Over $3.9 Billion Raised by Opportunity Zone Funds, with Michael Novogradac

Michael Novogradac

Are Opportunity Zone funds having success raising enough capital? Will capital raising reach federal government estimates? Find out why one prominent tax accountant thinks so.

Michael Novogradac is managing partner of Novogradac, a top 50 accounting firm and thought leader in the Opportunity Zone industry.

Click the play button below to listen to my conversation with Michael.

Note: This is Part 1 of my two-part conversation with Michael Novogradac. Click here for Part 2, when we discuss how different real estate tax credits can be paired with Opportunity Zones, and options for 1031 investors who want to get into Qualified Opportunity Funds.

Episode Highlights

  • Why early results from Novogradac’s Qualified Opportunity Fund capital raising survey are promising.
  • Novogradac’s Opportunity Zone fund directory tracks 346 funds with an aggregate aspirational raise of $67 billion.
  • Novogradac’s survey has information on 164 funds, showing $3.9 billion raised so far. And this is only part of what’s been raised.
  • Initial capital raising estimates by the Joint Committee on Taxation and the Office of Management and Budget is $8-10 billion per year.
  • Why Michael believes we’re on pace to be at greater than $8-10 billion per year.
  • The favored asset types of Opportunity Zone investors.
  • The disappointment at how little has thus far been raised for operating businesses, and why this warrants more attention.
  • A breakdown of which geographies are having success raising Opportunity Zone capital.
  • Some of the recent Opportunity Zone reform legislative proposals, and why some anti-abuse legislation may be overreaching.
  • Why IRS data collection may fall short. And how Congress can use NMTC systems and the CDFI Fund to establish reporting for OZs.

Featured on This Episode

Industry Spotlight: Novogradac


Based in San Francisco, Novogradac is a top 50 national accounting firm with an emphasis in the real estate sector, specializing in tax credits. In recent years, the firm has become one of the foremost thought leaders in the Opportunity Zone industry.

Learn more about Novogradac:

About the Opportunity Zones Podcast

Hosted by OpportunityDb.com founder Jimmy Atkinson, the Opportunity Zones Podcast features guest interviews from fund managers, advisors, policymakers, tax professionals, and other foremost experts in opportunity zones.

Show Transcript

Jimmy: Welcome to the Opportunity Zones Podcast. I’m your host Jimmy Atkinson.

Novogradac is a top 50 national accounting firm and has emerged as a prominent thought leader in the Opportunity Zone space over the last several years. Today, I’m pleased to be joined by Novogradac’s Managing Partner, Michael Novogradac. Michael has over 30 years of experience specializing in affordable housing, historic preservation, and renewable energy with a focus on real estate taxation and accounting. He is also the author of several real estate tax books, including the “Novogradac Opportunity Zones Handbook,” and he is also host of the popular “Tax Credit Tuesday Podcast.”

Today Michael joins us from his office in San Francisco. Michael, thank you for taking the time to speak with me today and welcome to the podcast.

Michael: Thank you, Jimmy. It’s a pleasure to be on the podcast and to be a guest. It’s my honor.

Jimmy: The pleasure is all mine, Michael. I’ve learned a lot from Novogradac and in particular your Novogradac Opportunity Zone Resource Center over the past year and a half since I started my site and my podcast. You’ve been a great educational resource for me personally and for many of our listeners I’m sure as well. So thank you. To start us off, I want to talk about some research that your firm has done in the qualified opportunity fund industry. You have a list of several 100 Opportunity Zone funds that are actively raising capital from outside investors. Can you tell me about your opportunity funds capital raising survey? What data have you been able to glean from that thus far?

Michael: Great, yeah, thank you. It is something that is a bit of a labor of love and we’re tracking opportunity funds as best we can in terms of the capital that they’ve raised and how much they want to raise, first of all, then how much they’ve raised, as well as what geographies and investment types that you’re looking to invest in. And as we further this research, we’re trying to get more and more detail on the various funds. But the survey of the funds are those funds that have publicly available information or have volunteered their information to us, and it’s a survey of funds that are out there seeking to raise money from third party investors. So the Opportunity Zones incentive is an incentive that can be used by proprietary private funds, where you’re not raising capital from third party investors.

And the whole group of funds that are out there that are private funds, proprietary funds aren’t part of our survey. So our survey is a subset of all the capital that has been raised. Our survey is of those who are out there seeking to raise money from third party investors. And like I say, it’s either they voluntarily report it to us or we find it through public sources. But with that said, the funds that we’re tracking has grown to 346 funds. And those 346 funds have targeted capital raises, I like to say aspirational capital raises of nearly $67 billion. Now we don’t expect them to raise all those funds, raise all the $67 billion but they’re definitely have been formed and they’re seeking to raise that much. But of that, that’s how much we know is out there at a minimum and the dollar numbers we’re seeking to raise.
But of those 346 funds, we actually have capital raising information, so how much money they’ve raised on 164 of those funds. Many of those funds haven’t disclosed publicly how much capital they’ve raised and haven’t disclosed to us the capital they’ve raised. But the interesting thing about the 164 funds that we have information on, they report having raised nearly $4 billion, $3.9 billion roughly so far, and this survey is a rolling survey. So I know we basically are updating various funds periodically. So it’s $3.9 billion, nearly $4 billion. And some of your listeners might be thinking, “Well, how does that nearly $4 billion compare?” Well, you know, this $3.9 billion is only part of what’s been raised. It doesn’t have private and proprietary funds. But the initial estimate by the Joint Committee on Taxation as well as by the Office of Management and Budget in terms of how much capital Opportunity Zone incentives would raise was about $8 billion to $10 billion a year.

And if you think about the fact that the incentive was only really operational since the summer of 2018, the fact that we are already have documented $3.9 billion, knowing the number is much higher right now shows me that we’re on pace to be at greater than $8 billion to $10 billion a year.

Jimmy: Yeah, that is impressive, the $3.9 billion you cite is based on just a little more than half of the funds that are publicly seeking capital and not to mention private funds at all. What date is that number from?

Michael: So it’s a rolling survey. So it’s basically some funds we haven’t heard from for a few months and some funds we’ve heard from as recently as yesterday. So it’s a rolling survey. So as a practical matter, at any one point in time, the number is actually larger because they don’t have everyone through a certain date. So it’s a ever sort of expanding survey. But I would also note that it’s interesting to look at the $3.9 billion and then say, “Well, what investment types is it going into?” And when you think about investment types, you think residential, commercial, you know, there’s a big push within the Opportunity Zone community to invest in operating businesses. And then there’s also you can take hospitality or renewable energy.

And clearly the favorite right now for the investors is residential. Of the funds that we, you know, have capital raising information on, roughly three-quarters, about 75% of the funds are going to invest in multiple investment types. About 25% are going to invest in only one investment type. And of those that are focused on a singular investment type, more than half are focusing on residential only. And then maybe 30% to 40% are focused on commercial only and operating businesses, hospitality and renewables make up the rest. But if you look at all the funds that have raised, and we have capitalizing information on, three-quarters plan to invest at least some dollars in residential. And the unfortunate part right now I think for the Opportunity Zones incentive is operating businesses only make up about 1% to 2% of that capital already raised.

So operating businesses are definitely trailing. Real estate is leading by a large measure. And in part that’s due to regulatory issues and all the rest. But we don’t need to digress into all those issues, but it is disappointing how much how little is reported being raised for operating businesses and definitely something that, you know, warrants more attention.

Jimmy: Oh, I agree with you there. I believe that you’re hopeful and I know I’m hopeful that that number will climb in the years ahead as the regulations become a little bit more clear. As operating business investors kind of take hold of the program a little bit more there’s a lot more muscle memory or inertia in the real estate asset class to kind of follow along a federal program or incentive such as this whereas this is kind of a new beast for operating business investors.

Michael: I will also note though that in some ways, much of your commercial investment is indirectly an operating business investment. So to the extent that, you know, there’s a large portion of the capital is focused on commercial development in Opportunity Zones and a lot of that commercial obviously will be occupied by operating businesses, so they’ll be able to provide an indirect subsidy by having better facilities and such to locate their businesses. And it may be also a case of the commercial property has to be renovated or built prior to the operating business coming in. So it’s not that much of a surprise that you would see a bit of a lag. I wouldn’t have thought this much of a lag but there is a lag aspect to it as well.

Jimmy: Right. A lag aspect as the infrastructure gets built is one way to think about it, I suppose. Have you noticed any trend yet of more funds flowing into operating business? Or is it too early to tell it so far?

Michael: You know, I think it’s really too early to tell. But I will say one other part of the data that I found interesting from a geography perspective is that there are a reasonable number of funds that are focused on single states or single cities. And if you look at the single states, those funds that are focused on a single state, Arkansas, you know, has funds that have already raised $50 million in the State of Arkansas, Maine, $30 million for the investments in the State of Maine. And then when you look at single cities, you know, to no surprise New York and Los Angeles lead the pack, but then you have Indianapolis with nearly $50 million fund of equity raise. You have Nashville. So you definitely have cities that aren’t the big urban cores that you think about in terms of where there’s a fear that all the operating capital is going to go to the urban cores. It’s nice to see some of these other areas getting funds focused on them and successfully raising capital.

Jimmy: Yeah, it’s good to see some capital flowing into some of these secondary and tertiary markets. I agree. And if I understand correctly, I believe this is just a survey of capital that has been raised by the fund. Do you have any data on capital that’s been deployed into Opportunity Zones so far?

Michael: Yeah, we do not have…This is all focused on capital raised or they’re trying to raise. So the $3.9 billion is the capital that’s been raised and the geographies that I shared with you or what they as part of their raising capital that they were going to be investing in the areas. But the flipside of that where like the actual capital being invested in the businesses or in the real estate, we do not have that data.

Jimmy: Okay, good. So, but overall $3.9 billion raised as of…we’re recording this on November 21st, 2019. And likely that number is much, much higher than that because as you mentioned, it’s a rolling survey. And where you’re only serving a subset of a subset of the total pie.

Michael: That’s correct.

Jimmy: Let’s back up for a minute, Michael. I want to see if you can tell us a little bit about your career background. And if you could also tell us about Novogradac and the types of clients that it serves.

Michael: Yeah, we recently celebrated our 30-year anniversary…

Jimmy: Congratulations.

Michael: …on October 17th, 1989. Thank you. We were founded on October 17th, 1989. I was with a major accounting firm. I left the major accounting firm and formed Novogradac on October 17th. And if you’re a baseball fan, October 17th, 1989 was the day of the San Francisco earthquake. I was at the Giants, AA baseball game. It was a World Series game ready for the first pitch and then there was an earthquake. So it was rather an auspicious beginning to the firm for there to be this natural disaster starting in San Francisco but we kicked off in October 17th of ’89. And we’ve been focused on affordable housing, community development, historic preservation, renewable energy ever since. We’re an accounting firm. We focus on the tax and audit needs and projection forecasting needs of our clients. And then along the way, we’ve layered in evaluation arm and we’re very much a niche firm that kind of operates by figuring that if we do good we’ll do well.

Jimmy: And who are the types of clients that you serve?

Michael: Yeah. We’re very much project based in the sense that our business base and then our sort of core clients are if you’re out there building affordable housing, you’ve got a joint venture partnership, the partnership is our sort of core client. If you’re out there investing and you’re out there doing community development work and you say you’re a new market tax credit awardee and you have a community development entity, the net community development entity, would be our sort of key client as well as some of the businesses they lend to, historic preservation, you know, the properties, you have partnerships that own the properties would be our core client. So I’d say the core clients are all the projects, the entities that own projects or businesses and then obviously the various sponsors, the developers end up becoming clients as well as the investors in developments and in the projects and in the investment. So we sort of touch all aspects of the…you know, if you’re involved in these areas, there’s a reasonable chance that you or someone you’re working with is a client.

Jimmy: Gotcha. So taking that to the Opportunity Zones space now, your types of clients might be the project developer, it might also be the qualified Opportunity Fund or fund sponsor, but it could also be the individual investors, the limited partners in the fund as well. Is that correct?

Michael: That’s right. I’d say our core clients are going to be the opportunity funds themselves as well as the qualified Opportunity Zone businesses.

Jimmy: Gotcha. Okay. I wanted to talk to you a little bit now about the slew of legislation that’s been introduced to Congress in recent weeks surrounding the Opportunity Zone program. Can you speak about some of those proposals that have hit the floor recently, any that have caught your eye that you think might gain some momentum in the coming weeks and months?

Michael: Yeah. No, there’s definitely been a reasonable amount of legislation introduced. Mostly notably, there was a bill by ranking member of the Senate Finance Committee, Ron Wyden. Senator Ron Wyden introduced a bill to…the title of the bill is the Reporting and Reform Act, Opportunity Zone Reporting and Reform Act. And that’s the bill…there’s been a number of bills that would put tweaks and such with respect to Opportunity Zones. But the Wyden bill is probably the one that’s gotten the most amount of attention over the last week or so. And there is a companion bill that was introduced by majority whip, Clyburn, in the House of Representatives as well. That was, you know, several days after the Wyden bill was introduced. And you know, the Wyden bill directionally does a lot of good things, things that I think has a lot of good provisions that many in the Opportunity Zone space support.

Most notably, his bill does provide for reporting on investments in Opportunity Zones and the investments that Opportunity Zones are making in Opportunity Zone businesses. I think everyone within the Opportunity Zone community supports reporting. You know, Senator Tim Scott and Senator Cory Booker are sort of the founders, if you will, of the Opportunity Zone concept in the Senate. They’ve already themselves introduced the reporting bill. So that part of the bill, I think, is pretty straightforward and has a lot of support. But there’s also a number of provisions in the bill that I think are designed to be sort of anti-abuse type provisions or are provisions to try to narrow how the Opportunity Zone incentive can work. And once again, directionally some of those are provisions…most of those are provisions that directionally most in the Opportunity Zone community support.

But there are parts of it that go a little farther than most in the community think they should go. Most notably, there are several provisions that are retroactive to the date of enactment. So we definitely look at that and say any tax legislation that gets introduced should be perspective only. It shouldn’t be retroactive when you have someone investing in a community development incentive expecting a certain benefit, they should get that benefit. They shouldn’t be retroactively denied that benefit. And if something like that did happen, it would have repercussions beyond just Opportunity Zones because any tax incentive you would then wonder if Congress is going to take that one away too in some future.

So I think that part of it is the one that, you know, is really a challenge. There’s another part in there where it limits the ability to invest in residential rental housing that, you know, would really be adverse to helping develop Opportunity Zones and giving them the opportunity to have housing built there as well as other types of businesses be supportive. But beyond that, I think there’s a lot in there that is sort of directionally good. It’s just a question now of seeing what Congress might be able to do.

As a practical matter in the broader spectrum it’s unclear that if Congress wouldn’t pass the tax bill, and if they do pass the tax bill, the tax bill might be just dealing with extenders. And if they passed a tax bill and it deals with more than what are commonly called as tax extenders, then they have to deal with a number of other potential tax provisions. And the question just would become if they do pass a tax bill, would it have to have to carry anything with respect to Opportunity Zones? And like I said, that remains to be seen. I think the retroactive revisions wouldn’t be included. But I think directionally some of these other provisions could be included.

Jimmy: Right. I agree with you. I think the retroactive revisions that would apply to anyone who has already, you know, got skin in the game. I think that would set a very bad precedent. I hope we don’t see any of that come about. Obviously there’s a great demand for transparency and reporting from just about everybody involved with Opportunity Zones and the federal government and both sides of the aisle want to see more transparency and reporting. The IRS recently released a beefed up Form 8996 that asks for a little bit more data, some census tract level reporting. There’s obviously a lot of legislation being introduced to the Congress. What would you like to see happen though, Michael, if you had a magic wand and could solve our reporting conundrum of how to actually receive the data and then report the data, what do you think is the best solution?

Michael: Well, thank you. We are commenting on the recent IRS Form that asked for enhanced reporting. It’s the form that QOF opportunity fund files with their return and we release many of our comments early next week. As you know, we host an Opportunity Zones working group. And our working group’s actually been around since late 2016, early 2017, you know, 12 months before the bill was actually enacted in the Opportunity Zones working group that organizes comments and tries to be a technical support for Congress and for others to ensure that the reporting, the drafting legislation, and the rest is consistent and sort of make sense, and will direct the incentive in the directions that we all think it should go for the most community good. And we will be submitting comments on the form.

I think there’s a little bit more data collection they can gather on the forms. We’ll be recommending a handful of additional data points. But unfortunately, you know, the IRS and Treasury believe they can only ask for information related to determining compliance for tax law purposes and they can’t ask for information needed to evaluate the ultimate benefits of the incentive. We are also going to put some…we think there’s additional compliance questions that the IRS should ask. But from a reporting perspective, if Congress came to me and said, “What should we do here?” I would say, “Let’s look at what we’ve done in other places and try to do something similar to what we’ve done in other places so we don’t reinvent the wheel.”

And when you think about Opportunity Zones and Opportunity Zone reporting and you think, “Well, Mike, what have we done in other places?” I would say all you have to do is look to the new market tax credit. The new market tax credit is administered by the CDFI fund. The CDFI fund has a system in place where the entities themselves have to report on an annual basis. And I would say we should basically take the Opportunity Zones incentive and have the CDFI fund create a series of reporting and use the existing systems and such that they have in place and then collect data on an annual basis from opportunity funds.

Jimmy: And they already have a lot of that infrastructure in place. So as you mentioned, they wouldn’t have to reinvent the wheel. And I think that makes a lot of sense. They’re already set up to do a lot of this work anyway, just expand their department a little bit more and we can get some third party transparent data reporting done. I think that makes a lot of sense.

Michael: And I would also increase their budget so they have the staffing to handle that. But since so much of it is they already have in place it’s not the cost to them of incorporating this in isn’t nearly what it would be if you created something at a whole cloth.

Jimmy: Yep. No, that makes perfect sense.


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