What is an Opportunity Zone?
The Tax Cuts and Jobs Act of 2017 allowed governors to nominate certain census tracts as Opportunity Zones, subject to approval from the U.S. Department of Treasury. Up to 25% of a state’s low-income census tracts were eligible for designation, which permitted Indiana to nominate up to 156 census tracts as Opportunity Zones. States were required to submit their lists of Opportunity Zones to the U.S. Department of Treasury by April 2018.
Opportunity Zones provide federal capital gains tax advantages for investments made in these areas. This designation is intended to attract capital investment into areas that are economically distressed.
To be eligible as an Opportunity Zone, census tracts had to qualify as low-income. To do so, the census tract must have met one of the following requirements:
- The tract has a poverty rate of at least 20%,
(A) For a census tract in a metropolitan area, the tract’s median family income does not exceed 80% of the greater of: the metropolitan area median family income or the statewide median family income; or
(B) For a census tract in a non-metropolitan area, the tract does not exceed 80% of the statewide median family income.
However, if the census tract is located within a high migration rural county, the tract qualified as low-income if it did not exceed 85% (as opposed to 80%) of statewide median family income. A high migration rural county is any rural county that, during the 20-year period ending with the year in which the most recent census was conducted, has a net outmigration of inhabitants from the county of at least 10% of the county population at the beginning of such period.
Why the Need for an Opportunity Zones Program?
Three of every four distressed counties in the U.S. have fewer business establishments today than they did in 2007, just prior to the Great Recession. These areas have witnessed a decline in business formations. Furthermore, they have fewer employers, innovators and service providers. Economic growth is happening in a handful of metropolitan areas of the U.S. But, economic expansion must occur in more communities, including rural areas.
What is a Qualified Opportunity Fund?
A Qualified Opportunity Fund (QOF) is a mechanism that is now in place to invest in eligible property or projects located in an Opportunity Zone. The fund uses investors’ capital gains from prior investments as the financial resources needed to support the Opportunity Fund. The intent is to encourage potential investors with capital gains to re-invest in economically distressed communities that could benefit from such investments. What is important to note is that the QOF has six months to deploy 90 percent of its capital in Opportunity Zones.
How are Qualified Opportunity Funds Created?
To become a Qualified Opportunity Fund, an eligible corporation or partnership self-certifies by filing Form 8996: Qualified Opportunity Fund with its federal income tax return. No approval or action by the Internal Revenue Service is required. Any taxpayer who wishes to participate in the Opportunity Zone program can do so (but it must be in a Qualified Opportunity Fund). Investors have 180 days from the point of sale of an asset to invest into a QOF. The QOF has six months to deploy 90 percent of its capital in Opportunity Zones.
Benefits to the investors increase over time
Less than 5 years
Deferred payment on existing capital gains until the date that the Opportunity Fund investment is sold or exchanged.
Benefits above plus 10% of tax on existing capital gain is canceled
Deferred payment of exiting capital gains until December 2026 or the date that the Opportunity Fund investment is sold or exchanged (whichever comes first) PLUS 15% of tax on existing capital gain is canceled.
Greater than 10 years
Benefits of the 7-10 years investment PLUS investor pays no capital gains tax on the Opportunity Fund investments (that is, investments are exempt from any capital gains beyond those which were previously deferred)
Fikri, Kenan and John Lettieri. The State of Socioeconomic Need and Community Change in Opportunity Zones. Economic Innovation Group. December 2018.
LISC, Opportunity Zones: A New Program to Connect Private Investment to Low-Income Communities Nationwide. Not dated.
For more information on Opportunity Zones, check out this article written by PCRD’s Dr. Bo Beaulieu.
Dr. Bo Beaulieu is Professor Emeritus of Rural and Regional Development, Purdue Center for Regional Development and the Department of Agricultural Economics. Since joining Purdue in 2013, he’s given leadership to Purdue’s EDA University Center, the development and implementation of the Hometown Collaboration Initiative, the launch of the Rural Indiana Stats website, and the Rural Opportunity Zones Initiative.
Opportunity Zone Investment Consortium:
The goal of the Opportunity Zone initiative is to encourage long-term private capital investment in low-income urban and rural communities. The program offers long-term federal tax deferral on capital gains for investments in designated zones, with additional tax exclusion from new capital gains achieved from those investments. Governor Holcomb nominated 156 census tracts with the help of a group of advisors from around the State. Additional information is available this April 19, 2018 press release from Governor Holcomb's Office.
Now that proposed regulations have been released, Indiana cities and towns with designated Opportunity Zones can move forward with positioning their Opportunity Zone for investment.
To help with next step, the Opportunity Investment Consortium of Indiana was created. The goal of this consortium is to encourage the transformation of Opportunity Zone neighborhoods into vibrant places for residents and businesses. The consortium is comprised of a public/private collection of investors and co-investors poised to support and invest in Opportunity Zones through the facilitation of this online pairing tool. This tool will help match projects in need of funding to potential investors. View this presentation to learn more.
An advisory leadership, together with backbone agencies, training and consultancy partners, will collectively provide coordinated assistance to deals as they clear milestones and prepare for Opportunity Zone investment infusions. Commitments to help staff the backbone of the pilot include: State of Indiana, Local Initiatives Support Corporation (LISC), Cinnaire, Indy Chamber, Indiana Bond Bank, Indiana Economic Development Corporation, Indiana Office of Community and Rural Affairs, and Indiana Housing & Community Development Authority. Local Initiatives Support Corporation will house the online portal with support from the Fifth Third Foundation.
Helpful OZ Resources
IRS-Qualified Opportunity Fund - https://www.irs.gov/credits-deductions/businesses/invest-in-a-qualified-opportunity-fund
Opportunity Investment Consortium of Indiana - https://www.opportunityinvestmentconsortium.com/
Indiana GPS Guide to Delivering Opportunity - https://indianagpsproject.com/wp-content/uploads/2020/11/Delivering-Opportunity-FINAL-002.pdf
The Opportunity Exchange - https://www.theopportunityexchange.com/resources/learn
OZWorks Network - https://www.ozworksgroup.com/share/qMM2FOStuFPK6d11?utm_source=manual
Opportunity Alabama - https://protect2.fireeye.com/v1/url?k=94586aee-cbc353dc-945c23ee-8697e44c76c2-33850fa47508ec7e&q=1&e=96e1fff8-5122-4d66-8c0c-76be34028d7e&u=https%3A%2F%2Fopportunityalabama.com%2F
Opportunity Appalachia - https://protect2.fireeye.com/v1/url?k=0ec032ca-515b0bf8-0ec47bca-8697e44c76c2-053d1e5a3fcc0089&q=1&e=96e1fff8-5122-4d66-8c0c-76be34028d7e&u=http%3A%2F%2Fwww.opportunityswva.org%2Fopportunity-appalachia%2F
Opportunity Virginia - https://protect2.fireeye.com/v1/url?k=0ec032ca-515b0bf8-0ec47bca-8697e44c76c2-053d1e5a3fcc0089&q=1&e=96e1fff8-5122-4d66-8c0c-76be34028d7e&u=http%3A%2F%2Fwww.opportunityswva.org%2Fopportunity-appalachia%2F
Acadiana Opportunity Zone Initiative https://protect2.fireeye.com/v1/url?k=05cc4ba6-5a577294-05c802a6-8697e44c76c2-859063fcc6f230e5&q=1&e=96e1fff8-5122-4d66-8c0c-76be34028d7e&u=https%3A%2F%2Fplanacadiana.org%2Fopportunity-zones%2F
Brookings-Opportunity Zones: The early evidence, February 2021 - https://www.brookings.edu/events/opportunity-zones-the-early-evidence/
The Commercial Real Estate Capital Stack: How it Works, May 2020-https://www.equitymultiple.com/blog/commercial-real-estate-practice/cap-stack-commercial-real-estate-works
CRE Pros Laud Biden’s Proposed Changes to Opportunity Zone Program, December- https://www.wealthmanagement.com/investment/cre-pros-laud-biden-s-proposed-changes-opportunity-zone-program
What are Opportunity Zones and How Do They Work?- https://www.taxpolicycenter.org/briefing-book/what-are-opportunity-zones-and-how-do-they-work
New Guidance on Opportunity Zones: Highlights for Real Estate Owners and Developers,May 2019- https://www.hklaw.com/en/insights/publications/2019/05/new-guidance-on-opportunity-zones-highlights-for-real-estate
Blueprint for Entrepreneurial Growth and Economic Prosperity in Southwest Virginia, April 2012- http://approject.org/wp-content/uploads/2016/06/ENT-Blueprint.pdf
GroundUp-Pro Forma Tool- https://www.groundupmodel.org/
Urban Institute-Opportunity Zone Community Impact Assessment Tool- https://www.urban.org/oztool
StatsAmerica-USA Opportunity Zones- http://www.statsamerica.org/opportunity/map.aspx
Financial Projections Template- https://www.score.org/resource/financial-projections-template