Opportunity Zones Continue to Hold Key to Economic Growth
More than 8,700 census tracts have been classified as Qualified Opportunity Zones (QOZ) in the United States, thanks to the passage of the 2017 Tax Cuts and Job Act.
As a result, an estimated $6 trillion in unrealized capital gains is eligible to be deployed into these QOZs, according to data by Real Capital Analytics.
The idea behind the creation of the QOZ program was to spur economic development in underserved communities by offering investors tax incentives.
These incentives create an opportunity for real estate development, redevelopment and investment. Potentially creating new jobs and improving the value and attractiveness of these underutilized areas.
Under the program, taxpayers who put their realized capital gains into a QOZ can get three tax benefits. They can:
- defer capital-gains taxes until December 31, 2026.
- get a reduction of up to 15% on the taxes ultimately paid.
- pay no capital-gains taxes on new appreciation on in-zone investments held for at least 10 years.
It should be noted that only capital gains investments are eligible for QOZ investment funds.
Proposed rules released in April would offer flexibility and certainty for investors to raise money and for developers to begin construction.
Maximum tax benefits from putting money into opportunity zones are available through the end of 2019.
Based on the rule proposal from April, a business can qualify for the tax incentives in a QOZ if 50% of its employees’ hours or wages are accrued in the QOZ.
Additionally, businesses can qualify if at least 50 percent of its revue is generated in a QOZ.
Some investors have worried about what would happen to the tax incentive if one QOZ investment is sold and the money from that transaction was used to buy another property.
According to the proposed rules, investors would have 12 months to reinvest proceeds from a transaction within a QOZ into a new QOZ investment to keep the incentive.
Allowing for investors to invest capital gains without paying the tax on those gains immediately could encourage the sale of more real estate assets in the near term that those investors would likely hold onto otherwise to avoid paying additional taxes.
Policies such as these that reinvest into lower income or economically disadvantaged communities give neighborhoods the shot of adrenaline they need to become revitalized and improve all around – from infrastructure to schools to safety to commerce.
Take Norfolk, Va. for example.
The St. Paul’s area of Norfolk, a 230-acre community located across the street from downtown, currently consists of three public housing developments that were built in 1950s.
Now, with the area being designated as a QOZ, the city is working on creating a public-private partnership that will transform the neighborhood into a mixed-income, mixed use community.
By doing this, the city of Norfolk hope to accomplish three very important goals:
- Create more financial independence and successful outcomes for neighborhood residents by creating suitable and affordable housing choices complete with supportive services.
- Deconcentrate poverty by developing a community that is attractive to families of all income levels.
- Create an environment with access to excellent education through partnerships with the Norfolk Public Schools, private early childhood education centers and Norfolk’s colleges and universities.
This kind of redevelopment is pricey, which is why the incentives of a QOZ is so attractive.
Last February, the city hosted a financing charrette with dozens of representatives from public, private ad philanthropic investment firms as well as government partners from the state and federal level.
Charrettes are planning sessions where developers, investors, designers and common citizens collaborate on a development vision. QOZ offer cities a reliable method of having the required flexibility to figure out financing, while ideating the potential impact of that development on a community.
Following the release of the rules in April, the Department of Housing and Urban Development (HUD) issued a Request for Information, seeking public guidance on how it can leverage the economic and social impact of Opportunity Zones.
HUD’s involvement is important as there is an overlap between public housing and Opportunity Zones. Data from that Request for Information included:
- Almost 27 percent of the residents of public and assisted housing – which amounts to roughly 2.4 million people – live in developments located within QOZ in the U.S.
- 371,000 public housing units are in QOZ, which is 38 percent of the total number of public housing units in the entire country.
- 337,000 project-based rental assistance units are also in a QOZ, which is 27 percent of the national total.
While these are incredibly high percentages considering the size of the country and the number of QOZ that exist, it’s not surprising because most cities put public and assisted housing in areas where there would be the least resistance from the community, almost isolating lower-income people onto their own low-income tract of land.
But now cities see the benefits and opportunities of redevelopment – especially in these QOZs where quality affordable housing options are prioritized while attracting new commercial development to bring in jobs and revitalize the area.
This means the future of public and assisted housing could be reimagined in a way that greatly benefits a community.
Cities could both preserve and enhance affordable housing inventory, as well as build wealth for current residents through intentional planning efforts. QOZs are thus stimulating a radically different discussion about the ends and means of community revitalization efforts – and ideally for the benefit of current and future residents of a community located within an QOZ.