Problem: Urban blight
Solution: Investment in opportunity zones
What are opportunity zones?
Opportunity zones are census tracts of land designated by the Tax Cuts and Jobs Act of 2017. They exist in all 50 states and five United States territories. The entirety of Puerto Rico is an opportunity zone. To qualify as an opportunity zone, the census tract must have:
- A poverty rate of at least 20%, OR
- A median family income of:
- No more than 80% of the statewide median family income for census tracts within non-metropolitan areas.
- No more than 80% of the greater statewide median family income or the overall family income for census tracts within metropolitan areas.
In each jurisdiction, up to 25% of the census tracts that meet this criteria can be nominated as opportunity zones. Nearly 8,700 census tracts in America were certified as opportunity zones by the U.S. Department of Treasury in June 2018. The federal government’s goal in establishing these zones is to stimulate private investment in exchange for capital gain tax incentives. The tax benefits are as follows:
- Investors can be granted immediate tax deferrals for qualifying gains invested in opportunity zone funds until April 2027.
- Investors who hold their Opportunity Fund investments for at least five years prior to December 31, 2026 can reduce the liability on their deferred capital gain principal by 10%.
- Investors who hold their Opportunity Fund investments for at least seven years prior to December 31, 2026 can reduce the liability on their deferred capital gain principal by 15%.
- Investors who hold their Opportunity Fund investments for at least ten years can pay no taxes on gains earned on their Opportunity Fund investments.
How are opportunity zones solving the problem?
Attracted by tax incentives, private investment can now help spur business development in lower-income communities within opportunity zones. This, in turn, reduces poverty, lowers the crime rate, and raises property values. In the past, similar “opportunity zone”-like incentives have been signed into law, such as Empowerment Zones and Enterprise Communities. However, these projects failed at utilizing all of the investment capital available. They focused on active investors: those who had started or would be starting businesses in these areas. Opportunity zones, however, can tap unused capital (approximately $6 trillion) provided by passive investors. Allowing passive investors to fund development in opportunity zones creates a larger opportunity for growth within these communities than previous acts had allowed.
What are some issues with opportunity zones?
There are two potentially large issues with the creation of opportunity zones. Firstly, opportunity zones can cause gentrification in these lower-income communities. Some residents of opportunity zones fear that rents and other costs will rise due to the influx of outside investments. This brings us to the other potential issue: too much investment in real estate and not enough investment in start-up businesses. The purpose of opportunity zones is to attract passive investors to revitalize communities and create jobs, but many fear that these passive investors look to only invest in real estate. This could have the opposite effect of sparking business development, instead driving rents up, residents out, and, as mentioned above, possibly resulting in gentrification.
What’s the environmental impact of opportunity zones?
Opportunity zones, although controversial, can be beneficial to the environment when invested in correctly. For example, the KNGDM Group led by former Tennessee Titan Derrick Morgan looks to invest in developing environmentally sustainable housing in opportunity zones.