Established by the Tax Cuts and Jobs Act of 2017, Opportunity Zones were designed to spur economic activity in the nation’s most distressed communities. States were charged with the responsibility to identify their designated census tracts that would be eligible Opportunity Zones for investment – which was designed to occur via private investment in Opportunity Funds. To read more about the background of Opportunity Zones and Ohio’s process to designate them, please visit GOPC’s previous blog thread.
Opportunity Zones required guidance from the US Department of Treasury to clarify many rules and regulations related to investment dollars, eligible projects, and questions related to tax deferral and reductions. In the end, Opportunity Zones were slower moving than many anticipated due to these hold ups. Many of these clarifications were “to the wire” for investors to get their dollars in by established deadlines.
GOPC has not provided significant updates on Opportunity Zones since their establishment. Nearly three years in, it is clear that investments are flowing into Opportunity Funds. While it is less clear the full extent of projects and social impact of the program, and if Opportunity Zones are the catalyst for development, it is likely that Opportunity Zones provide another tool in the belt in calibrating funding for projects. Opportunity Zones were mentioned during one of the 2020 presidential debates, and are sure to remain one resource communities have as they focus their efforts on recovery in a post-pandemic environment.
Designated Opportunity Zones in Ohio | Click Image for Link
The establishment of Opportunity Zones did not include a public reporting measure, which makes it difficult to evaluate the impact of the investment in distressed communities. An August 2020 report prepared by The Council of Economic Advisors in the White House estimated the impact to be around $75 billion. This dollar amount identifies the total economic impact and activity within all eligible Opportunity Zones in the nation – but each census tract will not receive the same amount of investment, projects, or activity. One criticism of Opportunity Zones is that because investors are motivated by their return on investment, investment may occur in the strongest of the tracts, which are already primed for investment. Many of the distressed communities’ census tracts in Ohio are in legacy cities, where investment aims at being a catalyst for revitalization. This means Ohio’s communities must compete against stronger market peers elsewhere in the Midwest as well as coastal states.
From the start, Opportunity Zones were primed as a vehicle which held the potential to bring dollars to the table in distressed communities that may not have otherwise. An influx of money for development projects can revitalize a community – which can be both a positive and a negative – especially for small businesses and the local economy. This is especially true for communities of color, as oftentimes the health of the economy is heavily reliant on minority-owned small businesses. In October 2020, Smart Growth America released a report to share their findings on the impact of Opportunity Zones and small businesses. This report states that it is found that the fundamental structure of Opportunity Zones makes it difficult for investing in small businesses – especially minority-owned – and many investments have been made to real estate development and such business ventures that align with the monetary incentive for investors. In fact, nearly 46% of investments have been made through Funds into real estate development. The report also identified that even those investors who place their capital gains in Opportunity Funds may not have knowledge of the communities where investment is needed, and therefore, invest where the profit margins are highest.
While it may be difficult to evaluate the full impact of Opportunity Zones from inception to this point, there are many examples of collaborative, community-led projects. The Economic Impact Group identifies these on their Opportunity Zones resources page. This resource provides examples of projects that fall into affordable housing, downtown/neighborhood revitalization, rural communities, and more. Communitywide collaboration has been noted as a fundamental piece of Opportunity Zones, as community leaders have worked together to nominate their census tracts to their state officials and then in the creation of community prospectus documents to encourage investment in their communities.
The establishment of Opportunity Zones does include a few milestone dates, which aim to keep investments on the ground for a significant time. These include a full tax deferral until December 31, 2026 for investors who place their capital gains in Opportunity Funds, and a tax liability reduction for holding funds for five to seven years. Additionally, investors who keep their initial investment for ten years do not pay tax on new gains from their investment. These dates show that Opportunity Zones will continue to serve as a vehicle throughout the next few years – though it may be some time until we know the impact on the communities.