Pairing Tax Credits with the Opportunity Zone Tax Incentive, with Michael Novogradac

Michael Novogradac

How can different real estate tax credits (New Markets, Low Income Housing, Renewable Energy, and Historic) be paired with the Opportunity Zones tax incentive?

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 2 of my two-part conversation with Michael Novogradac. Click here for Part 1, when we discuss how much capital has been raised by Opportunity Zone funds so far.

Episode Highlights

  • Tax credits versus tax incentives, and the implications of this distinction with respect to Opportunity Zones.
  • The New Markets Tax Credit, Low Income Housing Tax Credit, Renewable Energy Tax Credit, and Historic Tax Credit, and how these can pair with Opportunity Zones to create a lower cost of capital.
  • How to layer or side-car the Opportunity Zones tax incentive with the four real estate tax credits.
  • The biggest Opportunity Zone challenge that Michael and his clients have faced.
  • Options for 1031 investors who want to redirect funds into a Qualified Opportunity Fund.
  • The bad press that Opportunity Zones have received so far due to poor zone selection by some governors.
  • Highlights from the Novogradac Opportunity Zones Fall Conference in Chicago.
  • A look ahead to Novogradac’s Opportunity Zone Conference in Long Beach, coming in 2020.

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 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: One of your firm’s main areas of expertise, if you don’t mind me shifting gears here now is real estate tax credits. And I oftentimes hear Opportunity Zones incorrectly referred to as a tax credit program. Can you explain some of the similarities and differences between the Opportunity Zone tax incentive versus tax credit programs and in particular real estate related tax credit programs?

Michael: No, I’d be happy to, and I often hear it referred to as tax credits as well. Even some members of Congress when they introduce legislation in Opportunity Zones refer to the Opportunity Zones tax credit, or when they’re interviewed by the press they talk about Opportunity Zone tax credits. And as you correctly noted, it’s a Opportunity Zone tax incentive, not a tax credit. And the distinction is a tax credit is a dollar for dollar reduction in your tax liability. That’s what a tax credit is. An incentive is a tax benefit that relates to the amount of income or expense or deduction you would report.

And the Opportunity Zone tax incentive is that you get to defer when you recognize income, taxable income, capital gains. It allows you to potentially reduce the capital gains you ultimately have to recognize if you invest them in a fund by 15%, potentially, maybe 10%. And it allows you to not pay tax on any gain from investing in the fund if you hold the investment for 10 years. So the Opportunity Zone incentive is all about the amount of gain you recognize and when you recognize it, whereas tax credits are all about generating a tax credit that’s a dollar for dollar reduction in your tax liability.

Jimmy: So what implications does that distinction have on a real estate project or a fund sponsor of an operating business potentially within the qualified opportunity fund when it comes to raising capital, let’s say?

Michael: Well, I think the way I would look at it is there are a number of the tax credits that Congress has enacted to incentivize certain behavior. There’s the new market tax credit that’s designed to incentivize investment in low income communities and be able to provide below market rate debt and equity financing in low income communities. And as you know, the Opportunity Zones statute actually looks to the new market tax credit definition of low income communities to identify the majority of the Opportunity Zones themselves. So you have the new market tax credit that’s designed for community development. You have the renewable energy tax credit which is in real estate credit but it’s a tax credit designed to incentivize investment in renewable energy. You also have the low income housing tax credit, which is designed to give a tax credit to incentivize building or renovating affordable housing and then leasing and renting those units to lower income families at restricted rents.

And then you also have the historic tax credit which is designed to provide a tax credit, so developers will restore historic buildings back to their glory days as opposed to simply demolishing historic buildings. So there’s new market tax credits, renewable energy tax credits, low income housing tax credits, and historic tax credits. And all four of those are existing communities out there where Congress has given a tax incentive to try to spur on behavior and activities that Congress wants to incentivize. So when you then look at Opportunity Zones, it really just becomes an overlay question. It becomes a question of, to what extent if these incentives can they be married with Opportunity Zones in order to generate more equity benefit, you know, and lower cost of capital so more developments in these communities can become financially feasible as well as you can generate more resources for the development and further serve communities in those zones? And I’m happy to go through the various ones one by one or however you want to proceed.

Jimmy: Yeah, I’d like to dive in a little bit more. Or actually…and if you want to dive in one by one, I think that’d be great. But I guess my next question to you would be, what are some best practices for layering the Opportunity Zone tax incentive with those four main real estate related tax credits that you just mentioned? I mean, let’s say you have a client come to you who has a project located in an Opportunity Zone and this particular project may be eligible for one or more of those tax credits that you just mentioned. Logistically, how exactly does that get done? How can one take advantage of one or more of those tax credits and also layer on the OZ incentive as well?

Michael: You know, I would say that…I would probably reframe the question as, you know, normally what will happen is you have, you know, a developer or you have a nonprofit, you have a group, an organization that is trying to do something in an Opportunity Zone. They may be looking at it and saying, “I’m trying to build a healthcare facility,” or, “I’m trying to build affordable housing,” or, “I have this old building that I would like to preserve,” or, you know, “I want to add solar. I want to get some renewable energy on this particular site.”

And it’s really that activity that they then say, “I’m in an Opportunity Zone, what resources are available because right now I don’t have adequate funding? If I had adequate funding, I’d just march forward, build it and I’d be done.” So what happens is if you’re looking at a health care facility and you’re in an Opportunity Zone, then you might say, “Okay, what other incentives are out there to help me close my gap here?” And the new market tax credit is an incentive that could help you close the gap. So you’d end up looking at the new market and the client comes in and talks about the new market tax credit. You know, I won’t go into all the details here but it’s relatively difficult for a variety of reasons to layer directly the Opportunity Zones on top of a new market tax credit investment.

And most of the times what we’ll see is what we refer to as like a sidecar, where the new market tax credit incentive is provided to the facility as well as the Opportunity Zone benefit. So new market tax credit becomes more of a sidecar, if you will. However, with the low income housing tax credit, historic tax credit, or renewable energy tax credit, there is a layering that you can do where you would basically…and in that situation you have to just kind of walk through the mechanics of each of the three incentives and then determine whether or not a particular development is compatible with using both. Obviously you have the historic tax credits, there are sets of tax rules, low income housing tax credits, there are set of tax rules, as these renewable energy tax credits, and depending upon which Opportunity Zone you’re in, depending upon what you’re planning to build or renovate, you may or may not be eligible for Opportunity Zones as well or similarly you might have the Opportunity Zone incentive but you may not be eligible for low income housing tax credits, historic tax credits, or renewable energy tax credits.

Jimmy: I want to go back to that sidecar because I don’t know what that means. So can you explain to me what you mean when you say you can sidecar an MTC with Opportunity Zones?

Michael: Yes. So the sidecar basically means that…it’s the opposite of layering. When you say layering, usually when I think of layering, I think what that means is my investor will get Opportunity Zone benefits and the investor will get the tax credit benefits. So to me layering means I go in and I get Opportunity Zone benefits and say I get low income housing tax credits as well or I also get renewable energy tax credits going to one investor, or historic tax credit. And layering gets used as a means to have the investor invest more capital. So a project that has a financing gap can eliminate the financing gap. Sidecar means the investor will get their Opportunity Zone benefits and a different investor will get the new market tax credit benefits. So there are two financing cars next to each other versus on top of each other.

Jimmy: Gotcha. Two different tranches of capital.

Michael: That’s right. That’s right.

Jimmy: I gotcha.

Michael: Or two different sources of capital.

Jimmy: Two different sources of capital. That’s a better way of putting it. Good. Is it possible to receive multiple tax credits plus the Opportunity Zone incentive? Or do you typically only see the Opportunity Zone tax incentive sidecared or layered with just one of those tax credits?

Michael: No, you definitely generally will only see it layered with one, and even that is not that predominant. I’d say it’s definitely an emerging opportunity. I mentioned earlier that, you know, the incentive has really only been around for not all that many more months than 12 months and you think about the fact that when the incentive was passed in December of 2017, you had to first identify the zones because you couldn’t invest in the zone if they knew where the zone was. And then the IRS had to tell you a fund how to self-certify. So it really wasn’t ’til the summer of 2018 that you could start making investments.

You know, there were a host of unanswered questions in the Opportunity Zone world in the summer of 2018 just in general, well, when you thought about layering zones with tax credits, there are even more questions. And it wasn’t until October 2018 that we had our first set of regulations. It wasn’t ’til April 2019 of this year that we had our second set. So it really took some regulatory guidance coming out to best understand how to layer, and there’s still a few unanswered questions on the layering side. So I think really not since April has layering been as much opportunity to layer, and once the next set of regulations come out, which hopefully will still come out this year, my fingers are crossed, but I’m losing hope every day that once those come out, that’s when I think you might just see a lot more activity of layering of tax credits with Opportunity Zones.

Jimmy: Right. Right. Understood that this practice is certainly in its infancy. But it sounds like you’ve conceptualized it at least and you have an idea of how it works. Yeah, each day that goes by it seems less and less likely that we’re going to get these final regs before the end of the year. But that’s what I keep hearing is that they’ll be out by the end of the year. Well, I guess we’ll wait and see.

Michael: I would also say that we have worked on transactions in all four areas. There’s definitely transactions getting done. And I would say that historic is probably the one where we see the most. Historic and low income housing tax credits to a slightly lesser extent in terms of volume. Low income housing tax credit has the potential to really be impactful if we get the right guidance from Treasury and then renewable energy to a lesser extent, but even then that’s really emerging and I expect that can really take off. New markets I don’t expect much in the way of layering. I expect more in the way of sidecars.

Jimmy: Sure, sure. When we talk again in a few months, I get you back on this podcast, I hope you have several examples ready for me to show me exactly how this works.

Michael: Me too.

Jimmy: But I guess that ball is in Treasury’s court right now to see how quickly they can get you some clarification on some of these issues. Understood on that. Well, beyond, you know, some of the regulatory uncertainty, what have been some of the other biggest Opportunity Zone challenges that you and your clients have faced so far?

Michael: You know, I had a call with a client three or four months ago, a fund manager, and he said the greatest challenge that he was facing is just explaining how the incentive works and getting everyone comfortable with the incentive. And, you know, you’ve mentioned the differences in a tax credit and you’re still hearing it called the tax credit. Well, if you think about an investor, the investor is thinking about as a tax credit, there’s a lot of education you have to give that investor and also how it works. So I look at it much like I think about like-kind exchanges in Section 1031 and the like, it’s amazing how many people know what a like-kind exchange is or a Section 1031 exchange.

I know if I sell real estate, I can do this like-kind exchange or 1031 and then I roll it again into another investment. And it’s common knowledge by many, many in the investing world. Opportunity Zones, people hear about it and they hear the buzz and it definitely gets lots of eyeballs and such on magazines and all the rest. But when you think about an investor actually making the investment and understanding what it all means, there’s a real education that has to go on. And that’s what I think has been the biggest challenge. And it’s true at the investor level at a very basic level but there’s also a lot of misinformation that gets published that’s just wrong.

And I’ll look at it and I’ll go, “That’s not correct.” Some of the criticisms aren’t correct because they’re interpreting the rules incorrectly. So it’s definitely the misinformation that… And I don’t think anyone is doing it consciously. I just think it’s a question of it’s new. There’s a lot of moving pieces to it. And, as with anything, anything is complicated until you’ve done it a lot. And then it seems like second hand. And I always use the example of, if you drive your car, you know, you’re all secondhand. You know what the road signs mean and all the rest, but you know, you weren’t born with that knowledge.

And when you think about if you first got in a car and you had never driven before you wouldn’t know what the road signs mean or anything else. You face a little bit of that when you try driving in a foreign country, when you start seeing signs, you don’t quite know what they mean. So here, I just think we have to do more and more education. And that’s the biggest barrier, which is why I thank you for doing this podcast because your podcast does a great service in terms of how we educate more and more about the incentive so that we can overcome, you know, the greatest challenges.

Jimmy: Well, thank you for the kind words, I’m happy to do whatever small part I can to help get this tax incentive a little bit more clarity in the eyes of potential participants down the road. I’m happy to be doing what I’m doing educating folks out there every day. So happy to be doing it. You mentioned the criticisms and I want to get to that in a minute. But actually, I want to take us off on a 1031 tangent just momentarily here because you brought up 1031’s. I had a question for you, it relates to a question I got via email a couple days ago. I wasn’t quite sure what the answer was to it.

So let’s say you have a 1031 exchange and your money is with the Qualified Intermediary, the QI already, and maybe you put your money with the QI, let’s say, a month ago or so and you just heard about Opportunity Zones, and you think, “Well, wait a second, I don’t want to do a 1031 exchange. This Opportunity Zone thing sounds great.” What does that investor to do? Can he direct the QI to invest directly into a QOF or maybe there’s boot in the transaction already? How do you get the boot into the QOF? What are your options there exactly if you’ve kind of already started a 1031 and you change your mind or you just hear about Opportunity Zones and you want to kind of divert some of those funds into a QOF?

Michael: That’s a great question and we get asked that question quite a bit. And I think the better answer I think to this question is that when you initially do your exchange, when you initially sell your property, you give it to a Qualified Intermediary. And the expectation is that they will give you qualified property back. And if they give you qualified property back, then you’ve had what’s called a deferred exchange, you’ve given up real estate and then you’ve gotten real estate back. To the extent that you sell an asset or I should say you transfer an asset to an intermediary, you’re basically transferring the asset to them and you’re doing an exchange. And then if they end up giving you cash back, then obviously it becomes a taxable event and it’s more like an installment sale.

So I think that you can still, you know, take the cash back and that’s in an opportunity fund, but I think you’re measuring date in terms of are you compliant with the rules, which means you have to invest in 180 days if you sell or exchange, or if it’s 1231 property, you have until the end of that tax year, and 180 days from there. But I think you can roll it in an opportunity fund. It’s just your 180-day measuring period should be based off of the original sale or exchange, not when you get the money back from the Qualified Intermediary.

Jimmy: So are there any timing issues there?

Michael: You know, there are timing issues. I think you should look at it and say, from the date I transfer my property to an intermediary, I need to invest in an opportunity fund within 180 days of that date, or since when I transfer it’s probably…generates section 1231 gain, then you basically can’t invest until the end of the tax year that you made the transfer and you could invest on December 31 or 180 days starting on December 31. So let’s just use from date examples. Let’s assume on April 1 of 2019 you transferred your property to a Qualified Intermediary, you’re beginning your like-kind exchange, that April 1 date would be the date that starts your 180 days.

And the property being transferred to a qualified intermediary is probably going to be considered Section 1231 property. Which means if you get the…when you get the cash back, you can’t invest in a qualified opportunity fund until December 31st, 2019 if you’re a calendar year taxpayer. And that’s because of the rules around 1231 property. In that example you’d transfer in April 1 and you could invest in an opportunity fund until 12-31-2019 or you could wait and do within 180 days from that 12-31-2019 date.

Jimmy: Gotcha. Okay. Sorry about that. I didn’t mean to bog you down with the 1031 exchange question like that. I know that this type of stuff gets very technical very quickly, but it just came to my mind when you mentioned 1031s. Let’s get back on track now. So we spoke about some of the biggest challenges and you mentioned some criticisms of the Opportunity Zone incentive a few minutes ago. So speaking of those challenges and that criticism, there’s been a lot of bad press about Opportunity Zones over the past several months. What effect is that bad press or headline risk surrounding opportunity zones having on your clients?

Michael: You know, I wouldn’t say that there’s been a lot of bad press around Opportunity Zones. I would say there’s been some bad press around certain Opportunity Zones. I think the bad press has been around a handful of site selections where when you think about there’s 8700 opportunity zones approximately that were selected or were…you know, the Opportunity Zones in Puerto Rico weren’t really selected because all low income communities are eligible. But outside of Puerto Rico, the opportunity zones that were selected, they were selected by governors. And the governors had, you know, a large number of zones they could pick among and they could only pick 25% of those zones.

So I think the bad press relates to certain selections of certain zones by certain governors where when you look at it, folks are looking at those zone selections and saying, “Was that really a zone worthy of the governor selecting?” I look at that and say the…to me, the greater criticism should be directed towards the governors because the governors didn’t have to pick those zones. And that’s always a challenge with an incentive that allows those in a given state or more locally to make choices as you might end up not supporting those choices. So you look at the Opportunity Zones and you say rather than the federal government saying, “These are the ones that are eligible,” they say, “Here’s a pool to pick among. You governors decide where the greatest need is.” And then they pick those zones.

And then, lo and behold, when governors have picked a lot of zones there are some zones that, in retrospect, looking at a more deep analysis and all the rest, you start to look at those zones, essentially those zones have really been picked. And I think that’s a discussion that definitely should be had. And I think that that’s worthy of discussion, but I don’t think it’s a broad criticism of the incentive itself, I think it’s a criticism of some zone selections by some governors.

Jimmy: No, I think you’re right there. I think that’s an important distinction to make. I think you’re right. I think most of the bad press hasn’t been about the program overall. But yeah, a lot of it is focused on some of these poor site selections. Maybe there’s 100 or 200 zones throughout the country that you look at them and you scratch your head and you think, “Well, how come this is an Opportunity Zone?” And then you’ve got the allegations of what may or may not have happened with those zones in Reno and that’s a whole nother topic of discussion, right?

Michael: But I will direct you to, there was a recent story about a zone selection in West Palm Beach. And ProPublica did a piece on that. And then Economic Innovation Group came back and did an analysis of the zone and comes up with different or additional information about that site selection. So I just would point out that a lot of this type top line, you know, connecting the dots sort of where you look at a zone selection and say, “The X, Y, Z happened and we think this means this zone selection was inappropriate.” When you kind of go in and look at it through a different lens, you might get a different take. And I think West Palm Beach is a good example because you can look at the ProPublica piece that was written about it, you can look at the EIG piece. And neither one really says should or shouldn’t have been selected. But it definitely, if you read both of those, you get a more balanced view as to some of the complexities around zone selection.

Jimmy: You know, well, I’ll make sure to link to that piece in the show notes for the episode today. So there has been a little bit of bad press though over the past several months. Has it had any effect on your clients’ abilities to get their funds off the ground or to raise capital or have you not noticed that?

Michael: You know, we haven’t really noticed any…you know, it’s hard to know. Just because you don’t hear about it doesn’t mean it’s not happening. So we don’t know how…you know, I look at and say can have been helpful but it’s not proven to be any sort of safety barrier.

Jimmy: Sure. And as your data is pointing out as we alluded to, at the top of the show, you know, $3.9 billion has been raised so far, according to your survey, which you admit is probably far behind the actual number that you think that we may be well on pace for the $8 billion to $10 billion per year, which is excellent news.

Michael: Yes.

Jimmy: So I wanted to talk to you about your conferences that you host. You’ve hosted a few Opportunity Zone conferences already. Most recently, you had the Novogradac Opportunity Zones fall conference, which took place in Chicago back in October. Do you have any big highlights from that event that you’d like to share? And I know you’re also in the process of planning your next event in Long Beach, California, coming up in April of 2020. Maybe you can share with us what you have planned for that event as well.

Michael: No, absolutely. No, yeah, we just at the end of October had our Opportunity Zones fall conference in Chicago with a great gathering. You know, hundreds of folks. We were really pleased to have representatives from the White House. You know, we had Jeron Smith there. We also had representatives from HUD, Alfonso Costa, representative from Treasury, Dan Kowalski, you know, Executive Director of the White House Opportunity Revitalization Council, Scott Turner. You know, and my star John Lettieri of Economic Innovation Group who has done so much work in terms of getting the Opportunity Zones enacted and rolling out. So we had, you know, keynote addresses by several of them and some great discussions.

And it was really all about as we approach year end what guidance do we need, how can we kind of close the year strong for Opportunity Zones? And then looking to our Long Beach conference, there are a number of Opportunity Zones in the city of Long Beach. So we thought if there was a site in Southern California to hold the conference that was the place to be. So we’re excited to be headed there. And we’re really going to focus on community impact and some of the advocacy sorts of issues in terms of, you know, getting the word out about Opportunity Zones and discuss ways to make the Opportunity Zone incentive better. So it’s definitely something that we’re looking forward to and we’re sort of moving these conferences early on were all about sort of education and implementation.

And that’ll still be the education would always be a key part. And this is going to be continuing implementation, but also to look at and say, “Okay, we’re, you know, realistically at that point a year and a half approaching two years of effectively leading into the incentive. What have we learned? How can we, you know, better self-report while we wait for a reporting legislation? Maybe hopefully, we’ll have reporting legislation by the end. We can talk about how we’re implementing the reporting legislation.” But it’s really going to be focus more on the policy around Opportunity Zones to a greater extent I should say than in the past and we’ll still do a lot of the implementation stuff, but that implementation and education has been predominant in the past.

Jimmy: Perfect. Well, I’m definitely looking forward to it. Michael, this has been a pleasure speaking with you today. Thank you for taking the time again to speak with me and our listeners. I really appreciate your thoughts and your leadership in the Opportunity Zone space. Before we go, can you tell our listeners where they can go to learn more about you and Novogradac and your conferences and anything else you may be working on?

Michael: Yes, thank you very much. Appreciate the opportunity to share that with your listeners. is our main website, And if you’re interested in the Opportunity Zones aspect, that’s And if you just search within Google Novogradac Opportunity Zones, it’ll take you there.

Jimmy: And that resource center is an excellent resource for anybody who wants to learn more about Opportunity Zones. As I mentioned at the top of the show, I’ve used it myself. It helped me get up to speed on Opportunity Zones when I was first learning a lot about the program and I continue to browse it from time to time. I visit it just about every week and read about the news coming out and legislation that comes out. You guys have done an excellent job staying on top of this wonderful tax incentive. And all the best to you, Michael, in the future. And looking forward to speaking with you again soon.

For our listeners out there, I’ll have show notes on the Opportunity Zones database website for today’s episode. You can find those show notes at And you’ll find links to all of the resources that Michael and I discussed on today’s show. Again, Michael, thanks so much for joining me today. It’s been a pleasure.

Michael: Great. Thank you for the opportunity.