Opportunity Zones - a New Source of Development Funding

Regulation | December 10, 2018 | by Gates Dunaway

Buzz is increasing lately about a potential new source of development funding for low-income housing in certain areas referred to as “Opportunity Zones” (OZs).  The Treasury Department’s Opportunity Zones use tax incentives to encourage private investment into designated census tracts through privately- or publicly-managed investment funds known as “Opportunity Funds” (O funds).

The Opportunity Zone Program, created in 2017 as part of the Tax Cuts and Jobs Act, is designed to drive long-term investment and capital into distressed communities by providing tax benefits to investors. This is the first new community development tax incentive program created in almost 20 years and is seen as a way to move trillions of dollars of passive holdings into distressed communities.

How the Program Works

Opportunity Zones must be designated "low- income", and only up to 25% of the eligible census tracts in a state can be designated as an OZ. Governors were responsible for determining which qualified census tracts are going to be their state OZ's, and the IRS announcement in June 2018 of approved OZ's can be found here.

In the meantime, Opportunity Funds have been created and are accepting investments. 

Community development and finance organizations can create O funds though which U.S. investors can receive a temporary tax deferral and other tax benefits when they reinvest unrealized capital gains into O Funds for a minimum of five years.  Incentives are maximized for investments held for at least seven years. Treasury must certify O funds to pool and deploy investment capital in Opportunity Zones for eligible purposes (stock, partnership interest, and business property).  While a recent compilation of opportunity zone funding opportunities from the National Council of State Housing Finance Agencies indicates that many O funds are focusing on commercial and/or affordable housing, those are not the only allowed use.

Preparing for Potential Opportunities

Now that the OZs have been designated, the IRS has recently published proposed new regulations on structuring Opportunity Funds and is seeking industry comments.   It is expected that the Opportunity Zone program will be in place and ready for investment in 2019.

How the O funds may be applied for is not yet known - and, as noted, OZs will not be available in all areas.    However, it seems likely that O funds may be used in conjunction with low-income housing tax credits (or other Affordable Housing creation/preservation strategies).  

So start by reviewing the list of OZ’s that have been approved. According to the IRS, you can find 11-digit census tract numbers, also known as GEOIDs, using the U.S. Census Bureau’s Geocoder. After entering the street address, select “ACS2015_Current” in the Vintage drop-down menu and click “Find.” In the Census Tracts section, you’ll find the number after GEOID. You can also check out this useful interactive Opportunity Zone map, created by Enterprise.

Then, once you’ve established if you have an existing property or new real estate development interest in an Opportunity Zone, reach out to your state Housing Agency to make sure you are receiving any state information.  And begin to keep an eye out for qualified Opportunity Zone funding releases.
 

Resources:

There are likely to be many sources which can help interested participants access OZ funds.  Member are encouraged to share information about OZ and O fund resources they find useful with LeadingAge housing staff