Maximizing the Opportunity of Opportunity Zones

Opportunity Zones are designated census tracts that offer investors special tax incentives. The program was created by the Tax Cuts and Jobs Act of 2017 (i.e., the federal tax reform bill), and the zones have been designated by each state around the country. California designated 879 census tracts throughout the state, ranging from parts of Downtown Los Angeles and Oakland to Death Valley National Park and Modoc National Forest. By nature of the variation of the designated tracts, some Opportunity Zones will be more suitable and attractive for investment than others.

A few California cities have already gotten ahead of the Opportunity Zone curve, including Berkeley, which discussed how to utilize this new tool at its most recent City Council meeting. Some Californians see the law as something that only benefits the wealthy, who will get federal tax breaks by investing their capital gains in these zones, but in Berkeley, the City Council is combatting this by seeking to implement policies that take advantage of this tool to generate affordable housing. 

For those cities who haven’t begun formal processes yet, an inter-agency workgroup from the State has prepared an Opportunity Zone Portal with a lot of great information, and CALED has its own page with recommendations and resources for communities seeking to understand Opportunity Zones better. It’s important to keep in mind that Opportunity Zones are not a source of “free” money. Investors will only consider projects with a reasonable return for their equity investment. Opportunity zones are simply meant to tilt the scales to increase the expected return by reducing the tax liability of any gains.

For communities that have an Opportunity Zone, the State developed a step-by-step “Get Ready” guide. Steps include:

  • designating a point person to direct overall efforts,

  • creating a local story to leverage local strengths and stand out from other areas,

  • building a list of potential projects,

  • hiring a “deal jockey” to coordinate investment,

  • being proactive by reaching out to developers and investors,

  • seeking partners who can spur investment without displacement,

  • revisiting regulations and other incentives affecting development in Opportunity Zones, and

  • engaging with the State and Statewide agencies and organizations.

One form that this preparation can take is a prospectus, which delineates the purpose for which a community seeks investment, provides investors with the community’s profile, and even identifies investment opportunities. This can be useful if there are strong opportunities to publicize. There are also other steps to take. Even if a locality has strong investment attraction without taking any action, it should get ready to process increased development applications to ensure a smooth investment process.

The City of Stockton has already created an investment prospectus, its marketing strategy and economic development policy that indicates to investors the City’s goals. This is another way to combat the use of Opportunity Zones as tools for gentrification and displacement, and garner needed investments in these areas.  The City of Long Beach is also marketing their opportunity zones, and it has created an online mapping application to show the locations, zoning, and where certain entitlements would be allowed, letting developers know ahead of time what could be built there.

Even for communities without an Opportunity Zone, many of these same steps are still valuable to attract investment. A local champion can help to drive projects forward that target established community goals. It’s still important to understand a locality’s strengths when seeking investment. Similarly, being proactive in seeking opportunities, reviewing regulations and incentives, and engaging with public and private partners are key to any economic development effort.

For most communities, Opportunity Zones are one more tool to attract development. Like CRIAs, EIFDs, density bonuses, overlay zoning, Community Facilities Districts, and infrastructure investment, —a fundamental understanding of how communities can leverage and package these tools is the most important need today.

There’s still a big question about Opportunity Zones. The IRS has yet to publish the final rules governing Opportunity Zone investment and tax benefits. Interim guidance publicized in October 2018 offers some direction, but many investors, especially those interested in bolder projects, are waiting for the detailed clarity of final rules, including how the program will interact with other tax incentive programs. Once the final rules are released, analysts expect most Opportunity Zone investments to occur in 2019, to maximize the potential tax benefits. It’s important for jurisdictions to prepare now, so that they can target investment where they have an Opportunity Zone and build the foundation to attract investment where they don’t.