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- Opportunity Zones
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Opportunity Zones Designation
Q: What are Opportunity Zones? What makes an area eligible to become an Opportunity Zone?
A: An Opportunity Zone is an economically-distressed community in which certain types of investments, made through Opportunity Funds (see below), may be eligible for preferential tax treatment. The tax incentive is designed to spur economic development and job creation in distressed communities by providing these tax benefits to investors. Any low-income census tract, as defined within the New Markets Tax Credits program, is eligible for designation as an Opportunity Zone.
Q: What is the timeline for Opportunity Zone designations? How long will they be in effect?
A: The final deadline for governors to submit their Opportunity Zone nominations to the U.S. Treasury was April 20, 2018. As of June 14, 2018, Treasury has certfied Opportunity Zones of all states and territories. Opportunity Zone designations certified by Treasury will remain in effect until December 31, 2028.
Opportunity Funds and Businesses
Q: What is an Opportunity Fund?
A: A qualified Opportunity Fund is any investment vehicle organized as a corporation or partnership with the specific purpose of investing in Opportunity Zone assets. The fund must hold at least 90 percent of its assets in qualifying Opportunity Zones property.
Q: Who can create an Opportunity Fund?
A: Any taxpaying individual or entity can create an Opportunity Fund, through a self-certification process. A form (expected to be released in the summer of 2018) is submitted with the taxpayer's federal income tax return for the taxable year.
Q: What can Opportunity Funds invest in?
A: Opportunity Funds can invest in any qualified Opportunity Zone property, including stocks, partnership interest or business property (so long as property use commences with the fund, or if the fund makes significant improvements to the qualifying property).
Q: Will Opportunity Zone businesses need to conduct most of their business within Opportunity Zone tracts, or will it be sufficient if the majority of the business’ assets are located in Opportunity Zone tracts (property, equipment, etc.)? For example, would a trucking business based in an Opportunity Zone, but serving a whole region, qualify for Opportunity Fund financing?
A: To qualify as an eligible Opportunity Zone Business, a business must demonstrate that substantially all its tangible business property is located within a Qualified Opportunity Zone. No such stipulations have been made regarding the service area of the Opportunity Zone Business in the statute, but this may nonetheless be an item that the IRS chooses to address in future guidance or regulations.
Q: What happens if a business located in an OZ moves? Is there a recapture risk?
A: There is no recapture risk, but an opportunity fund that fails to meet the 90% asset requirement of the fund will be required to pay a penalty for each month it fails to meet the requirement. The penalty is not designed to be catastrophic, but rather, to ensure that funds stay within the zone’s parameters. Once an asset no longer qualifies, there will be a period of time in which the asset can be disposed of before incurring penalties.
Q: Can an Opportunity Fund make investments in multiple Opportunity Zones?
A: Yes - so long as an Opportuntiy Fund has at least 90% of its assets in qualified Opportunity Zone property, the fund may invest in as many qualified tracts as desired.
Q: Can an investor invest directly into an Opportunity Zone business to qualify for associated tax incentives?
A: No - an investor must invest in an Opportunity Zone business through a qualified Opportunity Fund in order to qualify for associated tax incentives.
Q: Is the tax exemption for the original capital gain and the new gain from the opportunity fund investment, or just the new gain?
A: The exemption is just for new capital gains. You can see a breakdown of investor benefits over time on page two of this document.
Q: Are there minimum or maximum investments?
A: There are no minimum or maximum investments required by Opportunity Zone legislation.
Q: What kind of returns are investors likely to expect? Will they be closer to LIHTC/NMTC yields, or lower returns seen within social impact-type funds?
A: We expect a broad range of investor return expectations. On one end of the spectrum, Opportunity Funds may raise high impact capital from investors that would otherwise be contributing to donor-advised funds with a principal preservation focus and a low PRI-type return expectation. On the other end of the spectrum are private equity fund investors that are expecting double digit returns based on the risk of providing equity capital to real estate or business investments. In the middle are preferred equity investment models with 6-10% annualized return expectations.
Q: Once an Opportunity Fund is established, is there a timeframe within which investments must be made?
A: This timeframe will be determined in the IRS rule making process. Based on the legislation, an Opportunity Fund may need to have 90% of its capital invested in Opportunity Zone Property within the first six months of the taxable year of the Opportunity Fund. There may be some timing relief in the rule making to enable a 12-month investment window. Also, to receive the tax benefits, the investor must deploy their capital into an Opportunity Fund within six months of realizing the capital gain being invested.
Q: Do you anticipate the creation of single-use or single-purpose funds? For example, could a developer that does business in an Opportunity Zone create an Opportunity Fund for a specific project?
A: Yes, given the expected ease of certifying an Opportunity Fund and the timing constraints of investing the capital in Opportunity Zone Property, we anticipate that single asset funds will be utilized.
Q: Will Opportunity Zones be compatible with LIHTC and NMTC investments?
A: As of today, we think Opportunity Zone investments could be combined with the Low Income Housing Tax Credit & New Markets Tax Credit, though we won’t know for sure until the Treasury Department releases its guidance.
Q: What is a reasonable timeframe in which we might see the first Opportunity Fund investments deployed?
A: It will take some time for the IRS to establish regulations and guidance relating to the certification of Opportunity Funds and the eligible use of proceeds. It is possible that the first Opportunity Funds will be deployed in late 2018, though we anticipate this happening in 2019.
Q: What sort of provisions could be added to the Opportunity Zone legislation to ensure impact accountability on the back end?
A: Mitigating displacement tied to gentrification will be one of the main challenges of a market-based initiative, and is something LISC and its partners are already trying to address. Specifically, we submitted a comment letter to the Treasury Department suggesting the creation of certification guidelines to manage where and how investments are made to avoid exacerbating displacement trends in certain tracts. In addition, we recommend advocating that your state officials also keep existing displacement issues in mind when designating tracts. Finally, to the extent these are going to be large scale investments, local zoning and approval processes would probably be triggered, which hopefully will offer an opportunity for community engagement.
Q: What is the likelihood of the Opportunity Zones incentive being extended beyond 2026? Why was 2026 selected?
A: The tax incentive itself does not expire in 2026. Investors in Opportunity Funds that hold investments for at least 10 years will still be able to take advantage of the favorable tax treatment of gains related to the investments into Opportunity Funds, even if realized after 2026.
2026 is significant because, in that tax year, investors are required to pay the capital gains taxes that were deferred at the time of the initial investment into the Opportunity Fund. 2026 was likely chosen because it established a date certain within the next ten years by which investors must pay their deferred gains, which means that these revenues will be returned to the Federal government within the 10-year window for which the tax bill was “scored,” thus lowering the overall cost of this initiative.
LISC CEO Maurice A. Jones testified before the Joint Economic Committee of Congress, urging its members to implement Opportunity Zones in ways that will truly benefit Americans in underinvested communities.