There’s a lot of buzz around Opportunity Zones (“OZone”), a tax-driven investment program created in 2017 by the Tax Cut and Jobs Act. By most accounts, the program has been developing rapidly, with a tremendous amount of capital potentially available to be invested through the program. The intent of the Federal program is to allow recently-harvested capital gains to be reinvested in economically depressed areas across the country. It is estimated that there is about $6 trillion in such capital gains available domestically, which sit in investment accounts of banks, insurance companies, corporations, individuals, retirement accounts, and other taxpayers. Only a small fraction of these funds would be considered for Opportunity Zone investment. But even if only one-tenth of one percent of this money were committed to the program, the size would rival that of the Federal Low-Income Housing tax credit program as well as the Federal New Markets tax credit program.
Much has been written about the technical rules of the program (as well as the lack of current guidance). But investors, hungry to shield their current capital gains from taxation, are pushing investment fund operators to quickly set up and activate Opportunity Funds. Some of these fund sponsors come from the tax credit industry, while others emerge from other asset management or hedge fund origins. It will be fascinating to see how the market develops, and the level of integration of traditional fund management with the tax credit universe more familiar with the rules of tax-advantaged investment.
In our estimation, the current demand for tax shelter is overwhelming the supply of well-structured, shovel-ready projects that can benefit from Opportunity Zone financing. One important factor in assessing a project’s interest in OZone funding is the duration of the investment. Funds seeking to maximize tax benefits want to keep their capital invested for the ten-year period that eliminates any tax on gain, the largest tax benefit. Few traditional market-rate real estate projects are comfortable committing to that partnership timeframe, whereas NMTC and LIHTC projects are more accustomed to the 7- to 15-year horizons required under their program rules.
Investment returns are another area of interest. Fund sponsors appear to be targeting returns in the range of 10-15% after-tax, which are generally in excess of most tax credit funds. However, this may be below the rate required by typical hedge fund investors, and above the threshold that banks accustomed to CRA-driven investments require. As in many new ventures, the first participants out of the box deliver the highest returns, and then over time, as investors become more comfortable and familiar with the program, returns drop and the more conservative money wins out, willing to accept lower returns for lower risk. This is especially true in the current environment, where the industry is sorely lacking guidance from the US Treasury Department on key issues, but some very impatient money is seeking these early opportunities.
Clocktower Tax Credits, LLC is well-positioned to help develop this exciting new investment vehicle. With 25 years of experience in tax-advantaged project financing, Clocktower will be helping developers obtain OZone funding, and helping OZone fund sponsors identify worthwhile and profitable projects in which to invest.
Please contact Jeff Jacobson at (978) 823-0200 or JJacobson@ClocktowerTC.com to discuss the current marketplace.