The Opportunity Zone Tax Incentive
Section 1400Z of Internal Revenue Code, amended by The Tax Cuts and Jobs Act of 2017, allows a taxpayer to defer paying federal capital gains tax on the sale of property if that gain is invested in a Qualified Opportunity Fund (QOF). A QOF must invest at least 90% of its assets in businesses or property in designated low-income communities known as “Opportunity Zones.” In addition, taxpayers that hold investments in those funds for at least five years receive a 10 percent reduction in their original capital gains tax obligation; holding investments at least seven years adds an additional 5 percent reduction for a total of 15 percent; finally, holding an investment a full ten years means taxpayers do not have to pay any capital gains tax on the appreciation of the new investment.
The new tax incentive differs from other federal tax incentives in several ways. First, it is more market driven; it does not use a federal or state agency to distribute the incentives but rather relies on the decisions of individual investors and QOF managers. Secondly, it can be used for a wide variety of projects—residential, commercial, industrial, infrastructure—rather than being restricted to a relatively narrow purpose like low-income housing or historic preservation. Third, there are no requirements for investors to ensure a certain outcome, such as job creation or local financial matches. Finally, there is no cap on the amount of the benefit as long as the regulations are followed.
The Investment Prospectus
To enhance economic and social impact, Accelerator for America and New Localism Advisors have developed an Investment Prospectus tool to help cities communicate the distinctive assets and advantages of their selected Opportunity Zones and, to the greatest extent practicable, tease out specific investable projects and propositions. We believe cities are best positioned to answer a fundamental question: what gives disparate Opportunity Zones their market traction and potential? Providing this information will help cities harness local tax advantaged capital as well as attract regional and national capital—particularly as large national, multi-asset, and multi-investor funds are formed.
More broadly, an Investment Prospectus can help cities organize their stakeholders around a unified vision of inclusive growth and catalyze better investments and decisions—for example, the infrastructure, place-making or skills-to-work investments of the public sector or the location decisions of public, private or non-profit institutions. To this end, smart Opportunity Zone strategies can leverage resources that are driven by the fundamentals and possibilities of the local market and by larger sources of local capital that do not directly benefit from this federal tax incentive.
The Investment Prospectus is a hybrid of three more common documents or approaches: a community marketing strategy, an economic development policy brief and a private investment memorandum. The intersection of marketing, policy analysis and capital investment is a way for the public sector to align interests with private capital and civil society.
Going forward, we believe the Investment Prospectus could become a recognized platform for financial institutions, local economic development organizations and other intermediaries to carry out deeper data collection and analysis that unveils market dynamics and helps match capital to investable projects. We ultimately hope to make Investment Prospectuses searchable by typology, geography, asset class, deal size, population and other critical indicators. This should help investors aggregate capital for particular purposes within and across cities and move quickly to find investments they otherwise would not.