- Who We Are
- What We Do
- Our Impact
- Opportunity Zones
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Opportunity Zones Designation
Q: What is the timeline for Opportunity Zone designations? How long will they be in effect?
A: The original deadline for governors to submit their Opportunity Zone nominations to the U.S. Treasury was March 21, 2018 (90 days after the enactment of the Tax Cuts and Jobs Act). Nineteen states submitted nominations within this timeline, while all of the remaining states applied for a 30-day extension, making their deadline April 20, 2018. Opportunity Zone designations certified by Treasury will remain in effect until December 31, 2028.
Q: How are Opportunity Zones designated? Is my community eligible?
A: Any low-income census tract, as defined within the New Markets Tax Credits program, is eligible for designation as an Opportunity Zone. Governors can nominate up to 25% of all low-income census tracts in their respective state or territory (or up to 25 low-income census tracts, if fewer than 100 low-income census tracts exist in the state or territory). You can check the eligibility status of your census tract here.
Q: Can you clarify Congress' guidance about choosing census tracts with certain characteristics (i.e., special consideration to tracts that have received other investments, such as New Markets Tax Credits (NMTC)?
A: The Conference Report that accompanied H.R. 1 (Report 115-466) states that:
“Governors are required to provide particular consideration to areas that: (1) are currently the focus of mutually reinforcing state, local or private economic development initiatives to attract investment and startup activity; (2) have demonstrated success in geographically targeted development programs such as promise zones, the new markets tax credit, empowerment zones and renewal communities; and (3) have recently experienced significant layoffs due to business closures or relocations.”
However, because this language was included in the Conference Report and not in the statute, it is not clear the extent to which either the States or the Treasury Department will be taking these factors into consideration as part of the selection and review process. At least for Treasury, we won’t know until they release implementing regulations.
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 entity can create an Opportunity Fund, so long as the fund follows the guidelines established by the Investing in Opportunity Act and the U.S. Treasury.
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 program’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 the program's tax incentives?
A: No - an investor must invest in an Opportunity Zone business through a qualified Opportunity Fund in order to qualify for the program's 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 the Opportunity Zone program.
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 this program 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. While it may be possible that Opportunity Funds will be deployed in late 2018, we don’t anticipate this likely happening until 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 program, 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 program 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.