The Opportunity Zone program was passed in 2017, as part of the Tax Cuts and Jobs Act. On the federal level, the program has allowed the investment of capital gains from the sale of assets into Qualified Opportunity Funds, or QOFs. These funds, in turn, push the monies toward specific, lower-income areas throughout the United States.
To determine which areas would qualify as lower-income areas that would be ripe for economic revitalization, state leadership selected certain population census tracts, with the U.S. Department of the Treasury certifying those selections.
Basically, while the Qualified Opportunity Zone (QOZ) program is a federal initiative, it’s up to state and local governments to push that initiative forward. So, can local governments modify opportunity zones?
The answer is no. State and local governments can maximize opportunity zones through a variety of methods. But they can’t designate new census or lower-income tracts to create new opportunity zones, at least not under the spirit of the current, national Opportunity Zone program.
Act National, Think Local
While the national QOZ program introduced broad strokes when it came to guidance, it’s been up to local governments and agencies to bring that guidance, and QOFs, to fruition. The idea here is that localities are in a better position to attract developers and QOFs by offering tax abatements, zoning options, and other incentives.
Some QOZ activities on a local level can include the following:
- Leasing city-owned land to developers to defray property costs.
- Selling city-owned land inexpensively, especially when it comes to income-restricted tenants
- Using tax increment financing (TIF) dollars for funding
- Reducing permitting costs for affordable unit set-asides
- Offering state, technical, grant, or loan assistance
Specific State-Created Agencies
Also in existence are state agencies created specifically to attract developers and funds to local Opportunity Zones. These include
- Opportunity Alabama, a nonprofit organization that connects investors with assets in Alabama’s opportunity zones.
- Ohio Opportunity Zones, which provides information about what areas might be attractive to investors, connecting these investors to project owners, developers, and economic organizations.
- South Carolina Opportunity Zone, which displays potential QOZ/QOF projects that might be appealing to those interested in investing capital gains taxes. The agency also allows those qualified to register a new fund or project.
- Opportunity Virginia, a state agency that works to connect national investors to help develop within Virginia’s opportunity zones.
While many states do offer opportunity zone-dedicated agencies and organizations, others tuck their QOZ initiatives under economic development or commerce umbrellas. Each state and region has its own way of appealing to project developers and potential QOF investors.
Working Within, Not Changing
While the opportunity zone initiative is a federal one, it was developed to work with local and community initiatives, as well as other subsidy sources. This is where regional and state governments can help, by making both development and investment attractive to potential funds and individuals who wish to defer their capital gains taxes. However, they can’t modify the actual opportunity zone boundaries.
There are material risks associated with investing in QOZ properties and real estate securities including liquidity, tenant vacancies, general market conditions and competition, lack of operating history, interest rate risks, the risk of new supply coming to market and softening rental rates, general risks of owning/operating commercial and multifamily properties, short term leases associated with multi-family properties, financing risks, potential adverse tax consequences, general economic risks, development risks, long hold periods, and potential loss of the entire investment principal. Costs associated with the transaction may impact investors’ returns, and may outweigh the tax benefits. Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation. This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice, meeting the particular investment needs of any investor.