some other states.”

Huang and Bo Menkiti, CEO of The Menkiti Group and Keller Williams Capital Properties in Washington, D.C., spoke Tuesday during the panel discussion “Commercial Redevelopment: Building a Bridge to Fair Housing and Thriving Communities” at the National Association of REALTORS®‘ 2020 Leadership Summit.

Menkiti added that strict zoning laws are often intended to protect the character of a neighborhood but can have unintended effects. “People think in terms of specific sectors: office, industrial, residential. Communities get overloaded with one type,“ he said. What we really need in a neighborhood is a range of residential options, including affordable housing, along with a main street that includes small businesses and other commercial spaces.”

While the industrial sector continues to boom, the pandemic has created challenges for the office space and retail sectors of commercial real estate. Redevelopment could soon be an issue for many communities, and revitalizing an area without pushing out current residents can often be a difficult prospect.

One potential solution for bringing together residents, small businesses, and community leaders are what the speakers called “mini opportunity zones“ that would reinvigorate the economy, support fair housing, and bring opportunity for all. These would differ from more conventional qualified opportunity zones in one critical area: they’d include a consortium of smaller investors rather than one large investor. “Opportunity zones are currently cost-prohibitive. You need mini opportunity zones so the community can invest together,” Huang said.

With mini opportunity zones, members of a community can invest together—residents, real estate developers, small businesses, and municipalities can all work together to redevelop a struggling neighborhood. “Mini opportunity zones can create access for smaller investors, and they are a way to keep capital gains in the community,” Menkiti said.

The collaboration among businesses, residents, and government can provide other opportunities: members can work to streamline zoning issues, reap the benefits of tax incentives, and, Menkiti noted, such a group can provide peace of mind to lenders who can be risk averse.

Because lenders are often quicker to invest in national companies rather than local ones,  a collection of investors is in a position to participate in capital stacking and have more to offer a backer, Menkiti said.

An additional benefit is afforded by the opportunity zone itself: time. “With a typical development project you’re looking at a three-to-five-year time frame,” Menkiti said. “But with an opportunity zone redevelopment project, you’re looking at a ten-year valuation. When that happens, investors have to start thinking of the community and keeping it healthy. Capital gets aligned with community interests.”