Realizing the Local Potential of Opportunity Zone Funds
May 13, 2019 | Buildings & Sites
Included in the United States’ Federal Tax Bill of 2017 was a bipartisan idea meant to help drive long-term, private investments into low-income urban and rural neighborhoods and communities across the nation. This initiative, called “Opportunity Zones,” provides a tax incentive for investors to re-invest their unrealized capital gains into dedicated Opportunity Funds. Prior to the release of the Federal Tax Bill of 2017, cities were able to submit their census tracts to their Governor who then selected areas that would be included in this new initiative. In our region—ICR Iowa—we were fortunate that Governor Reynolds selected two census tracts in both Iowa City and Coralville as well as three in Cedar Rapids (maps included).
In most basic terms, the Opportunity Zones program allows a person or business to take earnings which would typically be subject to capital gains tax and reinvest them into a project or business in an Opportunity Zone. Not only does the investor avoid taxes on the current gain, but they also won’t pay taxes on any gains from the appreciation of the asset in the Opportunity Zone over a period of up to 10 years.
The rules and regulations for the program have become more clear after the United States Treasury Department released its second set of proposed regulations in April. Now, the rush is on for money to find projects that this tool can be used for.
What can Opportunity Funds be used for? Two things: investment in a business or a real estate project in a qualified census tract. The general consensus seems to be that these investments are best suited to grow or move an established business rather than startup companies. However, some funds will look into the opportunity of funding startups. From what we can tell, the easier investment will likely be in real estate. Rules regarding how funds can be used for renovating existing properties is becoming clearer.
Opportunity Zone funding is equity funding, which can be a new experience as many developers are used to debt financing. These funds are liquid equity from capital gains that can be used to leverage traditional debt tools. However, the fund will take an ownership stake as a partner in the business or development project for at least the period they need to realize the long-term capital gains savings.
One thing should be clear with this new program: Opportunity Zone funding will not make a financially poor project good. The program was built to create new opportunities to leverage local and outside capital and, given the tax benefits, may be a good way to get more lower income or workforce housing projects capitalized, as these types of projects typically don’t show the highest return rates and can be challenging for developers to justify building. Each community’s local leadership will still have the final say on zoning and permitting to ensure development projects are in line with the goals of the program and create opportunities for housing and employment.
Time is of the essence, as the benefits of the Opportunity Zones program are only fully realized if the investment is made before the end of 2019. This time-sensitive tool could be a huge boon to our region to spur investment and job creation, but only if we can get our ducks in a row and can identify shovel ready projects and sustainable business models that can utilize this investment. Developers are encouraged to get preliminary city approvals for their projects, determine what state and local incentives are possible, learn what the financing gap is and be able to provide assurance that the project can move forward in a timely manner with this equity investment.
Opportunity Zones meetings will be held in each community to provide further clarification on the rules, the steps to establish an Opportunity Zone Fund, discuss examples of qualifying projects, and identify businesses and projects that are seeking investment from local and national Opportunity Zone Funds. Again, this is not a silver bullet but it is a tool with a lot of potential and we will work collaboratively to ensure we take full advantage of it throughout our communities.
If you would like more information about the program or to attend one of the local planning meetings, please email Mark Nolte at mnolte@icadgroup.com
