How will Opportunity Zones Help Local Communities?
- Posted: April 11, 2019
- Posted by: Travis Lynk
- Last Reviewed: April 12, 2019
Developers are ready to identify and fund new projects in Opportunity Zones. Supporters of the Opportunity Zone program believe it will unleash funds to revitalize distressed communities; some analysts believe the potential market is as high as $6 trillion.
Some, however, worry that investments in Opportunity Zones will simply subsidize development in areas either currently undergoing gentrification or on the verge of doing so. Given the results of similar programs, such as Empowerment Zones and New Market Tax Credits, it is reasonable to ask about the effects of the Opportunity Zone program.
Opportunity Zone tax incentives are based on capital appreciation as opposed to job creation or providing community services. Taxpayers investing in Opportunity Zones receive favorable capital gains tax treatment in a way that incentivizes long-term investment.
Investors who hold assets in an Opportunity Zone for 10 years can sell them with no capital gains exposure. There’s also tax deferment on capital gains rolled into an Opportunity Fund and on capital gains tax reductions on assets held for at least five years.
There is no government oversight over the types of projects developed by Opportunity Funds. As long as an Opportunity Fund passes the 90% test, demonstrating that at least 90% of the fund’s assets are invested in Opportunity Zone properties, then developers are free to choose projects that align with the fund’s goal.
Ultimately, the value of the tax incentive to investors depends on rising property values or business profitability within an Opportunity Zone. Critics argue that the highest returns, and thus the most attractive investments, will be in neighborhoods with rapid gentrification.
Supporters point out that states and territories had the final say in the process of nominating Opportunity Zones, meaning that state and local leaders could select neighborhoods that were most in need of economic development, not those already undergoing redevelopment.
Think tanks have stepped in to provide information and guidance for Opportunity Zone development. The Urban Institute, for example, tracked capital flows for various types of lending for every one of the designated Opportunity Zones to arrive at an investment score for each. The organization flagged zones that had already shown a higher than normal level of demographic and economic change, indicating redevelopment and revitalization had already begun. This gave government officials a tool for identifying tracts in need of development that were not yet experiencing improvements.
Additionally, city officials and community leaders within designated Opportunity Zones are working to select, prioritize, and market individual projects and properties that address previously identified needs within specific neighborhoods. With civic leaders involved in the process, supporters believe that Opportunity Zone development will actually benefit local residents and communities.
Officials in urban areas where Opportunity Zones are located are also experimenting with local policies for Opportunity Zone properties that promote “smart gentrification,” requiring developers to preserve or expand low- and moderate-income housing when building more expensive housing projects.
Ultimately, the Opportunity Zone program is an experiment in federalism, with states developing their own criteria for nominating Opportunity Zones. Power is further devolved to the local level, where city and county governments create their own regulations and policies for Opportunity Zone development. This local control means that capital inflow from Opportunity Funds are more likely to address the needs of residents and local communities.