Opportunity Zone Magazine Volume 1, Issue 3 - Page 61
with qualified opportunity zone businesses (QOZB), so called
operating businesses. While most real estate investments
have a cap on the upside, the same is not true about operating
businesses. Given the tax benefits available for holding
investments for 10 years, this program can be massive for
savvy QOZB investors.
So now, the key issue to answer is what other groups could
take more advantage of QOZs? Private equity (PE) groups is
the most logical choice.
WHY PRIVATE EQUITY
PE groups have vast amount of capital available to potentially
invest in QOZs -- roughly $1 trillion in equity 1 . Despite a
large amount of capital in these firms, many have yet to move
Given the current economic climate due to the COVID-19
pandemic, it may be the perfect time for PE groups to look at
QOZs as prices are low and there may not be other attractive
While there are some challenges PEs face in determining if
a QOZ investment makes sense for their investors, the final
regulations made it clearer for PE firms to move into QOZBs.
CHALLENGE ONE: INHERIT RISK OF QOZ
There is a total of 8,766 certified OZs available for investment.
Some of these zones are concentrated in gentrified areas in
prime urban markets that are very developable and do not
have the inherent risk of many other QOZs. Accordingly, we
have seen a focus of development in those zones early on in
the program. However, the majority of QOFs are in need of
significant capital investments and are in areas that may be
less appealing to investors.
The average poverty rate in OZs is 28.9% compared to 14%
across the U.S. Additionally, the median income is around
$44,000 in a QOZ tracts compared to $70,000 nationally 2 .
Those dramatic differences are the reason the areas are
QOZs, but it also means some types of investments may be
unsuccessful there, making them less appealing to investors
despite the tax breaks.