How Big Are the Impact Investing Opportunities in QOZ Funds?

Qualified Opportunity Zones (QOZs) have been on many investor’s minds lately, largely owing to the sizeable tax breaks the federal government is offering those who make qualified long-term investments in these economically depressed communities.

But QOZs — land tracts created by the Tax Cuts and Jobs Act of 2017 and designated by the U.S. Treasury Department and Internal Revenue Service — are ultimately about bringing financial opportunities and economic growth to underserved and low-income areas.

As such, QOZs address two big generational needs and trends. On the one hand, wealthy baby boomers with ownership stakes in private businesses or long-standing positions in publicly traded equities are looking to sell their interests as tax-efficiently as possible. Meanwhile, Gen X and Millennial investors are increasingly looking to make a positive social impact with their investments.

“That confluence of factors makes this an outstanding time to invest in QOZs,” said Avy Stein, Co-Founder and Co-Chairman of Cresset Capital Management, which together with Diversified Real Estate Capital recently launched one of the first QOZ portfolios, the Cresset-Diversified QOZ Fund.

But how big of an impact can socially responsible investors make with these funds?

In all, there are 8,766 Opportunity Zones across all 50 states, Washington D.C. and Puerto Rico. Those communities are also spread across all types of communities: Forty percent of QOZs are located in rural areas with low population density, 38 percent are in high-density urban communities, and 22 percent are in medium-density suburban areas. (1)

To appreciate how widespread QOZs are, consider the following:

  • Roughly 35 million Americans live within designated Opportunity Zones, which represents nearly 10 percent of the total U.S. population. (2)
  • Plus, there are 1.6 million businesses located with these designated communities, which collectively support 24 million jobs, or roughly 15 percent of the country’s civilian employed workforce. (3)

And to appreciate how much of an impact capital can make in these communities, consider that:

  • The unemployment rate within QOZs stands at 14.4 percent, versus less than 4 percent nationwide (4)
  • And the median income for families that live in these communities is $42,000, versus more than $61,000 for the country as a whole. (5)

Given the breadth of locations, and the significant tax incentives associated with the program, Qualified Opportunities Zones have real potential to re-direct private capital to distressed areas, generating jobs and other forms of positive economic activity that can change the future of these communities.

QOZs also represent a timely and useful tool for investors to monetize long-held assets in a tax-efficient way and to help diversify their portfolios during a time of heightened market volatility and uncertainty.

For investors who are sitting on significant unrealized capital gains, or for business owners who have recently sold or expect to sell a business, QOZ investments offer a once-in-a-generation opportunity to both defer and reduce the tax burden on those gains while also using those fund to create a positive social impact within America’s underserved communities.

Learn more about the Cresset-Diversified QOZ Fund

 

Sources:
(1) Department of the Treasury, CDFI Fund, IRS
(2) https://www.census.gov/newsroom/press-kits/2018/pop-estimates-national-state.html
(3) https://www.bls.gov/news.release/pdf/empsit.pdf
(4) Bureau of Labor Statistics – https://www.bls.gov/news.release/pdf/empsit.pdf
(5) https://www.cnbc.com/2018/09/12/median-household-income-climbs-to-new-high-of-61372.html