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OZ Investments Surge As The Program Attempts To Emerge From The Uncertainty Of Its Early Years

A year-end deadline for tax benefits and more clarity made 2021 a banner year for the opportunity zones program, with $6.9B invested in qualified opportunity funds in the latter half of the year, up 39% from the first half of the year, new data shows. 

California is top of mind for OZ investors, as are residential projects, according to a report from accounting and consulting firm Novogradac. 

Novogradac is one of the few firms that provides insight into the OZ program, which has faced criticism over the years regarding a lack of transparency, and whether investments are being directed toward distressed communities, as was originally intended. 


"There's much more clarity now around OZs," PTM Partners CEO Michael Tillman said. "We all remember the lack of clarity at the beginning, but that's mostly been worked through, and investors are more comfortable and even more enthusiastic."

Clarity wasn't the order of the day in the first few years of the program, which was created by language in the Tax Cuts and Jobs Act of 2017 with the goal of encouraging investment in low-income census tracks. 

It wasn't until roughly two years after the program became law, for instance, that the final round of regulations about the program were released to the public, in the form of a 544-page IRS document with a number of major changes from previous iterations of guidance.

Even with more regulatory clarity, academic research suggests the program has yet to meaningfully impact distressed communities. Transparency is another longstanding problem; gathering or providing data was not required as part of the program.

A 2020 Urban Institute report sought to collect data about the impact of the program from 70 participants. Its findings didn't reflect well on OZs.

"Although there are compelling examples of community benefit, the incentive as a whole is not living up to its economic and community development goals," the institute said. 

Even the government itself, in the form of a General Accounting Office report in late 2020, said the program isn't monitored closely enough to judge its impact. 

"There's still a need for more kind of transparency and reporting requirements," Revitate Partner and Chief Operating Officer Kunal Merchant told Bisnow. "That would help investors further understand the program, and it would further build trust, which is still important for the future of the program."

Thus, the Novogradac report is a rare one. 

Despite the programs challenges, more investors appear to be getting in on the action, with qualified opportunity funds seeing a "dramatic increase" in the latter half of 2021, according to Novogradac. 

The year-end spike in investment was in part due to a tax incentive deadline on the last day of 2021, Libin Zhang, a tax partner resident in law firm Fried Frank's New York office, wrote in a Bloomberg Tax report

Those who invested in a QOF before that deadline were able to avoid paying 10% of the ultimate gain after the program's expiration in 2026. Investors who placed a $1M capital gain can only be taxed on $900K when the deferment period ends, for example. 

"December 2021 is a busy time for some taxpayers who hope to invest by year-end to improve their economic returns over five years by as much as around two percentage points," Zhang wrote. 

The U.S. Capitol

Not unlike the broader CRE industry, OZ investors appear to be bullish on housing. 

More than half of QOFs tracked by Novogradac reported having at least some focus on residential development in the latter half of 2021. Those funds represent 78% of the total equity raised by QOFs. 

Among the QOFs that focus on non-residential development, office and retail are the most common targets. 

In the second half of 2021, California remained first on the list of states targeted for OZ investment, while Arizona climbed to the second spot from No. 4 during the first half of the year. 

While there aren't any figures available regarding the total amount deployed in OZs last year, Novogradac noted 20 U.S. cities have at least $200M in planned OZ investment, with Washington, D.C. in the top slot. 

Other cities seeing a big jump in investment during the second half of 2021 were Nashville, Austin and Phoenix. 

Reports of OZs being used in wealthy areas that don't need economic development still dog the program. In January, Sen. Ron Wyden of Oregon sent letters to Related Group, Kushner Companies and other developers, questioning how they are taking advantage of the opportunity zone program.

"I have long been concerned that the Opportunity Zone program may permit wealthy investors another opportunity to avoid billions of dollars in taxes without meaningfully benefitting the distressed communities the program was intended to help," the letter said.

In addition to critics, an industry of advocates now exists for the OZ program. 

"Project proponents are getting smarter and so are communities that would benefit from the program," Merchant said, Oklahoma City, which has eight OZs and a dedicated effort to attract investors to them, as well as Alabama, which has been "really astute at packaging OZs to attract investors." Alabama has 158 zones, at least one in each county.

Investors are also turning to OZs as a hedge against inflation, Tillman said. 

"Inflation is no longer viewed as purely transitory. It's forcing investors to also rethink the benefits of owning real estate for the long term," Tillman said.

The expiration of the tax incentive may prompt a slowdown in 2022 investments, albeit not a large one, according to Novogradac Partner John Sciarretti.

"Those who could have waited, accelerated [their investment]," Sciarretti said during a company podcast on Tuesday. "But I don't think it was a deciding factor on whether to ever invest, because the 10% benefit doesn't have a huge affect on yeild."

Capital is expected to continue to flow into OZs through the end of the program in 2026, Arden Group Chairman and CEO Craig Spencer said, spurred by a good number of worthwhile OZ sites still to be developed.

"There are 8,700 sites around the country, and absolutely a lot of sites that are today ready to be developed and should be developed," Spencer said.