Opportunity Zone funds are a hot topic in the real investment world. These funds appeared as a result of the 2017 Tax Cuts and Jobs Act. This legislation included a provision that designated 8,700 census tracts in the United States as Opportunity Zones – areas with less than average direct investment and economic growth.
Investing in these zones offers interested parties a number of tax benefits for both business and real estate investments within the designated Opportunity Zone. These tax benefits are intended to spur investment in those areas, to bring them up to par with national economic growth, or even to exceed the national numbers.
Critics of the program have charged that the legislation only helps the very wealthy since the program allows investors to lessen their tax burden using rolled-over capital gains. If you look at the majority of rolled-over capital gains in the United States, you’ll find that those at the high end of the economic spectrum are the ones who stand to gain the most from Opportunity Zone investments.
How the wealthy use Opportunity Zones to invest
It would not be entirely out of line to assume that Opportunity Zone Funds were set up to benefit wealthy investors. They stand to gain the most from the program, and unfortunately, their priorities are not always in line with the aims of the program- to improve the lives of people who live and work in these areas.
Opportunity Zones are by definition in, or next to, socioeconomically disadvantaged areas. Those communities fear that much of the Opportunity Zone investments being planned are in constructing luxury housing which do not necessarily serve the local community’s needs. In fact, it may even force long-time residents out of the area, as their rents and expenses will increase with the completion of new high-end housing and commercial developments.
Early data from the first year of the program, 2018, has shown that home costs have risen by 20% in Opportunity Zones, even when compared to other low-income areas that did not receive the Opportunity Zone designation. What this likely indicates is that gentrification is occurring in these communities, and at least partially driven by wealthy people deploying capital in these areas to receive tax breaks.
A potential solution?
Although the Opportunity Zone provisions were written with ultra-wealthy investors in mind, anybody is potentially eligible to receive Opportunity Zone Fund tax benefits. If you can create an Opportunity Zone Fund that is open for investment by the community, and that accurately represents the voices of the community, you flip the script, and this program becomes a force for good, rather than a detriment.
Community-driven investment through Opportunity Zone Funds
Taking a democratic approach to land usage and community development is possible through the use of an Opportunity Zone Fund with locally minded, neighborhood-oriented investors. A locally funded development, with stakeholders as investors will create the kind of projects, or development, or housing, that the community wants and needs. Additionally, when these funds are profitable, those profits will circulate within that area, since the initial investment capital will have originated in that community.
This isn’t to say that raising capital locally in low-income areas is a walk in the park. As many development projects rely on economies of scale, they often require significant amounts of capital to break ground. It is a challenge to come up with that much capital, but it is not far from impossible. Every community has resources, even if they do fall into the low-income category. Even if 50% of the community is below the federal poverty line, look at it half full- 50% isn’t.
Well-meaning government programs like Opportunity Zones can hurt or help local communities. While it may be impossible to stop gentrification and the growing affordability crisis, community-oriented investors can use these same programs to benefit current residents, rather than wealthy elites.
Philadelphia. Image courtesy of Small Change