Dallas-Fort Worth's opportunity zones – from inception to today’s challenges
Created as an economic development tool for disadvantaged areas, OZ’s are more complex than you might think
August 17, 2020
Workforce density | JLL Opportunity Zone Analysis Tool
A few of the many critical OZ investing rules
- The Fund is capitalized by the capital gains of investors made within 180 days of the sale or exchange.
- 90% of the fund must be invested in an OZ.
- A 50% gross income test assesses whether at least half of the services (hours or amounts) received by the business were performed in the OZ or whether tangible property & functions were in an OZ.
- Deferral of capital gains invested with a 10% savings “step-up” in the investment basis after 5 years & 15% after 7 years.
- After 10 years, deferral of the initial capital gains investment basis up to the 15% maximum step-up – and no additional capital gains on the value generated by the OZ at disposition.
- Opportunity Zones were added to the US tax code in December 2017. The first OZs were defined in early 2018, with IRS guidelines published that October and April 2019.
- The program’s goal was to create incentives for investment in low-income and economically distressed communities by providing “capital gains” tax breaks for qualified investments made through approved Opportunity Funds.
- The OZ concept was built on the successes of the New Markets Tax Credit and the Low Income Housing Tax Credit programs where tax credits were used to incentivize the private sector to re-invest in communities.
- Working with localities, the US government identified 8,800 census tracts in the US as OZs. Governor Abbott proposed 628 census tracts across 145 counties in Texas, which included 52 tracts in the Dallas-Fort Worth metroplex.
- As of 2019, 163 Opportunity Funds had been created in the US, totaling $43 billion. Of these, 23 Funds had Texas targeted, with a value of $2.2 billion.
- Opportunity Fund investing has numerous rules and specific deadlines that can present challenges to investors and impact their returns and tax liability.
- Two years since its enactment, many are looking at how successful OZs have been at initiating job and business growth in under-capitalized communities.
- This summer the Urban Institute released a report that underscored successes have been mixed. From an equitable development perspective, no federal process is in place to assess if an OZ is meeting its community goals.
- They also identified that its incentive-based structure makes it difficult to develop projects where the need is most critical. Quite simply, OZ projects with the highest returns are “rarely aligned” with community need.
- Among these challenges, using capital gains and tax deferment limits the pool of investors. The 10-year investment horizon is also not long enough to catalyze a community, yet it is viewed as too long by some investors.
- Complicating this, the program is set up to close the capital gap in making a project happen – but the incentive is viewed by most as only providing a small and insufficient boost to returns.
- The Urban Institute recommended to realign the incentives to better support small businesses; size the investment based on its impact; broaden who can invest; and support “mission-driven” funds that are community accountable.
- Beyond amending the 10-year horizon, other ideas to align it better with investor goals is to begin the clock when the project is “placed in service”, as opposed to when the investment is made.
- A consensus of city mayors believes that OZs will have a positive impact. Bi-partisan congressional discussions are now taking place to add reporting requirements, although this may not go far enough to refine the program’s investment challenges.