Opportunity zone projects are now in full swing. The opportunity zone model has been available for nearly two years, but investors were waiting the final regulations and guidance from the IRS. Then, the pandemic hit. Now that there is more understanding around both, opportunity zone projects are taking off.
“The delay was due to an abundance of caution from developers waiting for the final set of opportunity zone guidelines to be released before rushing to pour billions of dollars into projects,” says Braden Crockett, VP and director at Matthews Real Estate Investment Services, tells GlobeSt.com. “While some of the smaller, private developers plunged into the deep end, your institutional investors, who write the big checks, have a significantly more strict, deliberative process before presenting opportunities to an investment committee.”
The final guidance was crucial for most investors to move forward on opportunity zone investments. “Before the final round of guidance was released, there were still many questions outstanding, and boxes left unchecked that many fund managers would likely require in their development feasibility proforma’s and processes, and rightfully so,” says Crockett. “Because there were concerns that if the procedural items were mishandled, an entire project, underwriting substantial tax savings, could ultimately backfire. This not only amounts to losing favorable tax treatment but also creates a massive taxable event for investors, essentially voiding the entire investment thesis.”
The pandemic also played an role in delaying opportunity zone development. There was concern about the pandemic and the spread of coronavirus in March. “Novogradac reported roughly $3 billion in total capital was raised at the end of 2019, and by April 2020, that amount has ballooned to over $10 billion,” says Crockett. “While the data is not released past April, it would not surprise me if opportunity zone funds recorded record inflows in the spring months following the initial precipitous fallout in the stock market. Many investors decided they could not stand the heat of the 10% swings in stocks and decided to harvest years and years’ worth of gains compounded over the longest economic growth cycle in history.”
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The tax benefits of the opportunity zone promises to keep strong demand, despite the economic dislocation. “Facing large tax bills, many investors and their accountants scurried to find a way to tax-efficiently put this capital back to work, igniting the demand for a tax shelter with the promise of outsized after-tax returns, which is exactly what is promised by opportunity zone funds,” says Crockett.