Incentives Drive Multifamily Investments in Opportunity Zones

A tax advantage included in 2017’s tax reform law should lead to a “significant” capital influx to multifamily investments located in Opportunity Zones, said Freddie Mac, McLean, Va.

The Tax Cuts and Jobs Act of 2017 created Opportunity Zones to encourage investment in economically depressed communities by providing federal income tax benefits to taxpayers who invest in businesses within those areas. The Mortgage Bankers Association supports this objective and shared comments with the IRS in December about Opportunity Zones and Qualified Opportunity Funds.

Freddie Mac noted each state government has identified areas with comparatively high poverty and subpar employment opportunities. The GSE found the benefit of capital gains tax deferment and tax-free growth on qualified investments in Opportunity Zones can generate “significantly” higher returns for investors after 10 years compared with traditional investments.

“Of the 105 Qualified Opportunity Funds already established, 70 have an investment focus on multifamily residential development,” said Freddie Mac Multifamily Vice President of Research and Modeling Steve Guggenmos. “The substantial tax advantages offered by the tax law should drive multifamily investments in Opportunity Zones.”

The Freddie Mac research paper, Opportunity Zones–An Overview, compared a hypothetical investment under the tax structures offered by both traditional and Opportunity Fund circumstances. The simplified example demonstrates the clear advantage an Opportunity Fund can have for investors over competing investments. A traditional investment that provides an 8 percent annualized return may provide a 12-plus percent return if invested in a ten-year Opportunity Fund. Similarly, a five-year investment in an Opportunity Fund would increase returns for an investor from 4.6 percent to 7.4 percent, the analysis said.

But Guggenmos said the long-term effect of Opportunity Zones remain unclear. “Will these investments revitalize communities and enhance opportunity as intended? We’ll have to wait and see,” he said.