OZ Investments in Q1 2022: Takeaways From Novogradac’s Reporting Data

Novogradac, a national professional services organization that tracks Qualified Opportunity Funds (QOFs), recently released its findings from Opportunity Zone (OZ) investments made in Q1 2022. Amidst much speculation that investments  in QOFs would slow considerably with the final step-up in basis incentive falling off at the end of 2021, Novogradac data shows the opposite. New investments in QOFs have continued at about the same rate as Q4 2021. 

With the current absence of mandated reporting in the Opportunity Zone program, Novogradac provides a valuable window into what is happening in OZ investing. As of the end of March 2021, Novogradac is tracking 1,418 Qualified Opportunity Funds, with 1,035 providing specific data about equity raise figures. They get their data from information voluntarily provided by QOFs themselves and through publicly provided sources. Their data does not include proprietary or private funds managed by their own investors. Novogradac projects actual investment numbers to be 3-4x higher than what they are able to follow and report. Even with just a fraction of total data being available, they are able to show valuable trends in the OZ marketplace over time. 

In this article, we will look at what has changed in 2022 with the OZ program. We will then delve into Novogradac’s Q1 2022 data and how much has been invested and across what asset classes. We will also consider how new OZ legislation can come in and further spur investment. 

What Changed for OZs in 2022

When the Opportunity Zones program first became law, there were 4 tax incentives offered to investors. Reduction of the tax bill on the original capital gain invested in the form of a step-up in basis was offered to early adopters. Taxpayers who invested in 2018 and 2019 and left the money invested for at least 7 years received a 15% step-up in basis on their invested capital gain. Investments made in 2020 and 2021 received a 10% step-up in basis. In 2022, these incentives expired. 

However, the crown jewels of the tax incentives still remain in play: tax deferral on the capital gain invested through the end of 2026, and even better for investments held for at least 10 years, there will be no federal tax on any gains made. Learn more in our blog article How OZ Tax Incentives are Changing in 2022. 

Q4 2021 saw a surge in new OZ investments. Many investors were anxious to come in under the wire on the expiration of the step-up in basis. Novogradac reported that there have been more than $24 billion in cumulative investment by the end of 2021, with $7 billion of that being reported in Q3 and Q4 2021. Many OZ experts have attributed this surge to the end of the reduction in tax owed on money invested, but a strong Q1 2022 shows that the remaining incentives are enough to continue to drive investment into OZs.

Investments made in 2022

At the end of Q1 2022, the Qualified Opportunity Funds tracked by Novogradac reported $28.37 billion in equity raised since the start of the OZ program. This is $3.97 billion, or 16.3% more than the total tracked at the end of 2021. In Q1 2022, without step-up benefits, the OZ investment rate performed at essentially the same pace as Q4 2021.

This means that, according to Novogradac, the end of the basis step-up did not cause a significant negative impact on new OZ investments. Novogradac is tracking more and more QOFs who voluntarily report the specifics of their fundraising (they estimate a 53% increase), and the equity raises they report are progressively larger. Of course, when you take into account that Novogradac believes real statistics are 3-4x higher, there is a lot of money pouring into OZs in 2022. 

what asset classes are qofs currently TARGETING?

Most new investments in OZs are targeting residential and/or commercial estate. At the end of Q1 2022, $22.57 billion was committed by QOFs to focus on projects with at least some residential real estate, with $5.07 billion of that raised with plans to invest only in residential projects. Equity raised with at least a partial focus on commercial real estate totaled $19.27 billion, with a focus on commercial only coming in at $1.84 billion. 

In other asset classes; hospitality, renewables and operating businesses, the significant increase in equity commitment occurred in renewable energy. This asset class rose from $676.7 million to $1.32 billion, 95.1%. Renewable energy has not typically been the focus of a QOF investment, but rather one layer of a multi-target investment  plan.

potential impact of new legislation

In April, a new bipartisan effort emerged to strengthen and extend the OZ program. The Opportunity Zones Transparency, Extension & Improvements Act is a multi-pronged plan to bring required reporting to OZ investments, sunset higher income census tracts from the program and extend OZ incentives.

If the legislation is passed as written in 2022, OZ tax incentives will be extended for 2 additional years. The requirement for the 5% basis step-up will be shortened from 7 years to 6 years. Investments made through the end of 2022 will become eligible for a 15% step-up in basis and investments made through 2023 will be eligible for a 10% step-up in basis. 

Time will tell if this new legislation is passed what it may do for continued new investment in the OZ space. We expect to see additional and expanded reporting data from Novogradac in July, covering the first half of 2022. Until then, if you have experienced or are expecting a capital gain, check out our Fund Finder tool to be matched with the perfect Qualified Opportunity Fund that meets your investment needs.