Following the Great Recession, recovery across the United States has been uneven. Cities such as New York and Chicago have recovered, while areas such as Detroit, Flint, and Appalachia, are still struggling. Buried in last year’s tax overhaul was a provision intended to address some of these discrepancies and ultimately create a new asset class. Private investors could receive tax benefits in exchange for helping to revitalize low-income areas and, in effect, create jobs and boost local economies.
What are Opportunity Zones
The idea for Opportunity Zones came from American entrepreneur and philanthropist Sean Parker who wanted to “empower entrepreneurs and investors to forge a more dynamic economy throughout America” via a “more market-driven approach to community development”. The IRS defines an Opportunity Zone as “an economically-distressed community where new investments, under certain conditions, may be eligible for preferential tax treatment.” These zones are an economic development tool, intended to drive community restoration and job creation in distressed areas by providing tax benefits to investors. Opportunity Zones were added to the tax code by the 2017 Tax Cuts and Jobs Act with the goal of improving education, infrastructure, and workforce development.
To qualify as an Opportunity Zone, locations must be designated as such by the state and certified by the Secretary of the US Treasury. Locations cannot be on either end of the “distressed” spectrum, i.e. so distressed that private investors would pass no matter the incentive or already undergoing gentrification.
What are Opportunity Funds
The IRS defines an Opportunity Fund as “an investment vehicle that is set up as either a partnership or corporation for investing in eligible property that is located in an Opportunity Zone and that utilizes the investors’ gains from a prior investment for funding the Opportunity Fund.” In effect, Opportunity Funds use private investment to solve public policy issues, and investors receive a variety of tax deferrals, exclusions, and deductions for doing so.
Impact of Opportunity Zones and Funds
According to The Atlantic, “The Opportunity Zone legislation has both expanded the federal government’s place-based policy and erased the federal government’s role in executing it.” There’s no arguing that the Opportunity Zone initiative has well-placed intentions. It’s a powerful tool that has the potential to rebuild and develop underserved communities, create jobs, provide affordable housing, and boost economic growth. But while Opportunity Zones and Funds are intended to revitalize distressed communities, economists argue that they will merely amplify investment in areas that were already growing, intensifying rather than remedying regional inequality. Another concern is that Opportunity Zones may just shift investment from one place to another rather than increasing the overall level of investment or that developers will use the zoning to get benefits on an investment that they would have made regardless. Further, private equity investors may truly intend to make improvements in these areas, but investment decisions are typically not being made based on any analysis around specific problems and needs in the area (hospitals and schools instead of affordable multi-family housing, for example).
To learn more about how to leverage Opportunity Zones, as well as best practices and opportunities for CRE as they relate to blockchain and investor transparency, watch our free best practice webinar with RealCrowd and RSM. Watch here: The Future of CRE Investing: Blockchain, Opportunity Zones, and Investor Transparency.