Opportunity Zones and Tribal Economic Development
- Posted: June 6, 2019
- Posted by: Travis Lynk
- Last Reviewed: June 6, 2019
The 2017 Tax Cuts and Jobs Act included a new economic development program designed to attract private investment into economically distressed communities. The Opportunity Zone program offers tax incentives for investors to roll capital gains into a Qualified Opportunity Fund, which then invests in real estate and businesses in designated Opportunity Zones.
In June 2018, the U.S. Department of the Treasury and the IRS completed the final round of Opportunity Zone designations. State and territorial governors nominated low-income census tracts within their jurisdictions; at least 26 states included explicit set-asides for tribal land.
Over 250 of the roughly 480 census tracts on tribal land received Opportunity Zone designation. Of the 1,340 eligible census tracts containing tribal lands, 30% were designated as Opportunity Zones, well above the average for eligible tracts not on tribal land.
The Opportunity Zone program has the potential to have a huge impact on tribal economic development. Tribal leaders who take steps now, in collaboration with state and local government officials, will be best positioned to attract private investment dollars under the program.
Understanding Opportunity Zone Incentives
Taxpayers who realize capital gains can defer capital gains tax payments on those gains until the end of the 2026 tax year if those gains are invested in a Qualified Opportunity Fund within 180 days of the date of sale of the assets.
In addition, the capital gains tax is reduced by 10% for an investment held at least five years, and an additional 5%, for a total of 15%, if the investment is held for seven years. If the Qualified Opportunity Fund investment is held for at least 10 years, the taxpayer owes no capital gains tax on the investment when it is sold. The program is structured to encourage long-term investment in Opportunity Zones.
Qualified Opportunity Funds are investment vehicles that allow taxpayers to invest in Opportunity Zones. The investments may take the form of stock or partnership interest in a business operating primarily within an Opportunity Zone, or developing new property or improving existing property within an Opportunity Zone.
Attracting Opportunity Fund Investments
Indian Country leaders are uniquely positioned to draw long-term investment by making Opportunity Zones within and adjacent to their lands attractive to Qualified Opportunity Fund investors.
An effective strategy includes
- Understanding the type of investors who would be attracted to investing in tribal lands. Qualified Opportunity Fund investors have profitable investments they wish to sell, but they don’t want to recognize gains. This suggests that they are primarily interested in long-term investments, and perhaps socially responsible or philanthropic investments. Tribal leaders may want to partner with Native American philanthropies to identify and cultivate this type of investor.
- Seeking Qualified Opportunity Funds with a focus on tribal lands. Tribal leaders should identify Qualified Opportunity Funds with the stated purpose of developing Indian Country properties or connect with potential fund investors and collaborate with them to form tribal land-specific Qualified Opportunity Funds.
- Evaluating potential opportunities within tribal Opportunity Zones. It’s important for leaders to understand that investment is driven by market forces, not government mandate, so it’s incumbent upon those leaders to identify opportunities for development and present a case to fund managers that explains why investment in these areas would be successful and how it would perform over a five-year and 10-year period. Leaders should also take steps to identify and address any potential limitations on development within a tribal Opportunity Zone.
- Investing in infrastructure. Tribal governments can take steps to increase their potential to attract Opportunity Fund investments. Infrastructure projects such as road work, utility improvements, and water and sewer upgrades may make tribal land development more attractive to investors.
- Developing complementary businesses. The Opportunity Zone legislation specifies that investments in golf courses, tanning facilities, massage parlors, liquor stores, and casinos do not qualify for tax incentives. However, tribal leaders who can show that investment in qualifying complementary projects—such as affordable housing, grocery and convenience stores, and rental property—are better positioned to attract Opportunity Fund investments.
- Updating tribal legal codes to accept private investment. Opportunity Fund investors need to know that the tribal legal codes have secure transaction codes and that commercial codes are in line with other state and local codes. Bureau of Indian Affairs regulatory processes should be streamlined and excess red tape removed to compete with other Opportunity Zones. Tribal lands with HEARTH Act protections in place will be better positioned to compete for Opportunity Fund investment.
Many Opportunity Zones are either adjacent to tribal lands or comprise both tribal and non-tribal lands. In these cases, tribal leadership should work closely with local government to identify and promote opportunities for investment.