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Opportunity Zones Incentive Sees Early Success, Investment Accelerating

Published by Michael J. Novogradac on Wednesday, April 1, 2020

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The opportunity zones (OZ) incentive has seen notable early success amid many challenges. As we near the second anniversary of the time when investors could begin investing in OZs, investment is accelerating.

The ability of investors to invest in OZs began in late spring 2018. The OZ statute was enacted in late December 2017, but taxpayers couldn’t invest in OZs until the Internal Revenue Service (IRS) announced how a qualified opportunity fund (QOF) becomes certified (the announcement occurred in April 2018) and until Treasury began designating OZs (which culminated in a June 20, 2018, IRS notice).

While investors were able to begin investing in late spring 2018, many investors and potential QOF fund managers chose to wait for additional guidance from Treasury on a variety of tax issues before proceeding. That guidance came in three major regulation releases: proposed regulations (in October 2018 and April 2019) and final Treasury regulations (released Dec. 19, 2019).

This month’s issue of the Novogradac Journal of Tax Credits has an OZ focus, with articles on recommended practices for QOFs, a look at the Novogradac Opportunity Funds Listing, an examination of state and local incentives and more. To put those articles in context, the discussion in this space will take a broader look at the OZ incentive, examining where the incentive stands, how well it’s working, what hurdles it faces and what is needed to make it more effective.

Rolling Out a New Tax Incentive–Building the Knowledge Infrastructure

As with any new tax incentive, OZs began as a germinal statute in need of regulatory guidance and clarity before the incentive could grow to its fuller potential. While Treasury was developing and rolling out guidance on the new tax policy, investors, business owners, community development activists, fund managers, policymakers, advisers and many others were busy identifying the types of OZ investments that were and weren’t possible, assessing the potential effects of new investments in OZs on low- and moderate-income residents, and developing ways to increase positive community impact.

At the beginning of OZs, a large knowledge gap existed, leading to a thirst for information. This thirst was filled by OZ conferences, our OZ Working Group and considerable press. The popular press stories included descriptions of the benefits to investors, the expansion of an inclusive economy, concerns over displacement and gentrification, the lack of reporting requirements and allegations that some zones were inappropriately designated or otherwise unworthy of designation as OZs.

Normal Pains

One early perception was that guidance was being unreasonably delayed, thus harming the effectiveness of the incentive. As noted previously by Novogradac, the release of guidance was actually remarkably quick, as compared to the roll out of other tax incentives.

The early days for a tax incentive are always challenging. For example, let’s look at the low-income housing tax credit (LIHTC). The LIHTC is widely viewed as the most successful federal affordable housing production incentive in the history of the United States.

The LIHTC became law in October 1986 and was effective for 1987. States had to determine how to allocate credits (including qualified allocation plans), establish methods to ensure compliance and institute provisions to determine reasonable fees. In seeking to use the LIHTC, developers, investors, policymakers and others quickly realized that as originally designed, having to place a property in service in the year an allocation was received was poor policy. Other policy improvements were also identified. It took until November 1988 for Congress to make many of the necessary policy changes, including the creation of a 10 percent test to allow a property a reasonable period to be developed.

The use of the LIHTC in the early years reveals this. In 1987, only 20 percent of available credits were allocated. In 1988, that increased to 67 percent and by 1989, the year the credit was originally scheduled to expire, the LIHTC was nearly fully subscribed.

Quick Success

One early theme regarding OZs reported in the popular press was the lack of OZ capital being invested in OZs. This story line vanished as more evidence revealed that the OZ incentive was bringing meaningful investment into low-income communities. Literally billions of dollars.

QOFs on the Novogradac Opportunity Funds Listing had invested nearly $10 billion by the start of March. The actual OZ investment total is likely two or three times that, due to the rolling nature of the survey and the fact that the survey only includes information from QOFs voluntarily providing information or from other public sources, including press releases. The Novogradac list doesn’t include proprietary or private funds owned and managed by their principal investors.

Original federal government estimates for the amount of capital that the OZ incentive would incent for the first two years (2018 and 2019) was roughly $10 billion to $13 billion. It appears that OZs are generating considerably more equity capital investment than originally expected.

This quick success in raising and investing OZ capital in distressed communities is an excellent complement to existing community development tax incentives. By comparison, for affordable rental housing, there was an estimated $17 billion of LIHTC equity investment in 2018. For community development, the new markets tax credit will get $5 billion in annual allocation for 2020. The federal historic tax credit (HTC), which recently commemorated its 40th anniversary, created $7.7 billion in investment in 2018, according to the National Park Service and Rutgers University, a figure that included all investment, not just the credits.

Incidentally, according to the National Trust Community Investment Corporation, 58 percent of HTC Part 2 applications in 2018 were in OZs–making those properties eligible for both incentives.

The OZ incentive is channeling equity capital to low-income neighborhoods alongside other tax incentives. By those measures, it’s a success.

Treasury Guidance Crucial

There were myriad issues addressed in the Treasury’s final OZ regulations, but let’s focus on two.

One was a change regarding the 180-day clock to invest Internal Revenue Code Section 1231 gains in QOFs–those are gains from the sale of business property held for more than a year. Treasury ruled that the clock can begin on the date of the sale or exchange. This change from the proposed regulations will lead to capital being invested in OZs more quickly.

Another key issue in the final regulations was to allow a member of a consolidated group to invest in a QOF the capital gains of another member of the consolidated group. Prior proposed regulations did not allow this.  This change will lead to more capital investment in OZs.

Treasury’s regulations covered a variety of issues and cleared the deck to allow investment to further flourish.

What’s Still Needed

In 2018, OZs needed to be designated, QOFs needed to be certified and investment structures needed to be developed.

In 2019, OZ fund managers, businesses and residents needed final regulations from Treasury to increase the number of willing investors and broaden the range of investable businesses.

In 2020, we need reporting requirements, an extension of the Dec. 31, 2026, deadline to maximize tax benefits, assurance that OZ investment is a key part of measuring whether banks meet their Community Reinvestment Act (CRA) requirements and clarification from Treasury on a few outstanding issues.

The desire and need for reporting requirements is not new. The original legislation for OZs, sponsored by Sen. Tim Scott, R-S.C., included reporting requirements, but as the provisions of Scott’s bill were added to the year-ending tax reform in 2017, the reporting requirements were eliminated.

Investors, developers and those who oversee OZs desire reporting requirements and data to allow comparison and measurement of the effectiveness of investment. Scott and Sens. Cory Booker, D-N.J., Maggie Hassan, D-N.H., and Todd Young, R-Ind., introduced a bill to require reporting in 2019 (a companion bill was introduced in the House of Representatives) and the hope is that legislation will gain traction. That isn’t the only OZ reporting bill, but the most high profile.

Another benefit would be an extension of the Dec. 31, 2026, deadline to defer taxation on gains. That deadline meant the last investment date to claim the seven-year benefit of OZ investment was Dec. 31, 2019, but Congress could extend the deferral deadline.

One week before Treasury issued the final OZ regulations, the Office of the Comptroller of the Currency and the Federal Deposit Investment Corporation issued a notice of proposed rulemaking concerning how they measure CRA compliance. OZ stakeholders have weighed in on the importance of OZ investment being part of that measurement and remain hopeful that OZs will carry significant weight.

The Novogradac Opportunity Zones Working Group (OZWG) has been involved in the OZ incentive from the start, submitting multiple comment letters to Treasury and including suggestions that helped shape the final regulations. That work is far from done, as evidenced by a letter the OZWG sent to Treasury about one month ago, which identifies areas in the final regulations that need clarification and/or correction. 

Membership in the OZWG provides an opportunity for stakeholders to share information and continue to shape the incentive as it matures. More information about it is available at

Healthy Incentive

As the OZ incentive continues to mature, billions more in capital will be raised and invested in low-income communities across America.  There’s still work to do to maximize the benefit for the residents in low-income communities: some is legislative, some is administrative and some will come with growing participation and engagement with community and philanthropic groups. ;

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