With Blake Christian, CPA, MBT
From the March / April 2025 Issue
For nearly a decade, the federal Opportunity Zone (OZ) program has been a transformative tool for real estate developers, particularly in the multi-family housing sector. With rental demand surging in high-cost metropolitan areas, developers have leveraged the OZ program to increase housing inventory in underserved communities, benefiting from the substantial tax incentives.
However, the technical requirements—especially the substantial improvement test — work best for ground-up build projects versus rehabs. When a Qualified Opportunity Fund (QOF) acquires improved real estate (rather than raw land), the fund must make improvements at least equal to the building’s tax basis within a 30-month period.
OZ Program’s Role In Housing Affordability
Despite initial gentrification concerns, research indicates the OZ program has played a significant role in expanding housing supply and stabilizing rents. A study by Wheeler (2022) using American Community Survey data found that OZ designation led to a 3.4% increase in median home values between 2017 and 2020, while rents remained comparable to non-OZ areas.
With increased development and rehabilitation in OZ census tracts, supply constraints have eased, helping to stabilize rental prices. Research from John Lettieri (2021) of the Economic Innovation Group and others confirms the strong correlation between expanded housing supply and rental affordability.
OZ census tracts, which are home to 10% of the U.S. population, now account for 20% of all new market-rate multi-family developments. That’s a significant increase from 8% prior to the program’s passage in 2017. This surge in housing has dramatically improved the availability and quality of housing in low-income communities and adjacent neighborhoods.
The Future Of OZ And Housing
HUD Secretary, Scott Turner, who has been involved with the OZ Program since its inception, is expected to champion the program and expand its use with a wider variety of housing projects. 2025 will be a critical year for tax policy changes and will give us a clearer vision of the future of the OZ Program.
With the House passing a tax package in February, the likelihood of an OZ program expansion is rising. If enacted, these changes will sustain multi-family housing incentives and encourage momentum in OZ real estate development. This bodes well for companies and their site selection teams when considering a move to more affordable areas.
With the probable expansion and extension of the OZ Program under the Trump Administration, expect to see additional funds flowing into OZ multi-family housing as well as into single-family homes that are “build-to-rent.” Renting these projects is key to meeting the OZ program’s 10-year holding requirement. As an example, Pinnacle Partners has an East Coast build-to-rent OZ Fund.
Another benefit of OZ investing into rental properties is the ability to use debt leverage. Doing so can enhance overall returns and accelerate tax deductions by increasing investor’s tax basis in the OZ Fund. Also, utilizing cost segregation studies can allow acceleration of tax deductions for investors. According to our firm’s modeling, accelerated depreciation, combined with the lack of recapture, generally adds another 1.5% to 2.5% annually to overall project return. This further incentivizes construction of affordable housing.
The Low-Income Housing Tax Credit program (LIHTC) can also be combined with OZ projects to benefit investors further who commit to affordable housing.
All of these factors bode well for investors and developers of affordable housing in the long term. If your organization is considering a move to locales with more economical housing options for your workforce, there are nearly 9,000 OZ census tracts to choose from—and potentially more to come under Opportunity Zones 2.0.
Christian, CPA, MBT, is a tax partner in the Park City, Utah, office of HCVT LLP. Christian leads the firm’s efforts in providing tax consulting services for Qualified Opportunity Zones (OZ).
