The Opportunity Zone (OZ) program was created to help economically disadvantaged communities by providing tax incentives for private investments in those areas. These low-income communities have struggled while much of the rest of the country has grown. According to the Economic Innovation Group’s research, there are approximately 50 million Americans that live in communities that are struggling to attract investments and sustain economic opportunity for their residents. The country’s distressed zip codes contained 1.4 million fewer jobs in 2016 than they did in 2007. Through private investment, the hope is that jobs, new businesses, improved housing options, and general revitalization of these distressed communities will occur. As an incentive to get businesses involved in OZs, the federal government provides capital gains tax deferrals for any entities investing in OZs and no capital gains tax for gains earned from the OZ investment.
How well has the OZ program worked so far? With the OZ program being relatively new, there hasn’t been enough time for the full effects of private investment into OZs to materialize. Currently, there is very little information about the impact the OZ program is having on communities. Not that it isn’t. Within the next few months and years, more information should be forthcoming.
The Federal Reserve Bank of Philadelphia did release a 2019 case study detailing the effects of the OZ program within Philadelphia, which we will look at, along with WIFAX. WIFAX is an OZ Fund that is investing in technology firms within OZs.
Philadelphia Case Study
This case study provides great insights into the effects of the OZ program on communities. The case study observes various trends that are occurring.
One trend that was noted: The areas where housing prices were increasing prior to the OZ program were more likely to be selected to be an OZ. In other words, already gentrifying areas were selected to be OZs. Since 2012, house prices in these areas increased by 81.6% compared to ~25% in other low-income neighborhoods that were eligible but ultimately not selected to be OZs.
The most distressed communities were not always designated as OZs. Those selected tended to have a higher number of jobs than those that were not selected. Ultimately, the tax benefits of the OZ program make a good investment opportunity even better, but they aren’t enough to make a bad investment into a good one. The communities designated in the program have a higher likelihood of attracting OZ investors. If investors are not willing to invest in certain communities, then the program will have no impact on those communities.
OZ Funds And Community Impact
Another example is the OZ fund WIFAX. WIFAX has taken in private investments and then invested those funds into businesses within OZs. These businesses are technology-focused, specifically AI and blockchain. WIFAX also invests in real estate and sustainable businesses nationwide. Part of WIFAX’s mission is to fund women-balanced companies within OZs. The KNGDM Impact Fund also invests in minorities.
Companies that are creating OZ funds to invest in tech and startups include Hypothesis Studio and Hall Labs (Hall Venture Partners fund). Funds aren’t the only entities impacting OZ communities. Galen Robotics has decided to move its surgical robotics company from Silicon Valley to an OZ in Baltimore.
It will take some time to fully understand what impact the OZ program is having on communities. But we can already get a few glimpses into the positive effects that OZ investments are having.