Opportunity zones have been one of the most bipartisan pieces of legislation to come out in recent years. The program, part of the Tax Cuts and Jobs Act of 2017, created 8,700 zones around the United States eligible for tax incentives for developers, businesses, and investors. While the program has faced its share of controversy, it remains of interest to many investors, who want to find a way to defer capital gains taxes from other investments, as well as completely avoid taxes on gains accrued on the opportunity zone investment itself.
At the end of 2019, the final set of opportunity zone regulations were issued, setting up 2020 to be a year of strong investment in opportunity zone funds. With final regulations issued, it was expected investors would feel more confident in participating in these programs.
But as with much of 2020, the arrival of a global pandemic changed many investment plans. When it comes to opportunity zones, as in just about every other facet of this year, it's been a bit of a roller-coaster.
The impact of COVID-19
When the pandemic struck in March, nonessential construction immediately ceased in many markets. However, as the stock market began to recover and construction began again, more projects continued and more funds were started. Interest in opportunity zones as a tax benefit increased. In May, a report from Novogradac put the total amount of money invested in opportunity zone funds at $10 billion in mid-March.
One thing that did shift was the types of projects of most interest to investors. Hotel and office projects began to lose their appeal, and funds began to look outside big cities to other markets. Another consideration for potential opportunity zone investors in 2020 has been how delays in construction and in obtaining funding could change the amount of time they have to significantly improve the project or business they're invested in.
Because of the disruption this year, some of the deadlines around opportunity zones have been pushed back. Investors have until the end of 2020 to place their capital gains in a qualified opportunity fund, as long as their 180-day deadline falls between April 1, 2020, and December 31, 2020
Is the promise of opportunity zones being realized?
One of the biggest criticisms of opportunity zones is that they promote gentrification and provide more benefits for developers, wealthy people, and corporations looking for tax shelters than the communities they are supposed to help. A study from the Urban Institute reflected opportunity zones were being used primarily by developers whose investors were looking for large returns. That dynamic led to a concentration of projects in coastal cities. While this led some people to label opportunity zones as a flawed program, the criticism is also aimed at refining opportunity zones so they provide the most benefit for all involved.
Here on Millionacres, we published our research on the fastest-growing opportunity zones by analyzing population growth and household income. This research revealed there are many opportunities for development outside areas that have seen the most activity so far. The current demographic trend away from large cities and toward suburbs may cause developers to look to secondary and tertiary markets for opportunity zone projects.
A political talking point
Opportunity zones have also become part of the political discussions leading up to the election. They became a highlight of the Republican National Convention as a key talking point for the success of the current Trump administration. Shortly before the convention, the White House Council of Economic Advisors touted that $75 billion has been invested in opportunity zones, and they created at least 500,000 jobs. The designation of an area as an opportunity zone also raises local property values by over 1%.
In his platform, White House challenger Joe Biden has said he will reform the Opportunity Zone Program. His plan includes incentivizing funds to partner with local organizations to create a community benefit program for each investment. He also wants the Department of Treasury to ensure opportunity zone tax benefits are only allowed when there are clear benefits to the community.
No matter who wins the election, more refinements are likely. There are currently several different pieces of potential legislation before the House and Senate that focus on the ways that opportunity zones funds handle reporting. The Opportunity Zone Accountability and Transparency Act (H.R. 5011) and the Opportunity Zone Reporting and Reform Act (S. 2787) both look at ways projects are tracked. Senator Tim Scott (R-S.C.), one of the writers of the original legislation, is also one of the authors of the bipartisan Improving and Reinstating the Monitoring, Prevention, Accountability, Certification, and Transparency Provisions of Opportunity Zones (IMPACT) Act, which also emphasizes community benefits.
Part of the conversation around the future of opportunity zones also revolves around the zones themselves. The structure of the original 8,700 zones, chosen by the governors of their states, has been debated since the program began. The idea of adding or refining zones as time goes on has come up repeatedly.
One of the biggest reporting mechanisms for opportunity zone reporting is the IRS's Form 8996, which investors use to certify investment in a qualified opportunity zone business or development. The information from these forms will eventually be used to create a robust data set that will display exactly how and where these funds are being invested. That data is expected to be available in 2021 and will likely become a major component of decisions about the future of the program.
Looking to the future
The opportunity zone program is still very young compared to other real estate legislation. Updates and fine-tuning are necessary, and many great minds in both the nonprofit and for-profit sectors are dedicated to figuring out how to make opportunity zones both a great tax benefit for investors and a worthwhile improvement to communities.