When Congress passed the new tax code in late 2017, a community development program was created to drive long-term investments in underserved areas across the country. NNEHIF’s president Bill Shanahan explains Opportunity Zones and what’s next for this new program.
What is the Opportunity Zone program and how would it work?
The “Investing in Opportunity Act” had been in the works, led by Senator Tim Scott, R-NC, Senator Corey Booker, D-NJ, when it was added to the tax bill. Essentially, it is a federal tax incentive that allows investors to shelter capital gains. For example, an investor has a capital gain event – it can come from real estate, stock sales, sale of a business, etc. – and can then take the proceeds and invest them in an Opportunity Fund for projects within an Opportunity Zone. Investors would reduce or eliminate their tax liability on their capital gains , and there is no cap on the amount of capital gains invested.
What are the actual Opportunity Zones?
They are designated low-income census tracts eligible for these tax-favored investments. Governors nominated up to 25% of low-income census tracts in each state, which were then approved by Treasury, the department that oversees the program. 8,762 tracts nationwide were designated and certified. Unfortunately, the program does not allow for changes in these designated zones.
What are Opportunity Funds?
They are any investment vehicle organized (as a corporation or a partnership) for the purpose of aggregating and deploying investments in Qualified Opportunity Zone Property. Any eligible investor can “self-certify” and create an opportunity fund by filling out a one-page IRS form. The fund can have a private or public manager; have a national, regional, state, or local focus; or be a multi- or a single-asset fund. Also, funds are limited to making equity investments and cannot provide project debt.
That sounds quite broad. Are there other fund parameters?
There is no limit on where Opportunity Funds can invest (or how many projects), as long it is in one of the 8,762 approved census tracts. A fund must deploy at least 90% of its assets within an Opportunity Zone, and there must be an appreciation in value of the asset over time. The Treasury Department and the IRS recently issued its first guidance and revenue ruling. It’s a good first step in clarifying how these funds will work and will go a long way in helping fund managers and investors structure investment funds.
How can this program help create more affordable housing?
There are very few rules or restrictions in the law itself. Funds can invest in real estate, but also in new or existing businesses, partnership, or stock. We in the industry are continuing to figure out how we can take advantage of Opportunity Funds and identify potential investors.
Has anyone in Northern New England moved forward with Opportunity Zones?
Both Maine and New Hampshire have certified Opportunity Zones, but New Hampshire has already made strides toward an Opportunity Fund for the state. The Granite Opportunity Fund is a partnership between the NH Department of Business and Economic Affairs, the NH Community Development Finance Authority, and other agencies, including the Community Development Finance Authority, NH Housing, the Community College System of New Hampshire, and NNEHIF. As the partners anticipate further guidelines, they continue to gather information, review projects funded by other programs, and engage local stakeholders.