Despite the economic uncertainty caused by the COVID-19 crisis, investment in Opportunity Zone funds continues to grow and shows signs of gaining momentum. Investment in Opportunity Zone funds listed by Novogradac now tops $10 billion, and is up 50% since early January.
Opportunity Zones were a buzzword following the establishment of the program by the 2017 Tax Cuts and Jobs Act, but the slow rollout of regulations and the numerous questions surrounding implementation of the program gave investors pause. The Opportunity Zone program is still in its infancy however, and it is not too late for investors to take advantage of the program’s benefits, such as the potential tax-free gain on the sale of qualified investments.
Not all observers are confident that this increase in investments will continue, and some observers point out that most of the new investments occurred prior to March 13, the date President Trump declared a national emergency to fight the spread of COVID-19. It is unclear how the market has been affected since March 13 given the delay in available data and the fact that fund managers are not required to disclose new investments.
Investors are looking closely at Opportunity Zones despite the uncertainty for many reasons. For example, many investors are reallocating their portfolios away from public securities, and may be realizing capital gains without having a specific tax plan in place for the realized profits. The Opportunity Zone program’s deferral of the recognition of those capital gains until December 31, 2026, as well as the reduction of those taxable capital gains by as much as 10 percent, could be an attractive option.
In addition, some assets which have the reputation of being countercyclical and well-suited to withstand recession are also a good fit for the Opportunity Zone program. Affordable housing, for example, provides an essential service to communities, and tenants’ rents are often subsidized. Many also expect construction costs to decline due to greater availability of materials and reduced costs of hiring construction professionals. If this proves to be true, rehabilitation and development of assets in Opportunity Zones with the incentive of a tax-free disposition may be appealing for more risk-tolerant investors willing to invest in an otherwise down market.
On April 10, the IRS released Notice 2020-23, which extended the deadlines for various federal tax-related obligations, including the 180-day deadline to invest eligible capital gains into qualified opportunity funds. Under the notice, investors whose 180-day investment deadline was to occur sometime on or after April 1 through July 14 now have an investment deadline of July 15. This extension was intended to give investors who intended to take advantage of the program the ability to do so despite delays caused by COVID-19. If this extension works as intended, we may continue to see increases in Opportunity Zone investments through the summer. However, as we have seen the last few months, little is certain.