The Qualified Opportunity Zone (QOZ) was created by the 2017 Tax Cuts and Jobs Act to encourage economic growth in underserved communities across the United States. While the Quality Opportunity Zones (QOZ) program has been around for nearly five years, fundraising efforts continue to be strong as investors take note of the program’s appeal. As investors look to invest capital gains in a QOZ single investment or fund on or before December 31, 2021, to defer their capital gains tax liability until December 31, 2026, capital commitments to experienced QOZ fund managers are seeing a year-end uptick in interest.
QOZs are a win-win in many ways, providing tax deferrals to investors and driving revitalization in communities across the country in the greatest need of commercial and residential development along with critical resources and businesses.
Booming Markets for QOZ Investments
Back in June 2018, the U.S. Treasury and IRS finalized certification of the Opportunity Zones, qualifying a total of 8,764 census tracts—all located within the 50 states, with five inhabited overseas territories and two additional QOZs in Puerto Rico. Leading property types in QOZs have ranged from industrial, retail and commercial to shovel-ready land to rental housing. Some of the biggest drivers behind the growing interest in QOZs, as well as capital moving in this direction, are that they have been a strong way to redirect capital and provide diversification in terms of scale and the types of investments much needed in economically comprised communities.
Currently, QOZs are more commonly found in rural areas as well as dense, urban areas. Lately, we have seen particular interest with a surplus of fundraising efforts dedicated to QOZs around cities like Atlanta, Orlando, Phoenix, Austin, Los Angeles, Chicago and Detroit but in many others too.
As the QOZ program only really works on ground-up development projects opposed to acquiring existing product due to rules of the program, it has also been an especially positive program for economically challenged areas like Detroit, where the full 7-mile ring around the city sits in a QOZ. This specific area offers an abundance of excess vacant land sites where supply/demand characteristics support bringing new industrial, commercial, retail and residential development to the market and uniquely positioned to achieve the goal of improving the overall economic climate and quality of life for both Detroit’s residents and its visitors.
Diversifying your Portfolio
Much like with a 1031 exchange, QOZs are designed for investors who are looking to defer taxes by increasing the attractiveness of equity investments in areas that recently haven’t produced competitive investment returns. These types of investments over-time should be accretive to improving the risk-return characteristics of an investment portfolio. While the rules of the program require a high percentage of capital raised to be invested in a QOZ, a small percentage of capital (10%) can be invested into projects outside of QOZ areas to allow investors to diversify their funds accordingly. While there’s only a small window ahead of the critical December 31, 2021, QOF deadline, we expect QOZ investments to continue to drive interest due to the multitude of incentives they offer.
Lastly, QOZs undoubtedly provide an opportunity to invest where it truly matters. Beyond tax planning, the structure of this program holds the intent of revitalizing impoverished areas throughout the country by driving investment capital to underserved communities. This program allows investors the opportunity to invest capital today in real estate assets and businesses ultimately that will have a positive social and economic long-term impact 6on communities.