Fund sponsors and their investors began buying assets in Opportunity Zones en masse this past month, their enthusiasm triggered by the U.S. Treasury's mid-April release of a second tranche of proposed regulations for the tax-sheltering vehicles.

“The consensus is that there is no shortage of capital from investors who want to get in,” says John Cochrane, manager of policy and programs at U.S. Impact Investing Alliance, a Washington, D.C. organization which advocates for government policies to help foster impact investing.

“There has been an increase in interest. A lot of people were waiting on the sidelines for this last batch of rules,” says Matthew Peurach, a law partner in Atlanta’s Morris Manning & Martin, who advises asset managers sponsoring middle-market Opportunity Zone funds.

“I’ve had a few clients that had us put together multi-asset fund documents, but they were waiting for more clarity. The day after they got that clarity they hit the streets, comfortable that they can give investors what they promise,” Peurach says.

“You are seeing ginormous movement,” says Ronald Fieldstone, a partner in Saul Ewing Arnstein & Lehr in Miami, who advises real estate investors.

This week, Fieldstone returned from Las Vegas where he and some 1,400 other financial industry professionals attended a jam-packed conference on Opportunity Zones, which included a workshop entitled “What is known, what remains unclear with the newest regulations.”

What is known about those newly proposed rules?

“The new regs provided far more definitions and certain takeaways,” Fieldstone says.

In April, Treasury officials issued 169 pages of new guidance about the Opportunity Zone program. Some 16 months earlier, Opportunity Zones first entered the investment world’s lexicon with the passage of the Tax Cuts and Jobs Act of 2017. With that legislation, Congress identified capital gains tax relief as a way to induce investment into U.S. neighborhoods that have been long-neglected economically. Ultimately, the Treasury approved some 8,700 census tracts located in all 50 states as economically disadvantaged enough to be eligible for Opportunity Zone investments.

Under the program, investors may be able to defer capital gains taxes — and even avoid some entirely — if they use recently-realized capital gains to buy stakes for the long haul in the designated communities.

To achieve the maximum tax benefits, investors are required to make a 10-year commitment, and to receive maximum tax-sheltering benefits investors must purchase their stakes by a December 2019 deadline.

But many investors, particularly those outside the real estate sector, remained uncertain about the advantages of the Opportunity Zone program for them until the Treasury released the additional guidance in April.

“I was really stoked when I saw the new rules,” says Paul Saint-Pierre, a principal advisor for PSP Advisors, which provides alternative investment due diligence research and other fund advisory services.

The Treasury’s decision to allow for staggered tax-free capital gain distributions of Opportunity Zone funds, rather than requiring them to liquidate all at once, was “a huge win for investors,” Saint-Pierre says.

In late April, UBS published a pamphlet highlighting key points of the Treasury’s second round of proposed regulations. The pamphlet was co-authored by Andrew Lee, the wirehouse’s chief investment office’s head of sustainable and impact investing for the Americas.

“In our view, the proposed regulations and federal support provide clarity on a number of issues raised by investors and should provide increased confidence to structure and invest in Qualified Opportunity Funds,” Lee writes.

The Treasury’s newly-proposed rules give fund managers “greater flexibility” — specifically allowing them to “recycl[e] underlying investments,” Lee writes.

Treasury officials also included “more expansive definitions” for operating businesses to qualify, he adds. Those concerns may now qualify if, for example, the managers and operational functions that take place in a zone generate 50% of the trade or business’ gross income, or if 50% of the salaries and wages are paid to employees working in a zone.

Some in the investor community, however, want to apply some brakes to the exuberance that the Treasury Department’s additional guidance has triggered.

Saint-Pierre stresses that “one footfall” in terms of tax compliance will unspool all of the otherwise qualifying investments’ tax advantages.

“The only way this program can work is if there is a straight line of tax compliance. The program only works as well as its weakest link of tax compliance. All the players involved and the investors receiving the benefits have to elevate their tax compliance, keep it top of mind every day,” he says. As the Treasury’s rules get more detailed and specific, the possibility of tax compliance errors rises, he says.

Cochrane agrees caution needs a place at the table.

“It is by no means a simple program. We have the rules of the road now. But it’s still not going to be for every type of investor,” Cochrane says.