Bullish Opportunity Zones Equity Raising Continues Despite End of Basis Step-Up Benefit

Published by Michael J. Novogradac on Thursday, April 21, 2022 - 12:00AM

The end of the 10% basis step-up benefit for investments in qualified opportunity funds (QOFs) didn’t appear to slow equity raised for investment in opportunity zones (OZ), at least according to the first-quarter update of QOF equity raises tracked by Novogradac.

Blog Graphic: Overview of QOF Investment

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As of March 31, the 1,418 QOFs tracked by Novogradac (1,035 of which provided a specific equity raise amount) reported $28.37 billion in equity raised. That’s $3.97 billion (16.3%) more than the $24.40 billion in equity Novogradac-tracked QOFs reported at the end of 2021, when the step-up benefit expired. The first-quarter equity reported was 96.4% of the $4.12 billion increase in the fourth quarter of 2021–continuing a bullish run for equity raises by QOFs.

For added perspective, the equity increase in the first quarter of 2022 was significantly more than a year earlier–more than triple the increase in the first quarter of 2021 ($1.18 billion).

Blog Graphic: Total Equity Raised Continues Growth

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The Opportunity Zones Transparency, Extension and Improvement Act (H.R. 7467, S. 4065), introduced April 7, would still reinstate the basis step-up benefit because it proposes an extension of the OZ incentive for two years, as well as a provision to reduce the time a QOF investment must be held to qualify for a 15% basis step-up from seven years to six years. If passed as written, the bill would allow investments made by Dec. 31, 2022, to qualify for a 15% basis step-up and those made by Dec. 31, 2023, to qualify for a 10% basis step-up.

Equity raise amounts by QOFs appears healthy. The March 31 figures continue a steady increase in the number of QOFs tracked, the number of QOFs reporting a specific equity raise and the reported amount of equity raised. However, the reported amount of equity raised is increasing at a faster rate than the other two numbers (in the 15 months since Dec. 31, 2020, the number of QOFs tracked by Novogradac increased by 53.0%, the number of QOFs reporting a specific equity amount raised is up 57.1% and the total reported equity raised increased by 87.1%).

The first-quarter equity information comes at the midpoint between the Novogradac Opportunity Zones Investment Report: Data Through Dec. 31, 2021, and an updated report covering investment through June 30, 2022, that will be published this summer.

Total OZ equity raised is much higher than the amount reported by Novogradac–likely three or four times greater–since Novogradac’s report is based on a collection of information from QOFs that voluntarily provide information or from other public sources such as press releases or Securities and Exchange Commission filings. Novogradac’s list includes single- and multi-asset funds, but does not include proprietary or private funds that are owned or managed by their principal investors. So overall QOF equity raises since the incentive started in 2018 is likely approaching $100 billion, or more.

The types of investment targeted by QOFs remains steady, with the vast amount of equity reported by QOFs focused on residential and/or commercial real estate businesses. As of March 31, $22.57 billion in equity was reported by QOFs with at least a partial focus on residential businesses, with $5.07 billion of that total raised by QOFs with an exclusive focus on residential. QOFs with at least a partial focus on commercial businesses raised $19.27 billion in equity by March 31, with commercial-only QOFs raising $1.84 billion of that. Due to the large number of QOFs that identify multiple foci of investment, the sum of investment by type far exceeds $28.37 billion.

Blog Graphic: Residential, Commercial Remain Dominant Categories of OZ Investment

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While the overall increase in QOF equity reported in the first quarter was 16.3%, the increase in equity for QOFs with some focus on residential and commercial increased 18.0% and 22.6%, respectively. The other investment areas identified by Novogradac are hospitality, renewables and operating businesses. The biggest change for those in the early months of 2022 was the equity reported by QOFs with at least some focus on renewable energy, which jumped from $676.7 million to $1.32 billion (95.1%). That was largely due to large equity raises by QOFs that include renewables as one of multiple investment targets.

The information contained in this blog post is for informational purposes only and does not constitute an offer to sell or solicitation of an offer to buy securities. Novogradac does not provide investment advice and the information in this report is not to be construed as a recommendation to engage in any specific transaction. Readers are urged to consult with their own professional advisors if they are considering investing in a QOF.

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