Developer Lance Gilman helped change the economic fortunes of the Truckee Meadows in the 21st century with the Tahoe-Reno Industrial Complex (TRI) in Storey County, just east of Reno-Sparks.

Technology titans such as Blockchains, Google and Switch — plus large manufacturers such as Tesla — have located there, bringing jobs, population growth and new money to Northern Nevada.

Yet with little vacancy remaining at TRI, Gilman and partner Roger Norman Sr. are developing another mega-industrial park just east of TRI in Fernley.

Gilman predicted on Nevada Newsmakers that it will make Fernley — about 34 miles east of Reno — the “epicenter” of the regional economy.

“Fernley is just ripe for development,” Gilman told host Sam Shad. “It is in the epicenter of what is going to happen over the next 10 or 15 years in Northern Nevada. Fernley is the epicenter.”

Work has begun on the first speculative industrial warehouse at Victory Logistics District in Fernley, and the 815,000-square-foot building could represent the beginning of transformative change for Lyon County’s largest town.

Mark IV Capital purchased the land for Victory Logistics District in 2019 for $45 million and quickly began plans to transform the 4,300-acre site into a regional intermodal distribution and storage hub featuring a dual-service rail spur off the main Union Pacific line.

Mark IV broke ground April 21 for the massive speculative building located on Duffy Road next to Interstate 80. Based on initial interest, developers are expecting to have the facility fully leased before it’s completed in February 2022.

Altson Construction is erecting the building using standard tilt-up construction methods. Sierra Nevada Construction, meanwhile, is currently mass grading for two additional spec buildings of 170,000 or 220,000 square feet. A fourth spec building of about 600,000 square feet will follow the first three.

Mark IV plans to develop as much as 10 million square feet of new Class A industrial buildings during the first phase of Victory Logistics District. Half of that is expected to bring 10,000 new jobs to Fernley, said Ross Pfautz, Mark IV Capital’s senior vice president of Northern Nevada.

Pfautz envisions a time soon where residents of Fernley and surrounding communities can find a plethora of job opportunities without the need to commute west on I-80 to Tahoe Reno Industrial Center or even farther into Reno-Sparks.

“We are talking to some relatively new manufacturing techniques and disruptive technology tenants that will employ a lot more automated manufacturing or automated warehousing techniques, as well as some data center tenants,” Pfautz told the NNBW. “We will have a much broader mix of tenants in the job base than has existed in this rural area.

“That’s the part that’s really going to be transformative. We are bringing a diversity of jobs and economic expansion that will last for a couple decades.”

Construction crews work on the 815,000-square-foot building on June 16, 2021. Courtesy: Mark IV Capital

PLENTY OF BIG COMPANY INTEREST

The sheer scope of Victory Logistics District is drawing interest from large national tenants that likely would create a “critical mass” once they begin planting their flags in Northern Nevada.

It’s a scenario reminiscent of when Amazon constructed its Reno distribution center in 2013, kicking off a new wave of industrial building following the Great Recession, or when Tesla announced its Gigafactory in 2014, which jump-started Northern Nevada’s flourishing tech industry.

Mark IV’s phase 2 master plan, meanwhile, is also in development. That part of the project includes an additional 1,400 acres of developable land that could draw large tenants who wish to purchase their own land to construct new western region manufacturing or distribution facilities.

Evan Slavik, Mark IV Capital’s president of real estate, says the company is fielding a lot of interest from big companies looking to do major manufacturing facilities at the site. The addition of rail infrastructure served by both BNSF and Union Pacific is another big selling point.

“(Tenants) will have the ability to use both companies for competitive pricing,” Slavik said. “It’s a really unusual situation — a lot of other rail-served industrial is served by only one of those major clients.

“When we decided to put in rail infrastructure off the dual-service mainline, that makes a difference nationally to site selectors who are looking for rail service,” Slavik added. “Site selectors, even if they don’t need rail today, know that there will be other buildings they can move into if they need to upsize, add a building, or even downsize. It makes it easier for big corporate tenants to make a commitment because no matter what happens over the next 10-20 years, they will have choices.”

Both executives told the NNBW advancing the project through the pandemic brought about some unique challenges, particularly with project financing. Mark IV Capital partnered with Comerica Bank for its construction lending.

“They are a great partner,” Slavik said. “They are committed to doing future projects with us — they are very bullish on industrial, especially in this area.

Pfautz said that since the new industrial building started coming out of the ground, Mark IV Capital has seen accelerated interest from site selectors, as well as additional support from the City of Fernley.

The 815,000-square-foot building is ideally suited for e-commerce operations, he noted, but it could also accommodate manufacturing. While the building is divisible to accommodate up to four tenants, Mark IV said it would prefer to lease the facility to a single user.

Daphne Hooper

A WEALTH OF BENEFITS

Mark IV Capital’s bullish investment in the Victory Logistics District is expected to provide a wealth of benefits for many years for residents of Lyon County.

Daphne Hooper, Fernley City Manager, says the project puts Fernley in an incredible position for economic development and growth.

“Northern Nevada is a key hub for manufacturing, distribution and logistics planning, and Fernley’s strategic location is garnering national recognition,” Hooper said. “The entire Victory site sits within a federally designated Opportunity Zone, which is intended to spur economic development and job creation in eligible communities. In addition to the positive economic impact, our residents have the opportunity to work in the same community where they reside.”

Considering more than 60% of Fernley residents commute outside the area daily, Hooper said that negatively impacts quality of life, not to mention significant traffic and economic issues.

“Local job creation has numerous positive impacts for residents, business owners and the city, and proximity to the workplace can significantly improve quality of life by allowing for more free time, less wear and tear on vehicles, and less money spent on gas,” Hooper added. “Local job creation can positively impact the Fernley economy as well, allowing residents to spend their dollars on local retailers, restaurants and services during their workday.”

Slavik says the company is playing the long game with its real estate holdings in Fernley.

“We are long-term real estate holders across our portfolio, and we will be involved in Fernley for many decades,” he said. “We are looking forward to growing the industrial base and really helping the economy as a partner with the city.”

CEO of Driftwood Capital, focuses on the investment, development and syndication of institutional-quality hotel assets.

The opportunity clock is ticking. As a critical deadline in the qualified opportunity zone program approaches on December 31, 2021, investors are finding the potential tax benefits of the program increasingly attractive — in no small part because capital gains tax rates are almost certain to go up in the weeks ahead.

Just to recap, the opportunity zone program was created as part of the Tax Cuts and Jobs Act of 2017 to incentivize private capital investments in low-income communities. Initially, investors shied away from allocating dollars to qualified opportunity funds (QOFs) due to their complexity. Over time and with additional guidance and clarification from the IRS, the program has gained momentum — and by the end of 2020, investors had poured over $15 billion in equity into QOFs, according to Novogradac.

Now, with Congress contemplating raising capital gains taxes from 20% to 39.6%, investors are even more eager to allocate realized capital gains into tax-free vehicles. Thus, opportunity zone funds have become an attractive option for gain harvesting. While deferred capital gains ultimately pay taxes at the applicable rate at the time of realization (i.e., they will likely be greater in the future than today), the ability to pay no taxes on the “new” capital gains generated by opportunity zones investments is extremely attractive, especially given the potential future rate of 39.6%.

By investing capital gains into a QOF, investors can defer capital gains tax liability until December 31, 2026, reduce tax liability on the original gain by 10% and eliminate tax on any capital gains realized from an opportunity zone investment after a 10-year holding period.

When the basis of the investment from an investor’s original, rolled-over gain is taxed in 2026, that gain will decrease by 10% if they’ve been in the QOF for five years, making the end of this year — December 31, 2021 — the final deadline to be eligible for the 10% reduction.

For investors interested in this program, here are four general pieces of advice about investing in real estate through a QOF.

The potential tax benefits of investing in a QOF are alluring, but the fundamental commercial real estate principles still apply. The project should stand on its own. It should make financial sense with or without the capital gains tax benefits. In other words, think of the QOF as the cherry on top — not the deal driver itself.

Similarly, work with a sponsor that is already far along in the process. For example, they’ve already secured financing and received all necessary approvals (or are close to it). If it’s a retail project, there should be an anchor tenant; if it’s a hotel asset, a flag should be signed on.

Another reason this is important in today’s inflationary climate is the seesawing cost of construction materials and labor. For new development projects, make sure the GC contract has been inked, as that could have a material impact on costs.

2. Consider single-asset funds over multi-asset funds.

Traditionally, real estate funds often hold multiple assets in order to maintain a diversified portfolio and reduce risk. But when it comes to QOFs, investing in single-asset funds could be the safer bet.

There was originally a great deal of uncertainty surrounding the tax benefits of multi-asset QOFs, though later guidance from the IRS did clear up some of the concerns. Still, single-asset funds offer investors a greater understanding of the specific opportunity zone they are investing in and the true potential for ROI when considering the associated tax breaks.

3. Choose a sophisticated, seasoned sponsor.

The QOF program is not for the amateur sponsor/developer. There are complicated and ever-evolving IRS regulations and rules that must be followed to remain in compliance and ensure the maximum tax benefits are achieved.

It’s extremely important to invest alongside a sophisticated, experienced sponsor that has both real estate and fund administration expertise. Go with a group that is receiving sophisticated legal and tax counsel and is very engaged and communicative regarding the underlying project as well as the fund’s administrative side.

4. Consider the asset class carefully.

Given that there is a 10-year holding period to qualify for the tax elimination granted to QOFs, investors should carefully consider the type of property they are putting their money into before diving in.

No one can predict the future, but there are clear trajectories for certain asset classes that are undeniable. Retail, for example, has been on the decline for many years and suffered massive losses during widespread shutdowns due to Covid-19. In contrast, multifamily properties, especially in the suburbs, are in great demand given the current residential market. And while hospitality has gone through the gauntlet over the past year and a half, there are now tremendous opportunities in that space.

While it’s nearly impossible to pick specific winners 10 years from now, it’s still important to go into it with the assumption that you’re in it for the long haul — and can’t reposition your capital during that 10-year hold period.

In summary, it’s all but certain that capital gains rate hikes are just around the corner. With three months left until the critical December 31, 2021, QOF deadline, investors have an unprecedented opportunity to stash their stock market or property markets gains of the last year and put them to work elsewhere to continue earning returns that will ultimately be tax-free beginning in 2031.