B6| Wednesday, October 23, 2019 THE WALL STREET JOURNAL.
Marriott recently paid $206 million for this hotel in Manhattan’s Union Square, in part to avoid having a competitor move in.KEVIN HAGEN FOR THE WALL STREET JOURNAL
can happen over that period of
time the money is invested,”
said Chris Loeffler, chief exec-
utive of Caliber Cos., which
has raised about $50 million
of its $500 million target.
Uncertainty about the pro-
gram’s fine points has ham-
pered fundraising, industry
participants say. The Treasury
issued its first guidance in Oc-
tober 2018 and a second set of
guidelines this spring.
“The first six months was
very slow. There were a lot of
questions,” said Ben Miller,
chief executive of Fundrise
LLC, which has raised $50 mil-
lion of its $500 million target.
The Treasury “has worked
diligently to issue comprehen-
sive guidance,” a spokesman
said. “As investors continue to
learn more about this policy,
the amount of capital flowing
to new and expanding busi-
nesses in those communities
will only increase.”
Some funds have reached
their goals. SoLa Impact, which
invests in distressed neighbor-
hoods in South Central Los An-
geles, closed in August a $100
million fund. Managing Partner
Martin Muoto said for the past
10 years, the firm has “been in-
vesting in areas that most peo-
ple overlook.”
Return expectations could be
a hurdle for some after a first
wave of projects already in the
works soaked up early money.
Investors also worry about
whether they are benefiting res-
idents as the program intended.lion of the roughly $22.7 billion
they seek. Novogradac said it is
aware of 285 of these types of
funds, though not all have
shared fundraising details.
“Every manager I talk to is
saying gaining traction is
slower than expected,” said
John Lettieri, chief executive
of the Economic Innovation
Group, a nonpartisan think
tank that helped develop the
opportunity-zone program.
Mr. Lettieri said it isn’t sur-
prising that the program is tak-
ing time to pick up steam, espe-
cially given that regulationsaren’t yet final and these are
new markets for many inves-
tors. But the slow start is rais-
ing fresh questions about inves-
tor appetite for the program,
and what impact it will have on
distressed communities.
Opportunity-zone invest-
ments must be held for 10
years to capture maximum
benefits. The value of defer-
ring capital-gains taxes could
fall if tax rates rise.
“The No. 1 concern [inves-
tors] have is the length of
time they are investing for
and the uncertainty of whatInvestors have been slow to
embrace a new tax break
meant to spur economic
growth in distressed commu-
nities, leaving the amount of
money raised for these pro-
grams well short of fund man-
agers’ lofty expectations.
The program, part of the
2017 federal tax overhaul, al-
lows investors to defer and re-
duce taxes if they reinvest
capital gains in nearly 9,000
low-income communities des-
ignated by the government as
opportunity zones. Funds
qualify for the preferred tax
treatment by making equity
investments in companies or
projects in these communities.
Some real-estate executives
have said the program could be
the biggest thing for the indus-
try in decades. Treasury Secre-
tary Steven Mnuchin predicted
last fall that opportunity zones
would attract more than $100
billion in private capital.
But opportunity-zone funds
have so far, on average, raised
less than 15% of their goals,
according to a new analysis by
Novogradac & Co., a San Fran-
cisco accounting firm that ad-
vises fund managers and in-
vestors on tax incentives.
The Novogradac data in-
cludes 103 funds set up to in-
vest in opportunity zones.
These funds, which include
many of the industry’s largest,
have raised a combined $3 bil-BYRUTHSIMON
ANDPETERGRANTOpportunity-Zone Tax Break
Off to Slow Start With Investors
Funds have raised,
on average, less than
15% of their goals,
an analysis found.A Los Angeles project by Fundrise LLC. The company has raised $50 million of its $500 million target.FUNDRISE OPPORTUNITY FUND AND NICOLAS ZUNIGAbrand in 2016 when it ac-
quired Starwood.
Marriott had another reason
to buy the hotel. The hotel’s
owner, New York-based real-
estate investor Westbrook
Partners, was in advanced talks
over the summer with Rose-
wood Hotels & Resorts about
ditching Marriott’s W brand in
favor of reflagging the hotel
with a competing Rosewood
brand, according to people fa-
miliar with the matter.
“If we hadn’t made the ac-
quisition, we may or may not
have kept the flag,” said Leeny
Oberg, Marriott’s chief finan-
cial officer. But, she added, the
main reason was that “we re-
ally felt it was a unique oppor-
tunity to showcase the new W
brand going forward.”
Westbrook’s chief executive
and chairman, Paul Kazilionis,
said: “Our long-term relation-
ship with Marriott and ourconfidence in its ability to com-
plete the purchase as agreed
confirmed our decision.”
Marriott, like many other
big lodging companies, used to
own most of its own hotels.
But it decided in the early
1990s to focus on hotel man-
agement and on franchising its
brands without having to take
on the risks or debt involved
with owning property.
Marriott spun off its real es-
tate into the company now
known as Host Hotels & Re-
sorts. Other big hotel operators
like Hilton Worldwide Holdings
Inc. pursued a similar model.
The lodging company still
uses its balance sheet oppor-
tunistically to buy real estate.
Marriott spent about $800
million to acquire properties
in Miami Beach, Fla., Manhat-
tan and London to convert
them into Edition hotels, a
brand the company createdwith hotel impresario Ian
Schrager. In 2014 and 2015 it
sold all three hotels to the Abu
Dhabi Investment Authority.
More recently, Marriott
bought the 1,000-room Shera-
ton Grand Phoenix in 2018 for
$255 million and the Charlotte
Marriott City Center in Char-
lotte, N.C. in 2013, for $170
million. Both were for the pur-
pose of upgrading the hotels
to serve as examples of new
visions for the brands.
Now, Marriott is in the
early stages of updating most
of the 26 W Hotels across the
U.S. to make them more up-
scale and change the focus
from nightlife to a wider vari-
ety of activities.
Marriott wants each prop-
erty to be a little different,
said Anthony Ingham, Mar-
riott’s global brand leader for
W Hotels. “It won’t all be cock-
tails and restaurants,” he said.Marriott International Inc.
mostly got out of the real-es-
tate business many years ago,
but the big hotel operator still
buys properties when it sees an
opportunity or senses a threat.
In the most recent example,
Marriott last week acquired
the W Hotel in Manhattan’s
Union Square for $206 million.
The company says it bought
the hotel to use it as a show-
piece as Marriott remakes the
W brand, which was originally
launched by Starwood Hotels
& Resorts Worldwide Inc. in- The Bethesda, Md.-based
hotel operator took over the
BYCRAIGKARMINW Hotels to Get a Revamp
Marriott buys New
York property to make
into showpiece for a
more upscale brandtion is mostly occupied and
generates stable profits. In its
recent public filing with the
SEC, We said it had signed
leases for 258,000 worksta-
tions where construction work
had yet to start as of June 1.
The company estimated
that it spent an average of
$3,661 building out a new
workstation in the first half of
the year. If the average cost
stays roughly the same, the
company could be on the hook
for close to $1 billion in capital
expenditures on newly signed
leases over the coming years,
not counting marketing and
other pre-opening expenses.
WeWork has doubled its
footprint in each of the past
two years, growing from
154,000 workstations in June
2017 to 301,000 desks a year
later and 604,000 in June- The company plans to
open more than 80,000 desks
a month on average this No-
vember and December, accord-
ing to people familiar with the
projections. That reflects
leases signed before the
botched IPO and is up from a
monthly average of 23,000 in
the first half of the year.
Lease costs are set to in-
crease as more locations open,
free-rent periods end and
scheduled rent increases kick
in. WeWork said its annual
lease obligations are set to in-
crease from $873.1 million in
the second half of 2019, or
around $1.75 billion annual-
ized, to $2.43 billion in 2023.
WeWork also faces cash
costs for thousands of layoffs
that are expected as part of its
efforts to control costs. Its
bonds have plumbed new lows,
as investors grow nervous it
won’t be able to repay them.
—Eliot Brown contributed
to this article.
THE PROPERTY REPORT
WeWork, which has gone
from hot startup to bailout
candidate in a month, will face
a tidal wave of rising real-es-
tate costs that could top $10
billion in the next four years, a
result of its growth-at-any-
cost strategy.
In its rush toward an initial
public offering and its goal to
dominate the shared-office-
space market, WeWork parent
We Co. signed leases that
would nearly double the com-
pany’s size. Those leases and
the costs of building out new
offices are forcing WeWork to
raise cash and cut costs after
its IPO failed.
On Tuesday, SoftBank
Group Corp. won approval
from WeWork’s board to take
control of the troubled co-
working startup in a deal that
would hand co-founder Adam
Neumann nearly $1.7 billion
and sever most of his ties with
the company.
WeWork has committed to
lease payments of $10.2 billion
between mid-2019 and the end
of 2023, according to filings
with the Securities and Ex-
change Commission, and it
may have to spend up to $1
billion building out newly
leased offices.
In a bid to stem losses, We
has slowed down new leasing.
But that doesn’t remove the
potential burden of leases it
has already signed.
The company’s financial sit-
uation is more precarious than
it appears because of build-out
costs for new locations and
because We has benefited
from periods of free rent,
which will require bigger out-
lays of cash when they end.
We says it generally takes
24 months until a new loca-BYKONRADPUTZIERWeWork Faces
Soaring Lease Costs
From Growth Binge
!" #
$
%
&
'
(
& ) & &
* $
+ +
#
+
,-% %
) ./..*
,
$
0
$
!"#
"$ %&$
!"
# $
%
&'()(&()* *+
%)