Opportunity Zones Program
Updates as of May 16, 2018:
Tax policy has long been a tool for encouraging (and discouraging) investment in places, innovations, business expansion, and community development. From New Markets Tax Credits to more recent programs like Pay for Success (PFS), many of these financing incentives also receive bipartisan support from Congress.
Within the just-signed Tax Cuts and Jobs Act of 2017 is a new incentive to attract investments in communities: the Investment in Opportunity Act. Learn more below about how the incentives work and how Opportunity Zones (OZs) are selected.
How Opportunity Zone Incentives Work: Putting Capital Gains to Work
Opportunity Zones (OZs) are intended to spur long-term investments in low-income census tracts in the U.S. The new law allows investors to place unrealized capital gains (a profit from an investment that hasn’t yet been sold) into Opportunity Funds that invest capital into OZs. The greatest tax benefits would go to investors who invest for 10 or more years.
In this way, Opportunity Funds (O Funds) may activate passive, patient capital by connecting investors to projects in low income communities. The pooled fund model may also increase the scale of investments while lessening the risk to any individual investor. It could also provide complementarity with the NMTC program: where NMTC provides tax credits for loans to businesses in low income areas, OZs are more focused on long-term equity and may have fewer restrictions on the kinds of investments that would qualify. NMTC also has a cap on the annual allocation amount ($3.5 billion), while O Funds are, as of February 2018, limited primarily by market demand.
Selecting Opportunity Zones
Opportunity Zones are low-income community census tracts as defined by the NMTC program. Governors in US states and territories had until March 21, 2018 to send their nominations for Opportunity Zones (OZ) in their states to the U.S Treasury. They could nominate up to 25% of eligible census tracts as Opportunity Zones. Up to 5% of census tracts can be in areas that are contiguous with low-income community census tracts. (Read more here for the EIG’s early recommendations on how states should consider selecting OZs.)
With guidance from the IRS and CDFI Fund, states that have chosen to participate have now designated Qualified Opportunity Zones. Some states requested input for their selection processes from local governments and other stakeholders. For example, Washington State developed a procedure for nominating tracts; and Missouri collected formal feedback from local governments. (See a map of Opportunity Zones Program from all participating states here.) Many states' selections for zoning have now been certified.
As Opportunity Zones are certified, local leadership (including government, community leaders, foundations, and others) will begin the work of shaping the implementation of the program. It is not yet clear, for example, how O Funds will be created and managed to ensure that local investments effectively balance positive community outcomes with financial return for investors— without leading to gentrification. It is also not clear how the funds will attract investments.
This program is developing quickly, and foundation impact investors may play a unique role in keeping impact at the heart of the program — as local community convenors, supporters of research and monitoring, investors in O Funds, and more. As the program continues to evolve, visit Enterprise Community Partners, Summit Consulting, the Economic Innovation Group (EIG), and the CDFI Fund for additional details and regular updates.