Wizards of Oz; Let’s Talk Opportunity Zones
Three years ago, President Donald J. Trump signed into law the 2017 Tax Cuts and Jobs Act in what was heralded as an attempt to spread wealth to areas seen as lagging in real estate development and spur economic growth in struggling communities. Whether or not this attempt has been fruitful is difficult to judge, as skeptics and supporters alike try to discern who has come out of the deal grinning — and wealthier.
The idea for Opportunity Zones first clearly emerged in a bi-partisan supported “Investing in Opportunity Act” that held notable Republican and Democratic champions from Wisconsin, Ohio, New Jersey and South Carolina. The surface intention was for the zones to stimulate lower income communities and help distribute wealth, which was becoming more apparently unevenly distributed in the United States, especially after the 2008 financial crisis. Supporters wanted to access private capital and redistribute it to areas deemed as “distressed,” while boosting wealth on both sides of the investment.
The U.S. now has more than 8,700 opportunity zones in each of the 50 states, with each opportunity zone having been certified by the US Department of the Treasury so that investors can put capital in new approved projects and enterprises in exchange for beneficial tax advantages. Those tax advantages are most notably temporary tax deferral for any capital gains then re-invested into an “OZ,” a boost in capital gains basis, and — if left within an “OZ” for a minimum of ten years — permanent exclusion from taxable capital gains.
While some see economic benefits to these communities, others argue that opportunity zones are extractive as some projects are falling short on their community impact promises and the wealth generated by the investments often does not remain with the community that generated it. How, some argue, do condos and storage units benefit a struggling community?
Some are frustrated with the general ambiguity of the law’s requirements, which are argued to leave too much room for interpretation, which too often translates into loopholes for wealthy investors. Interpretation issues remain around language surrounding profits and qualifications of what it means to invest in “active businesses”, and which areas qualify as “low-income.” Many have even shown correlations between such low-income areas and those with a high susceptibility risk for gentrification within the next decade.
Perhaps the questions then for opportunity zones should be: how do we measure the success of opportunity zones, how do we measure who benefits, and if both sides benefit does it really matter?
Lillian MacCartney, Business Development YvesBlue
Reading through news articles will leave you wondering about the current state of the law, if it is a credible advantage to low-income housing or a catalyst for gentrification. The laws may be touted by the current administration as having far-reaching positive effects but the skepticism is growing. And as the global climates shift will opportunity zones still seek foreign investment as the IRS considers modifications to lure just such investors? On a domestic front we see that Puerto Rico is seeing strong opportunity zone activity from investors which seems undeterred by the island’s recent and loud political disruption, with 98% of Puerto Rico qualifying as an Opportunity Zone. Many on the island fear that as the law hurtles forward, new privately owned real estate developments will take the place of Puerto Ricans’ businesses and livelihoods.
There will need to be a larger focus on the relationship between communities that are invested in as opportunity zones and the economic health of them after 10+ years, when many investments could hypothetically pull out and still receive full tax benefits under the Tax Cuts ad Jobs Act. Likewise, a more concentrated effort on monitoring at-risk areas for gentrification and the lasting effects of opportunity zone investment needs to be prioritized so we can learn moving forward who walks away from such laws as the victor.
New Orleans students are studying the effects of opportunity zones by adopting a non-profit approach to monitoring development and “adopting” one of the 25 zones that Gov. Jon Edwards successfully passed into qualification for OZ status and draft initial profiles as a way to understand what potential investors would be looking for in the area.
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