By Anayat Durrani
Patient investors can reap the benefits from investing in the Opportunity Zone program. A study found that Qualified Opportunity Fund (QOF) Equity Investments have risen by more than $6 billion since the beginning of 2022, with the six-month period having the second-largest dollar increase in OZ investment, since Novogradac began tracking the data. The study demonstrates the strong viability of the Opportunity Zone program for investors.
“Buttonwood considers investments in Opportunity Zones to be arguably the most compelling tax-incentivized program type we’ve encountered,” says Vince Brady, co-owner and principal, Buttonwood Due Diligence. “Despite the sunsetting of the deferral provision on December 31, 2021, in which capital gains resulting from investments in an Opportunity Zone Fund held a minimum of 5 years were given 10% reduction in the amount taxed, we’ve seen unprecedented capital raising in this space throughout 2022.”
Surge in Opportunity Zone investments
Brady says this demonstrates that the Opportunity Zone program is continuing to gain major traction with new investors and program sponsors.
“For the OZ industry, the fact that we’re seeing the increase in funds is a game changer,” says Roy Carrasquillo, who leads the CLG’s Opportunity Zones Practice and EB-5 Immigrant Investor Program Services and Compliance practice group.
He says now that there is a significant amount of funds, a much more active market will be seen that will be beneficial for these Opportunity Zones. At his firm, he says they’ve seen an uptick in clients interested in OZs in the past few weeks and months in using opportunity zone funds.
“We were talking to a group last week that was looking to raise capital from minority owned businesses with social impact,” says Carrasquillo. “They have significant interest from groups to put the capital in and investing in OZs is a great opportunity. It’s a trend that we’re seeing to create funds as they have potential investors interested in it.”
He says they are also witnessing this from the developer side where they are now recognizing the benefits of the OZ investment funds.
“In Puerto Rico specifically, where the whole island is virtually an OZ, there are many, many opportunities to invest in different projects, and not just real estate. It’s a good sign for the economy that people are having capital gains and deploy them to OZ projects,” says Carrasquillo.
Opportunity Zone program is flexible and tax efficient
“The continuing inflow of OZ equity infusions is a testament to the tax efficiency and flexibility of the OZ program,” says Blake Christian, partner, Holthouse Carlin & Van Trigt LLP. “The 2022 influx is also clearly related to the very significant taxpayer-reported capital gains—stock market, real estate and private business sales—in calendar 2021 and early 2022 which needed a place to land for tax deferral.”
The reason QOF equity investments have increased, says Christian, is that four and a half years into the OZ program, the most sophisticated taxpayers and/or their advisory teams are now very familiar with the OZ program tax and economic benefits.
He says the challenges in 2021 and the first quarter of 2022 in finding any real estate deals or bargain operating businesses have allowed investors, through the OZ program, to set up their own OZ Funds in a reasonable amount of time to formulate a business plan and make due diligence on their potential long-range OZ investments.
“Unlike the highly restrictive 180-day replacement property reinvestment timeline for an IRC 1031 deferral, the OZ program can extend a taxpayer’s reinvestment period for a minimum of 37 months from the time of initially funding their Qualified Opportunity Fund,” says Christian.
Growing investments in Opportunity Zones
Carrasquillo says the increase is due to the “perfect storm of the program being more mature and many realizing capital gains and wanting to shelter these funds in OZs.”
He says programs like these need time to mature as seen with the EB-5 investor program, where it took some time for the program to be used to its full advantage. Carrasquillo says similar is occurring with the OZ program, which has taken time for investors to understand the advantages and regulations and realize the full potential of the projects.
“With the high inflation rates and uncertainty in the economy, the OZ program is a perfect vehicle to temporarily “park” your capital gains in a “captive” OZ Fund and then opportunistically wait for real estate and business values to decrease in value and buy on the dip,” says Christian. “With future appreciation, including inflation-driven appreciation, being tax-free, the OZ program will handily reward these patient investors.”
Brady says he believes that this level of investment cited in the study will continue and be spurred on by recent legislation introduced in Congress, The Opportunity Zones Transparency, Extension, and Improvement Act. If enacted, he says, “this legislation would impose additional clarity and possibly reinstate the deferral provision.”
Powered by Froala Editor