Opportunity Zone Funds may have gotten a boost from President Donald Trump’s recent executive order, which created an Opportunity and Revitalization Council that can help steer federal spending toward low-income communities, including those designated as opportunity zones.
It already has a list of more than “150 actions to better target, streamline and coordinate federal programs and opportunity zones,” said Ben Carson, secretary of Housing and Urban Development, who leads the council and was present at the White House when Trump signed the order.
The council was developed to help coordinate federal efforts among 13 different agencies to develop strategies for revitalizing economically distressed communities.
The executive order could potentially lead to an increase in government spending in opportunity zones. “For example, if government agencies bias purchases to target suppliers that operate within opportunity zones, that may create more of an incentive for businesses that deal with the federal government to shift operations into an opportunity zone, or for new businesses to be formed in OZs,” said Andy Hart, a managing partner of Delegate Advisors, a multifamily office for 25 wealthy families.
Opportunity zones are a creation of the 2017 tax overhaul, specifically the Investing Opportunity Act that was included the tax bill and designed to attract investments into distressed communities. There are currently about 8,700 opportunity zones across the country, designated by state governors, and investments in those zones receive preferential tax treatment, including a stepped-up basis to market price if held for at least 10 years (the basis increases 10% for investments held for at least five years and 15% for investments held for at least seven years). In addition, those investments allow investors to defer capital gains so long as the money is invested in the opportunity zone within 180 days.
The Economic Innovation Group, a bipartisan think tank credited with the developing the idea of opportunity zones, welcomed Trump’s executive order, noting that federal resources and tools will help revitalize distressed communities because “private investment is only one part of the solution.”
EIG was also pleased that the executive order noted that the council should consider data, metrics and methodologies that can be used to measure the effectiveness of public and private investments in opportunity zones.
Measuring the impact of these investments “is essential to sound policymaking,” according to EIG, but there are currently no such reporting requirements under the law or guidance issued so far.
That creates “difficulties for investors, local policymakers and community groups to understand the impact” of these investments, according to a report from LOCUS, a national coalition of real estate developers and investors who advocate for sustainable, equitable, walkable development in America’s metropolitan areas, and The George Washington University School of Business.
“Investors, local policymakers and community groups are clamoring to attract viable real estate and business projects to maximize the potential of the federal Opportunity Zones program,” notes the report. “However, despite Opportunity Zones’ transformative potential, there are no social impact requirements to ensure that investments do not expedite resident or local business displacement (gentrification) or accelerate climate change.”
Gentrification and displacement are among the concerns of residents opposing Amazon’s new second headquarters in Long Island City, New York, located in an opportunity zone, specifically in an area contiguous to a low-income residential area, which is allowed under the law for 5% of the zones that a state chooses.
The LOCUS/GWU report recommends that Congress and the White House encourage the IRS and Treasury to release on a quarterly basis the self-certification forms of each opportunity fund. Currently qualified opportunity funds (qualified for favored tax treatment) are only required to file a Form 8996 with their federal income tax return and the funds certify themselves as such without any approval or action required by the IRS.
In October the Treasury and IRS issued preliminary guidance for opportunity zone funds, including the requirement that a fund invest at least 90% of its assets in a business located in one of the 8,700 census tracts identified as opportunity zone and retain 70% of its tangible property in the opportunity zone. The preliminary guidance won’t be finalized until January and several more rounds of guidance are expected to follow through the first quarter, according to EIG.
“We must not lose sight of the urgent need for clear and effective regulatory guidance from Treasury so that investors, local leaders, and other stakeholders can put the new incentive to use,” according to EIG. “This is especially true related to investment in local Opportunity Zones businesses, which Congress intended to be the core of the new policy.”
— Related on ThinkAdvisor:
- Tax-Advantaged Opportunity Zone Funds Are Coming to Market
- Opportunity Zone Funds: Will They Provide the Impact Investors Expect
- How to Reduce Clients’ Taxes While Providing a Social Good