At least one part of the Tax Cuts and Jobs Act (TCJA) may play more of a role in the economic recovery of struggling communities than perhaps even the bill's authors anticipated when the massive tax cut package became law in 2017.
Opportunity zones (OZs) -- primarily an array of tax benefits intended to attract investment in some of the country's poorest areas -- passed the $10 billion mark in commitments to qualified opportunity funds (QOFs) shortly before the COVID-19 pandemic began crippling the U.S. economy in mid-March.
That's according to a press release issued last Wednesday, April 29, by the Opportunity Zones Resource Center, operated by Novogradac & Company, a San Francisco-based professional services firm whose specialties include taxing, structuring, and valuations of the zones.
A calm because of the storm
"Anecdotal evidence since March 13 (the day President Trump declared a national emergency) suggests QOFs are seeing a pause in new investment as the nation struggles to react to the pandemic," managing partner Michael Novogradac said in the press release.
Still, Novogradac said, reaching that $10 billion milestone in QOF investments, as measured by funds reporting to a list his company keeps, "is good news, as opportunity zones are an economic tool poised to play a key role in the post-pandemic recovery."
He said the total currently invested in QOFs is likely significantly higher.
The list grows as the time nears
Opportunity funds were created to pool investor money in OZs, giving increased scale to the private money going into those areas while providing a managed vehicle for investors to get involved.
Novogradac -- which also oversees the Opportunity Zones Working Group of investors, community development financial institutions, and other stakeholders -- said its list of such funds grew from 502 in January to 621 in mid-March and that 406 of them reported the amount of equity they have raised.
The consultancy said the total raised and poised to help revive moribund local economies is perhaps double or triple the $10.1 billion it knows about in QOFs. Its list is a rolling survey that includes many funds that haven't revealed their totals, and there are funds that are not part of the survey, including private pools formed by corporations and high net worth individuals, Novogradac said.
Opportunity zone advocates say the time will come for those investments to begin paying off in social and tax benefits.
Tough times and tax breaks
John Lettieri, president and CEO of Economic Innovation Group (EIG), a bipartisan public policy organization in Washington, D.C., that advocates for opportunity zones, said in the Novogradac announcement that although it's hard to see past the pandemic, when it ends, "there's a number of reasons investors might look to opportunity zones to help rebuild the economy by investing in areas that need it most."
Two of those reasons are tax breaks and depressed real estate prices in those struggling markets. The tax breaks are outlined in this Millionacres article that details the overall program.
As for the lower prices, the Novogradac announcement included a list of buy signals of a sort from Steve Glickman, CEO of opportunity zone advisers Develop LLC, who cited "the prevalence of distressed assets in the OZs, a downward pressure on construction prices, a low interest rate environment, and a lack of other attractive investment options."
Interesting months ahead
How much energy these investments will give to revitalization of trouble spots across the national map remains to be seen, but as Glickman, who as a co-founder of EIG worked with Congress to help create the OZ program, said, "All those things will conspire to create an interesting next 18 months or so."
Better Returns - half the volatility. Join Mogul Today
Whether over the 21st century, the past 50 years... Or all the way back to more than 100 years... Real estate returns exceed stocks with SIGNIFICANTLY less volatility! In fact, since the early 1970's real estate has beat the stock market nearly 2:1.
That's why we launched Mogul, a breakthrough service designed to help you take advantage of this critical asset class. With volatility spiking, Mogul members have been receiving investing alerts with projected rates of return of 16.1%, 19.4%, even 23.9%, and cash yields of up to 12%! And these aren't in some 'moonshot' penny stocks or biotechs, but more stable multi-year real estate developments that don't see their value swing on a daily basis like the stock market.