Opportunity Zone Investment Generates Positive Impact in Arizona with Ongoing Prospect for Extension of OZ Incentive

The Opportunity Zone (OZ) incentive was initiated by Congressional legislation to spur economic growth in underserved areas across the United States in late 2017.  Currently, there are 8,764 designated Opportunity Zones nationwide, including 168 in Arizona. Arizona was one of the first states in early 2018 to designate its opportunity zones and has been one of the top places for real estate development and investment.     

There are several distinct benefits for investors who invest qualified capital gains into a qualified opportunity fund (QOF), including initial deferral of tax on capital gains contributed, exclusion from taxes on any capital gains generated from a sale of the initial investment held in the QOF for at least 10 years and no depreciation recapture.

The equity generated by investors who contribute qualified capital gains into qualified opportunity funds continues to foster development of all asset classes and real estate in opportunity zones throughout Arizona.  In fact, well over $2 billion has been raised through the end of 2023 for projects in Arizona, which is the second leading State in attracting opportunity zone capital to date.  Five Arizona cities rank in the Top 50 for opportunity zone investments.  Phoenix and Tempe rank among the top 20 cities for the number of new housing units generated by opportunity zone investments, with 8,476 taken collectively, making our region #2 nationally.

The OZ incentive has created additional bandwidth for developers to raise funds for sourcing large-scale real estate deals in what has been a challenging financial market over the past two years.  A host of developers who have sponsored QOFs have been able to successfully raise OZ equity, leverage a variety of debt sources, expand their footprint in opportunity zones and generate more economic activity across Arizona.

Among other developments currently active in the region:

Affiliates of Jackson Dearborn Partners are planning to develop several new construction multifamily housing projects located in opportunity zones in the Phoenix, Arizona metropolitan area, including:

• a proposed mixed-use multifamily project in downtown Chandler with approximately 126 multifamily units and an anticipated 3,400+ square feet of retail space
• a proposed mixed-use multifamily project in downtown Scottsdale with approximately 83 units and an anticipated 5,000 square feet of commercial space
• the second phase of a multifamily project in downtown Goodyear with a total of approximately 296 units

YourSpace America and its affiliates are in the process of developing the following new construction projects, among others, located in opportunity zones in Arizona:

• a state-of-the-art 125,000+ square foot self-storage facility in downtown Phoenix with approximately 1,225 storage units
• a state-of-the-art 130,000 square foot self-storage facility in downtown Tucson with approximately 966 storage units

Significant legislative proposals were introduced during 2023, such as:

H.R.5761 — Opportunity Zones Transparency, Extension and Improvement Act, which would, among other things, extend the deferral date for opportunity zone investment from December 31, 2026 to December 31, 2028, reinstate reporting requirements relating to qualified opportunity zones; and allow for “fund of funds” investments; and

H.R.3937 — Small Business Jobs Act, which would create a new category of opportunity zone census tracts located in rural areas.

Both bills are currently stalled.

Although the opportunity zone tax incentive has generally benefitted from a solid foundation of bipartisan support since its outset in 2017, the gridlock on Capitol Hill is likely to prevent any new legislation from passing in this current election year.  It will be imperative to the survival of the opportunity zone incentive for Congress to enact extension legislation before the end of 2026.  Feel free to reach out to your Congressman or Senator to show support for the extension of the OZ incentive.

Brett Siglin is a director in Fennemore’s Real Estate practice group with extensive corporate and real estate experience who works out of our Phoenix office. He focuses his practice on a broad range of business law matters involving organizational structuring, joint ventures, syndication of equity, bond financing, contract negotiation, regulation and compliance, tax credits, property tax exemptions, and real estate acquisition and development.