The opportunity zone program is currently experiencing a surge in investments, following a lull due to the pandemic, as more investors learn about investment options and tax benefits within the opportunity zone program.
Tracking of Qualified Opportunity Fund equity raises showed that the first quarter of 2022 saw an increase of $3.97 billion in equity reported over the first three months of the year, according to Novogradac. As of March 31, the 1,418 QOFs tracked reported $28.37 billion in equity raised.
“I believe that Opportunity Zones is the right initiative at the right time,” says Reid Thomas, Chief Revenue Officer and Managing Director, JTC Americas. “As time continues since the introduction of the initiative back in 2018, investors are able to see the positive effects that OZ investments are having on disadvantaged communities. In addition to the social impact benefits, the tax benefits to investors continue to be significant.”
Even with the Dec. 31, 2021 expiration of the funding deadline to take advantage of the 10% basis step-up provision, OZ investors continue to have the ability to defer tax on 2021 capital gains for up to five years into the future.
“To date we have assisted in the formation of over 175 QOFs and QOZBs. And the calendar 2022 pace is still very steady,” says Blake Christian, CPA/ MBT, HCVT. “I attribute the strong interest in OZ investing to a number of factors including taxpayers taking stock market, real estate and other profits after significant valuation increases over the past several years.”
Advantages of Opportunity Zone investments
Christian says the aim of the OZ program is to provide taxpayers the potential to monetize tax gains, but defer the tax payment “is certainly the primary attraction to taxpayers - and even those who initially are not enamored with investing into OZ census tracts quickly wise up to both the economic and social aspects of the OZ program.”
Christian added he is seeing promising real estate and operating business formation and expansion nationwide.
“Approximately 25% of our clients are investing in OZ operating businesses and these may very well have investment returns that eclipse OZ real estate investors,” says Christian.
Thomas says the typical OZ investor is not necessarily what has been painted by the media.
“Based on our own client experiences and our external research 62% of investments were for $500,000 or less, which goes against the media narrative that OZ is only for the extremely wealthy,” says Thomas.
In reality, he says OZ investors are a diverse group, and invest for a range of reasons beyond tax incentives, which include the ROI of OZ investments and their ability to impact disadvantaged communities.
Investor expectations in Opportunity Zones
There are 8,700 census tracts designated for OZ investment nationwide, many in economically disadvantaged areas.
“I am also predicting that we will see an evolution of a very robust secondary market for OZ investors to invest into mature OZ projects - either at the QOF or QOZB level through September 2027 - or later if legislation extends the investment deadlines,” says Christian. “This will be good for early investors as well as the OZ program and the OZ communities.”
Both houses of Congress introduced the Opportunity Zones Transparency, Extension and Improvement Act on April 7, that contains provisions that would extend the incentive through 2028, including putting in place again the basis step-up provision. The bipartisan, bicameral bill would extend opportunity zone tax benefits, include more reporting requirements, and disqualify some Opportunity Zone tracts that are not impoverished, among other changes.
Thomas says the surge has been good news for investors going forward.
“At the end of the day, the OZ initiative will be judged on whether it did the good it was intended to do. The fact that investments continue to grow is helpful as Congress reviews how to evolve the OZ initiative,” says Thomas.
He says they continue to see the results of early OZ investments and investors and fund managers will have a better understanding of what has worked best. He says those success stories will spur more offerings, providing investors with a greater choice.
“There are also efforts to add impact reporting and transparency requirements to OZ, which will likely make these investments even more enticing for impact-focused investors,” says Thomas.