Community Foundations, Meet Opportunity Zones

Adam Northup

Advisor, LOCUS Impact Investing

- Guest writer Adam Northup, LOCUS Advisor, shares what every Community Foundation should know about Opportunity Zones. Created by the new tax law, this new tool has the potential to revitalize left behind communities.

Tucked into the Tax Cut & Jobs Act passed in December 2017 is the first new community development tax program enacted since the millennium.  Inclusion of this “Opportunity Zone” tax incentive was somewhat of a surprise to stakeholders across the country.  Businesses, economic development authorities, regional & local governments, philanthropic organizations, financial institutions, and non-profits have been scrambling to make sense of the new law and the opportunities and challenges it presents.  Even the U.S. Treasury is playing catch-up and has yet to release final rules – even though Opportunity Zones are designated and investors are lining up.  So, what do community foundations need to know?

In July, the U.S. Department of the Treasury published the finalized listing of opportunity zones. Qualified areas based U.S. census tracts were nominated by state governors. Photo Credit: Salma Smida

1.     How it works

The Opportunity Zone Program is billed as a free-market approach to spur economic resurgence, job creation, and wealth building in low income and distressed communities.  It taps into potentially trillions of dollars in passive wealth (in the form of unrealized capital gains) and aims to divert that capital to communities in need.  The program establishes three key structures:

• States designate specific "Opportunity Zones" for investment.  These are low income census tracts in both rural and urban areas. This is already complete!
• Investors get tax benefits from equity investing in the Opportunity Zones via a “Qualified Opportunity Fund” over a 10-year period.  The benefits include temporary deferrals, basis reduction, and permanent avoidance.   
• Investment must flow to qualified “Opportunity Zone Property” or “Opportunity Zone Businesses” in the designated communities.

The U.S. Treasury is intent on keeping the rules light and business friendly.  For example, the IRS plans to allow the Qualified Opportunity Funds to be simply a self-certifying corporation or partnership entity.  The program has no limits and can pair with other tax credit programs (e.g. Low-Income Housing Tax Credits).  Also, as currently written, it is important to note that the statute offers a somewhat brief investment window to realize the full benefits (ideally by end of 2019).

2.      Is this good social policy?

Time will tell, but the Opportunity Zones outcome could certainly be a gentrifying force that pushes economic inequality to other localities. There is no “mission mandate” requirement for Opportunity Zone Funds.  Some of the designated census tracts are already developing economically.  Real Estate developers are clearly the early movers – and infrastructure investment interest in healthcare and jobs seem to be lagging.  The statutory timelines make it difficult to get shovel-ready projects and investor interest in place.

Still, the Opportunity Zone program could be a powerful tool for local impact investing to take hold.  Unlike other programs, it is relatively easy to understand and navigate.  It is limitless, in that it does not require getting a piece of a tax credit pie that is typical of other programs.   Almost any investment in an Opportunity Zone would qualify (“sin” businesses like liquor stores or massage parlors won’t).  The time horizon is long and thus requires a deeper commitment to the community. And of course, unlike grant-making there is tangible financial return that may be re-invested by local impact driven organizations and individuals.

At the end of the day, communities that bring all stakeholders together to leverage the Opportunity Zones will likely be the ones that make good with the program. Business leaders and real estate developers need to engage with local community leaders and economic authorities to ensure the right investment focus.  Local government needs to help streamline permitting and re-zoning.  Financial institutions need to help gather capital beyond just the Opportunity Zone Funds.  Importantly, community foundations, private foundations, non-profits, and other philanthropy need to help ensure the investment is driving real economic revitalization and wealth building.

3.     So, what should community foundations do?

Community foundations are uniquely positioned to help influence and align stakeholders.   With a deep understanding of community needs, strong connections to local officials and business leaders, and access to philanthropic funds, community foundations could play any number of roles to ensure that Opportunity Zone capital meets local community need and achieves positive local impact.  Potential roles to consider right away:

• Spur activity by helping community stakeholders become more aware. Offer to help educate via regular communication channels or forums.
• Convene and align stakeholder interests. Bring together potential investors, philanthropists, community leaders, government and other officials to share ideas, intentions, and challenges.
• Help set the local Opportunity Zone agenda with the influence of philanthropic dollars.
• Steer grant and other foundation capital toward Opportunity Zones to amplify the impact. 

To begin, community foundations should ensure they know the Opportunity Zones in their communities. Help identify and advocate for the investment needed in those communities.  Take a seat at the table as business interests, local leaders, government authorities, and other stakeholders convene.  Be open and willing to drive donor interest into the Opportunity Zones.  As mentioned above, communities where all the stakeholders come together to leverage the Opportunity Zones will likely be the ones that generate the economic activity and lasting wealth these communities truly need.