Why Opportunity Zones Will Benefit No Matter Who Wins

The election may prove to be one of the most contentious in U.S. history – and with Opportunity Zones on the agenda for both parties, one might reasonably think that the net outcome for the initiative would differ meaningfully depending on the winner.

But what if that’s not the case? In fact, I would argue that OZs stand to benefit no matter what as both candidates have made proposals that could be good for the initiative – especially if the candidates’ plans are designed and executed in the right ways.

President Trump, for instance, recently signed an executive order directing future federal government offices to be built in OZs; this has the potential, as one senior White House official said, to pour immense federal resources into distressed communities “and also drive down the high cost of locating government offices in expensive business districts.” Some critics point out that OZs have varying levels of economic distress, so it’s important to direct these federal funds to areas where they can have the most significant impact – and to measure that impact effectively. The White House has also directed the IRS to consider new rules around foreign investors’ ability to defer capital gains under the OZ initiative. While promising, some say this won’t have much of an impact on the initiative– namely because foreign investors rarely pay taxes, unless, for instance, they sell a U.S. business or piece of real estate. What might provide real value – to the initiative and foreign investors – is if these rules forgave any capital gains taxes on investments kept in OZ funds for 10 years. Now is the right time to create these incentives, as countries look to take advantage of low interest rates in the U.S.

A Biden administration, on the other hand, has suggested three areas for improvements: incentivizing OZ funds to partner with community organizations; having the Treasury Department review OZ regulations to ensure the tax incentives provide distinct economic, social, and environmental benefits; and creating a detailed public disclosure and reporting system for developers.

The majority of current OZ stakeholders support these fixes in one form or another. On the community partnership front, a recent report from the Economic Innovation Group illustrates how such collaborations – between local government leaders, property owners, community representatives, community anchor institutions, capital providers, and legal and accounting experts – can deliver real change to neighborhoods (they even have a convening guide for this express purpose). EIG’s Director of Impact Strategy, Rachel Reilly, notes, “such collaborations have led to a new arts education and creative co-living space in Newark, a medical office building for the County of San Bernardino’s Children’s Department of Behavioral Health, and a mixed-use project in Tuscaloosa that includes a teaching hotel for Stillman College – to name just a few.

As for the latter two suggestions, legislation that would improve impact reporting and measurement has long been on the docket: in 2019, a bipartisan effort called for increased reporting to help ensure the initiative delivers intended benefits to OZ communities.

The industry would welcome such legislation – as long as it doesn’t overburden funds or investors themselves that would ultimately lead to less investment. Anything that would add additional layers of complexity – and/or cost – onto already highly specialized regulations and deal structures could lower net returns in such a way that the initiative may not be as attractive to new capital. Designing the reporting requirements in order to provide only enough information to see if the OZ initiative is succeeding in helping distressed communities as intended might be enough.

The good news is that a number of providers have technology platforms that already exist which measure and track impact with built in security and transparency. Such platforms can deliver audit-ready fund tracking and reporting documentation, both for current regulations and metrics like job creation and social impact data. In other words, its solutions exist that minimize the burden on those required to measure and report impact.

While Opportunity Zones stand to benefit no matter who wins, the importance of this impact data to the initiative’s long-term sustainability can’t go unmentioned – especially now, when OZs are poised to play a vital role in bringing back the communities hit hardest by the economic downturn.

Reid Thomas is Chief Revenue Officer and Managing Director for the U.S. division of JTC Group, where he is responsible for the management and strategic direction of the organization, including NES Financial’s technology-enabled EB-5, 1031, Private Equity, and Opportunity Zone Fund administration.