What Are OZs Not?
OZs are not a traditional form of capital for affordable housing. OZ investors make equity investments through a mechanism that is distinct from the grants, loans, or tax credit-based investments provided for affordable housing over the past few decades.
Traditionally, Congress appropriates funds for affordable housing development and a federal agency administers those funds. For instance, HUD administers the HOME Program and distributes these block grant funds to states, territories, and local jurisdictions based on a formula that measures relative need. These public funds are very scarce relative to affordable housing needs in the nation.
In addition to public funds, another key affordable housing resource is the LIHTC program. LIHTCs are a tax incentive to investors to invest in affordable housing. The IRS awards a specific amount of LIHTCs to states and territorial areas, and their administering agencies establish preferences for their use. Developers submit LIHTC applications to the designated agency on a competitive basis against other applications for this limited resource.
Unlike tax credits or public funds, the capital available to a developer of affordable housing in an OZ does not require an application to a public agency. Provided the property is located in one of the 8,700 OZ-certified communities, a developer negotiates the terms of an equity investment directly with an investor or a fund created to invest on behalf of taxpayers that have experienced a capital gain and would benefit from OZ tax relief.
Also, unlike tax credits or public funds, the capital that can be generated through OZ investments is not limited. There is no cap on the amount of investment that is generated in a community designated as an OZ. As long as there are taxpayers with capital gains, there is a potential source of funds for projects located in an OZ.
Individual and corporate taxpayers with a capital gain can take advantage of the tax relief offered by the OZ program by identifying any eligible project in the OZ to invest in. Industry observers suggest there are trillions of dollars in potential capital. Further, this capital is available to a developer of affordable housing in an OZ without an application to any public agency.