As Congress considered the Tax Cuts and Jobs Act last year, the fight to save key affordable housing and community development programs made it easy to overlook another of its provisions, one to create a program with the potential to give a powerful boost to economically struggling communities. The next several months will be critical to the impact of this new program.
The legislation created Opportunity Zones, distressed areas that enjoy a new federal tax incentive designed to drive long-term private investment to them. These areas need help: Over half the communities eligible for designation as Opportunity Zones had fewer jobs and fewer businesses in 2015 than in 2000.
The source for this investment? The estimated $2.2 trillion of unrealized capital gains in stocks and mutual funds held by individuals and corporations. Unlike with the low-income housing tax credit or the New Markets Tax Credit (NMTC), there is no authorized cap on the amount of capital that could be made available through Opportunity Zone investments.
An idea developed by the Economic Innovation Group, Opportunity Zones offer investors a significant incentive: They can defer and even reduce their federal tax liability on the sale of appreciated assets if they place their gains into a new vehicle called an Opportunity Fund. These funds then channel pooled capital into equity investments in small businesses and real estate in distressed communities.
The Opportunity Zones program optimizes flexibility, allowing different types of investments that could benefit multiple parts of the community development ecosystem. For example, developers, service providers, and other small businesses critical to affordable housing delivery could receive new equity investments. Similarly, impact-motivated Opportunity Funds could help fill a capital gap that has been a barrier to scaling mixed-income and workforce housing.
Defining an Opportunity Zone
In general, census tracts eligible for Opportunity Zone designation align with qualified census tracts in the NMTC program. Governors must nominate low-income communities to receive Opportunity Zone investments. Certain tracts not meeting this definition can also be eligible if they are contiguous with designated Opportunity Zones that do.
By law, governors can nominate up to 25% of their state’s qualified census tracts for inclusion – or, if the state has fewer than 100 such tracts, up to 25 tracts. Up to 5% of the state’s 25% can be non-low-income tracts eligible based on contiguity. This article explains more about what qualifies as an Opportunity Zone.
Finding and Nominating Opportunity Zones
To help government officials and community development advocates see which areas qualify, Enterprise developed a free online tool mapping the qualifying tracts. In our home state of Maryland, for example, Gov. Larry Hogan could nominate as many as 148 tracts.
But which 148? Enterprise’s tool helps address that question by providing broader information about eligible census tracts. It shows other federal programs and designations in a tract, such as Choice Neighborhoods, Promise Zones, and NMTC developments, showing where Opportunity Zone investments could be layered on existing investments. The tool also draws on our Opportunity360 platform to document factors central to opportunity, such as housing stability, economic security, education, health and wellness, and mobility.
Since only 25% of each state’s qualified census tracts will be eligible to receive investments, governors should consider targeting tracts with capacity to receive an influx of private capital in a way that benefits communities and residents.
What Happens Now
Governors must nominate census tracts or request a 30-day extension by March 21, and the U.S. Department of the Treasury will review nominations and certify Opportunity Zones within 30 days of receiving nominations. Governors failing to meet the March 21 deadline will not have another chance to nominate census tracts, essentially disqualifying their states from this investment opportunity for the next 10 years.
Treasury will have a second crucial job: establishing the rules and regulations for the investments, including the process for creating an Opportunity Fund. Affordable housing and community development stakeholders need to engage in any public comment process to shape these rules so equitable investments are a cornerstone of this new opportunity.
Because Opportunity Zones have not yet been identified and Treasury has yet to establish rules for the program, there are too many unknowns to predict its impact. It has the potential to transform distressed neighborhoods—but advocates and policymakers must ensure that investments in Opportunity Zones produce economic development that benefits everyone. Now is the time to get involved.
Lori Chatman is president of the Enterprise Community Loan Fund and senior vice president of Enterprise Community Partners.
