In case you haven’t heard, the Opportunity Zone is a tax incentive that was passed as part of the Tax Cuts and Jobs Act of 2017. Opportunity Funds created in these zones allow investors to defer federal taxes on any recent capital gains until December 31, 2026, reduce that tax payment by up to 15%, and pay as little as zero taxes on potential profits from an Opportunity Fund if the investment is held for 10 years (Read more in a previous blog post). The tool could potentially help rebuild distressed and low-income communities around the country, if used cautiously and intentionally. So far, the tax breaks for certain investments in designated census tracts has already led to the creation of nearly $1 billion in new funds. The Treasury Department expects an overall $100 billion in private capital will be deployed through the tool.
As with various other tax incentives, the key ingredient to the successful investment of Opportunity Funds in our neighborhoods will be the core mission driving those investments. Without the right mission and goals guiding the investments, Opportunity Zones may become inequitable places that end up displacing existing residents, businesses, and jobs. In New York, there is already fear rising from Opportunity Zones being located in relatively posh, or gentrifying, neighborhoods “with projects from sponsors better known for luxury skyscrapers than affordable housing”.
We need local community groups, philanthropic foundations, and mission-driven organizations to steer the efforts in Opportunity Zones, with clear action plans and strategies.
To achieve this, city governments and community-based organizations are working with third-party, independent advisors who can help prioritize projects and provide market expertise. The California Opportunity Zone Partnership, organized by non-profit Accelerator for America, with partnership of the State of California, Energy Foundation, Cities of Oakland, SF, San Jose, and LA will be doing exactly that by providing grants and technical expertise to three small-to- medium-sized California cities to help them attract inclusive investments into their Opportunity Zones. In Louiseville, KY, Accelerator for America has already supported the city to engage a consultant to create a replicable product—an Investment Prospectus—to enable the city to communicate its competitive advantages, initiate local partnerships, and identify sound projects that are ready for public, private and civic capital.
Here at Larisa Ortiz Associates, we conduct similar work in mixed-use urban places, often times located in Opportunity Zones, to help municipalities prepare an actionable and market-based investment prospectus that help guide private investment. As part of our SMAR2T Approach, we carry out comprehensive market analyses that account for challenges and opportunities in the physical environment, business environment, local administrative/ regulatory framework, and demographics.
The time is now – opportunity funds have 31 months to deploy the capital and investments need to be made by the end of 2021 to qualify for the minimum incentive to reduce their required 2026 tax payment (investors get a step-up in basis only if opportunity fund shares are held for at least five years). And to qualify for the full seven-year tax break (15% off tax bill), investments will need to be made by the end of this year!
If your city or neighborhood is looking to prepare a mission-driven and market-based investment prospectus for Opportunity Zones, get in touch with us!