I have heard that fewer funds are focused on real estate and more are going into social impact investing. Is this true?
There is a lot of press and talk about social impact investing. We have also seen funds created with this in mind. I am not seeing these fund being invested into or projects well defined within these funds. As time passes, I expect the emphasis to shift from OZ fund real estate more to OZ businesses in manufacturing and technology.
I think large foundations and national organizations are more aware of the benefits OZ funds are to achieve and are focused on social impact investing for that reason. I see guidelines that have been issued addressing whether community support is solicited for various projects, for instance. I think that's all good, but there also are very investment-minded funds looking at 12% to 18% IRR and the tax benefits. I do not see that abating. Hot growth areas still are on the coasts, the southwest U.S., and large cities in Texas, Atlanta and Florida. Secondary and tertiary markets can get in the mix by having fourth and fifth layers of tax benefits such as TIF, NMTC or HTCs added to a project.
Impact investing is very politically attractive because it strikes at the heart of what the program was made for. Tim Scott from South Carolina said he needed to see investing for positive social change to keep the program alive, so if any shift did occur, I bet his comments influenced it.
I am not certain. Real estate is an easy qualifier for OZ investors, and there are strategies for continuing the deferral even beyond the OZ period. However, the recent proposed regulations made it clearer as to what can be included as an OZ business, and made it easier for service businesses to take advantage of the OZ rules. So it would not be surprising that other than real estate OZ funds are being created.
The primary area of OZ investments continues to be real estate. But with the clarifications provided in the April 2019 regulatory guidance, we are starting to see a pickup in OZ investment in businesses as well as social impact funds.
Sorry, I don't have information on any such statistics. I think it is way too early to assess where the investments are going, but I would not expect what you stated below to be the case. Though I obviously don't have a crystal ball. To me, it's natural that there would be investment in real estate and businesses in the zones. If I had to speculate on where that social impact investing information is coming from, I would suspect it is the state of California's political position. Though California does not currently conform to the tax laws that are available at the federal level for the Opportunity Zones.
I guess it depends on location. Definitely, after the issuance of the second set of regulations, there were a lot of the questions related to operating businesses. They were addressed in some sort of fashion, More interest is developing in the investment on operating businesses. Also, once this was understood, we are hearing and reading more on the potential of impact investment in the OZs. Real estate is a limited resource, therefore, operating businesses is where a great deal of growth is expected.
I have not seen that. My guess is that the projects are the same (real estate), but the return is less, so it is called "social impact" investing.
The second round of proposed regulations provided guidance on some unanswered questions as it relates to operating businesses that existed after the first round of regulations. This might be a helpful explanation to steer more investment into operating businesses. That said, real estate investments through QOFs are alive and well.
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