A set of panelists at the Foundation for Accounting Education's Qualified Opportunity Funds, Opportunity Zones and ESG Investing Conference on Thursday said that while the pandemic has certainly changed how people invest in Qualified Opportunity Zones, deals continue to go on.

The Qualified Opportunity Zone (QOZ) program was developed as part of the Tax Cuts and Jobs Act to encourage investment in distressed communities throughout the country. The basic idea behind the program is that taxpayers can defer all or part of a gain that would otherwise be included in income if the corresponding amount is instead diverted into a Qualified Opportunity Fund, which then makes investments in Qualified Opportunity Zone businesses. The gain is deferred until an inclusion event or Dec. 31, 2026, whichever is earlier.

Panelist Jill Homan, founder and president of real estate investment firm Javelin Investments, said she is still seeing deals happening across all asset classes, from multifamily residential to hospitals to data centers and even retail shopping centers. She said her own firm is currently working on a $300 million deal for a large food-processing facility in rural South Carolina that grows its own tomatoes and turns them into salsa in the building next door. She noted, though, that it seems that people are more often finding good investments or good early-stage companies to invest in and then seeing whether these can fit into the opportunity zone framework, rather than going out to find opportunity zone investments first.

Another panelist, Abe Schlisselfeld, partner-in-charge of the Real Estate Group at Marks Paneth, noted that the pandemic has shifted around the types of asset classes that are and are not advantageous to invest in at this time. This has led to new investment trends that skew more toward industrial developments.

"The deals I see are targeting, and trying to find, some of those off-the-beaten track industrials," he said. " Obviously, Amazon warehouses now seem to be... a new trend."

Panelist Jeffrey Uffner, chair of the law firm Stroock & Stroock & Lavan's tax practice, said that he has also seen increased focus on industrial and warehouse properties, as "those are areas and sectors where there is still a fair amount of profitability," but he added that he has seen investors looking into multifamily residential housing development as well, especially if the QOZ incentives can be combined with other subsidies such as local tax breaks or brownfield credits "to add some sort of additional benefit to your returns." He said that deals are continuing, despite the current market chaos, because QOZ projects are meant to be long-term investments that will go on long past when the pandemic (hopefully) gets under control.

"People are looking into the 10-year benefit, and for future appreciation," he said.

Brian Senie, a tax associate with Stroock & Stroock & Lavan who specializes in QOZ transactions, added that another thing that has made people more discerning in this pandemic was recent IRS regulations that extended the due date for reinvesting eligible gains into a Qualified Opportunity Fund from April until the end of this year, though he noted that taxes remain a major driver in decision-making.

"I've had a few calls in the past few weeks where people thought they were out of time, but now, when they look at it, they're not out of time and think, 'maybe I can defer some taxes and find a deal that's the right deal.'' he said. "They're still looking at the bona fides of the deal; they're not just doing the deal just to do it, but taxes, opportunity zone benefits, are definitely driving people to do deals where they were maybe on the fence." He added that clients have also asked him to "pump the brakes and make sure this makes sense."

Homan noted, however, that the pandemic seems to have shifted the balance of power between developers and investors. Before the pandemic, she said, negotiations tended to favor the developer, but since then, there seems to be a lot more capital in the market and so power is starting to shift toward the investors. This is a very different situation from the 2008 crisis, which had distinct capital considerations.

"When I talked to investors during this time on the downturn, what I found was the first 20 minutes were about how bad everything was, and how much worse it could get, and the last 10 minutes were about how they still wanted to see deals and there's just a lot of liquidity, versus the last downturn, when I'd talk to investors and it was just crickets, no capital to really make investments," she said.

But while "the returns investors are solving for are generally the same," the underlying assumptions in the underwriting process have changed. For example, she noted, before the pandemic, a typical underwriting for a residential rental building might have called for a flat 3 percent rent growth per year. Today, though, a deal might be underwritten where there is no rent growth for the first one to two years, but then there would be a ramp up and stabilization over two to three quarters.

Senie pointed out another change as well, which had more to do with the timing of IRS regulations on QOZ than the pandemic itself: consolidating multiple QOZ assets into a single fund. this move allows for easier capital distribution in the event that "I'm overfunded on project A but underfunded on project B," as well as a lower compliance burden since there's only one entity to consider. He brought up the example of a client who used to have several separate QOZ funds for different tranches of investors.

"When the final regulations came out, they realized they could do this all in one fund, and so they merged everything they had into the separate funds and have that master fund now as the keeper of all capital and drop that down to the project entities as necessary," he said.

All the panelists seemed confident that the QOZ program isn't going away, no matter who wins the election, as it remains popular with both parties, and so they feel confident making long-term decisions assuming it will still be around. Homan said that, in the event of a Democratic victory, the certification process might change to emphasize the social impact, but, overall, the program will still be seen as valuable. She added that this will especially be the case if Democrats raise taxes, considering the major tax savings people can get through this program.

"The reality is the higher tax rates just mean investors, at the end of 10 years, are saving that much more money and opportunity zones are that much more valuable as a development tool and as an investment vehicle for taxpayers," she said.