Wednesday could be a pivotal day for many of America’s distressed communities.
It’s the deadline for governors to nominate census tracts in their states to be designated as Qualified Opportunity Zones by the U.S. Department of the Treasury. These areas, created as part of last year’s Tax Cuts and Jobs Act, will benefit thanks to a new federal tax incentive designed to drive long-term private investment to distressed areas.
But to take advantage of this potentially powerful incentive, governors need to submit their nominations by the March 21 deadline, or at least file for a 30-day extension. If they do not, their states will not have another chance to make nominations.
Opportunity Zones optimize flexibility, so multiple types of investment could benefit lower-income communities. Developers, service providers, and other small businesses critical to the creation and preservation of affordable housing could receive new equity investments. Impact-motivated Opportunity Funds could help fill a capital gap that has been a barrier to scaling mixed-income and workforce housing.
The need for this kind of investment is clear: over half the communities eligible for designation had fewer jobs and fewer businesses in 2015 than in 2000. Fortunately, a potential solution to steer investment to these communities is also clear.
Originally conceived by the Economic Innovation Group, Opportunity Zones will draw on unrealized capital gains in stocks and mutual funds held by individuals and corporations. It’s a huge available pool, estimated to be between $2 trillion and $6 trillion.
But why would investors put their money in Opportunity Funds? They will be able to defer and even reduce their federal tax liability on the sale of appreciated assets if they invest in those funds, which will channel pooled capital into equity investments in small businesses and real estate in one or more Opportunity Zones. 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 Funds.
The Challenge for States: Which Areas to Nominate
In general, census tracts eligible for Opportunity Zone designation align with qualified census tracts in the NMTC program. Tracts not meeting this definition can also be eligible if they are contiguous with designated Opportunity Zones that do.
Governors can nominate up to 25 percent 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 percent of the state’s 25 percent can include contiguous tracts. This article explains more about what qualifies as an Opportunity Zone.
Because of the short timeline and critical nature of these nominations, Enterprise developed a free online mapping tool to help government officials and community development advocates see which tracts qualify. Since only 25 percent of each state’s qualified census tracts will be eligible to receive investments, the tool also provides broader information about which eligible tracts have the capacity to receive an influx of private capital, and do so in a way that benefits communities and residents.
For example, the tool shows other federal programs and designations, such as Choice Neighborhoods, Promise Zones, and NMTC developments. Pulling all that information into one place highlights where Opportunity Zone investments could be layered onto 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.
What Comes Next
The treasury department will certify Opportunity Zones within 30 days of receiving nominations. Treasury will also establish the rules and regulations for the investments, including the process for creating an Opportunity Fund.
Opportunity Zones have the potential to transform distressed neighborhoods—but advocates and policymakers must ensure that those investments produce outcomes that benefit everyone, including equitable revitalization and wealth creation for low-income individuals and business owners. In April, we’ll highlight how stakeholders can get involved in that crucial process.