The expiration date is nearing on a tax benefit launched in President Donald Trump’s first term that helped spur the completion of new multifamily units in low-income areas at more than twice the pace nationally.
The so-called opportunity zone tax program, introduced as part of the Tax Cuts and Jobs Act of 2017, was designed to encourage investments in almost 8,800 economically distressed census tracts. It offers individual investors the ability to defer and reduce taxes owed on capital gains from 2018 and received through 2026. Now, some property investors want the program extended or even made permanent, serving as what they call Opportunity Zones 2.0.
Opportunity zone tax credits are a relatively cheap way for the federal government to spur development compared to another option, Low-Income Housing Tax Credits, property professionals said in interviews. But they add that the program could use improvement: While it's a focal point for real estate and community development efforts, it has also faced criticism that it isn't permanent, doesn't do enough for rural communities, needs to require deeper financial distress for areas to be included, and should give tax breaks for more than just capital gains.
Even so, a CoStar News review of apartment openings and units under construction in designated opportunity zones shows that about 68,000 more units have opened in the opportunity zones than the pace that developers were completing before the tax break took effect. The estimated value of those additional units is more than $18 billion, based on CoStar’s average sale price per unit.
Nationally, apartments in opportunity zones are taking a larger percentage of all the new units that open each year. In 2017, unit openings in opportunity zones accounted for 12% of all U.S. units, according to CoStar data, a percentage that increased to 14% in 2018, the first year the tax breaks were available. That rose to 15% in both 2019 and 2020 and jumped to 18% in 2021.
Today, 23% of apartments now under construction will open in opportunity zones, CoStar data shows.
Zones in the city of Los Angeles were among the top beneficiaries. In 2017, before the tax breaks, opportunity zones in the nation's second-largest city had 1,245 new units, according to CoStar data. Last year, developers opened 3,432 apartments in these zones, and there are another 7,441 units under construction. Investors in these projects were all potentially eligible for the opportunity zone tax credit.
Opportunity zones are an important tool to help bring new residential property to Los Angeles at a time when the region faces a dire shortage of affordable housing that's affecting the larger economy, according to Damian Gancman. He's the chief investment officer and chief financial officer at Cityview, a Los Angeles-based multifamily developer that has raised more than $300 million from investors to spend on opportunity zone projects across the country.
Cityview got into opportunity zone investments after executives realized many of the projects they were working on happened to be in the zones already, Gancman said.
"When opportunity zones came out, the first thing we did was look at our deals we had done over the last 10 years, and about a third of them happened to just be in what were now designated opportunity zones," Gancman told CoStar News.
The firm's first foray was Jasper, a 296-unit apartment building that opened in 2023 on the site of a former bookbinding factory in Los Angeles' West Adams neighborhood.
Though located in a relatively underserved area, the project's location near transit and the University of Southern California made it a prime spot for development, according to Cityview's calculations.
The bet has paid off, with the project almost fully leased and thriving today, Gancman said. Where old industrial buildings once languished now sits an upscale complex with two rooftop sky decks, an entertainment terrace and a pool with cabanas. A park area includes a game lawn, billiards, a built-in outdoor pizza oven and communal spaces for outdoor dining and entertaining.
"We did it here,” Gancman said. He's hoping the program is renewed, saying: “Let's go do it again and again over the next 10, 15, 20 years.”
National apartment boost
New apartment openings across the country in opportunity zones rose 151% to 143,219 units last year from 2017, more than double the 63% gain to 807,206 units across all markets in the United States, according to CoStar data.
Michael Novogradac, managing partner of Novogradac & Co., a San Francisco-based accounting, valuation and consultancy firm that tracks fundraising and other opportunity zone data, found that "striking."
The “data confirms that residential real estate was spurred on in opportunity zones," Novogradac said in an email to CoStar News. “I would note that you could not begin investing in opportunity zones until the summer of 2018 and the regulations were not finalized until December of 2019. So, if you expect two years for delivery of new construction, you would expect to see a notable uptick in 2021.”
At the end of 2024, Novogradac was tracking 2,033 qualified funds, of which 1,611 funds reported a specific dollar amount raised. Those funds had reported raising more than $40 billion.
More than three-fourths of all equity raised is being targeted for residential properties, with nearly 200,000 housing units either built or scheduled with qualified fund financing, according to Novogradac. By far the most prevalent type of qualified opportunity zone fund for residential investment is multifamily properties, with 1,115 different developments financed.
Housing is just one outcome that organizations that care about opportunity zones follow, Ben Glasner, an economist at Economic Innovation Group, said in an interview.
Economic Innovation Group published a report in March concluding the opportunity zone program “caused a large — and still rising — increase in housing supply in designated communities.” The study tracked new multifamily and single-family developments.
“Given the amount of opportunity zones funding going to opportunity zones targeted towards housing, we're not really going to be able to have a sense for what the long-run effects are on things like poverty, employment, welfare effects in general, for many years, especially because we know that housing has such a long tail of effects,” Glasner told CoStar News.
He added that “If the opportunity zone program were not impacting housing, we would have good reason to be concerned about what those long-run effects might be. The fact that we're seeing such a positive impact on housing, or particularly residential addresses, is a good indication that at least that part is working so far.”
Individual investors lead charge
The driving force behind opportunity zone investments is often individual high-net-worth investors that have been traditionally drawn to the apartment sector for its reliable returns, industry professionals say.
“The key thing to keep in mind is that opportunity zones are predominantly a program that has been utilized by retail investors,” Steve Glickman, founder and CEO of Develop, an advisory firm supporting opportunity zone funds, said in an email.
About 84% of opportunity zone investors are individuals rather than institutions, he said, while individual investors make up the bulk of U.S. apartment buying.
In Los Angeles, opportunity zone investments helped Cityview get a foot in the door with wealthy individuals and family offices, Gancman said.
"It was a nice entree to the high-net-worth world because a lot of those investors aren't as focused on tax strategies," he said. "Cityview has historically been a more institutional fundraiser, and we wanted to diversify our capital sources."
In short, Glickman said, opportunity zones have become a flexible and successful program for addressing the shortage of housing in the U.S.
“That has the flywheel effect of creating new demand for local, retail businesses while providing increased property tax revenue to support other priorities like public education,” he said.
What’s next
With the opportunity zones set to expire next year, Republicans, in control of both houses of Congress as well as the White House, have the chance to extend the program, and maybe even pass a law to make it permanent, those familiar with opportunity zones say.
Even so, Andrew Weiner, a partner at the law firm Pillsbury Winthrop Shaw Pittman, pointed out what he considers opportunity zones' shortcomings in a paper last month.
“In truth, while the opportunity zone program has had promising outcomes, the law and regulations present structural flaws that make using the program difficult and cumbersome for many taxpayers,” he said. “As a result, many investors have stayed on the sidelines, thereby limiting capital investments into designated neighborhoods.”
The Treasury Department, the agency that administers opportunity zone tax programs, did not respond to multiple email requests from CoStar News seeking a comment.
Still, the program has powerful new backers in Washington, including new Department of Housing and Urban Development Secretary Scott Turner, Cityview's Gancman said.
"We hope and expect this program to have a 2.0 version. A few years ago, there was probably nothing happening," Gancman said. "In an otherwise divided country, there seems to be some bipartisan support to amend and extend the program. The general sense is it meets the public policy objective. It is proven to be successful in ways that other policies haven't in very tangible ways. The investment community views it as a really powerful tool in our arsenal.”
Weiner, in an email to CoStar News, said the program was initially "hampered by the time frames and the delay in producing regulations, followed by COVID.”
A major issue, according to Gancman, is the rigid timing of the capital gains tax deferral period. Rather than having a fixed deadline — where the benefit is simply extended by two or four years as is the case now — a rolling deferral window could encourage broader participation, he suggested.
“If I came in one year later, I get less of a benefit. And that’s probably why we haven’t seen much fundraising activity recently,” Gancman said. “There were periods when the incentives were really powerful. Having those windows be less finite could make a big difference. There may be ways to address proportionality while still meeting the goals of extending and improving the program.”