Manager interest in launching funds to invest in U.S. low-income communities designated as qualified opportunity zones is running high but the number of funds launched still is low as firms await greater regulatory clarity.
Money managers are avidly exploring the possibility of attracting significant assets from U.S.-based taxable investors seeking the relief from capital gains taxes available through investing in qualified opportunity funds.
Under the provisions of the Investing in Opportunity Act, part of the Tax Cuts and Jobs Act enacted in December 2017, investors can reduce, defer and exempt capital gains liabilities through Dec. 31, 2026, if they reinvest at least $100,000 within 180 days of a sale in a qualified opportunity fund for a minimum of five years.
At least 90% of the assets of a QOF must be invested in new real estate development or significant rehabilitation projects and in business development in the 8,761 communities designated as qualified opportunity zones in 50 states, the District of Columbia and five U.S. territories, according to the IRS.
"This is an interesting new pocket of opportunity for money managers to attract taxable wealth management investors, but so far, there's been more smoke than fire," said Tyler Cloherty, senior manager at consulting firm Casey Quirk, a practice of Deloitte Consulting LLP, New York.
"We're seeing interest among large managers but it's still too early for many to invest," Mr. Cloherty said, noting that money management firms are busy determining whether investment in disadvantaged communities is a "small, niche opportunity or if it can be scaled up for bigger funds."
Regulatory uncertainty is the primary reason many money managers are holding off on establishing QOFs, said Beth A. Mullen, a partner and affordable housing industry leader in the Sacramento, Calif., office of public accounting firm CohnReznick LLC.
The list of qualified opportunity zones was only finalized in June and "the industry only got real tax guidance from the agency in October," Ms. Mullen said.
She stressed that many more issues require regulatory clarification, particularly mechanisms for fund managers to measure and report the impact of their investments in real estate development and business support in the zones.
"Everyone will want to measure the impact of these investments on communities in the opportunity zones," Ms. Mullen said.