Sean Penrith, The Climate Trust
Weekly Policy and Finance Update – February 12, 2018

THE BOTTOM LINE.

Despite the tumult in the stock market, investors are awash in unrealized capital gains; up to $2.3 trillion in fact. The Tax Cuts and Jobs Act signed into law on December 22, 2017 included an innovative tool to appeal to such investors by offering them tax considerations in return for investing in underserved communities. Opportunity Zones (OZ) allow investors to re-invest capital gains and defer or reduce their tax burden and thus engage them in helping solve economic hurdles in those communities. This could go a long way with about one in six Americans (52.3 million) living in economically distressed areas in this country.

Investors now have the ability to invest their unrealized gains in a Qualified Opportunity Fund (certified by the U.S. Department of the Treasury) that targets distressed communities and defers paying any tax on those gains for up to nine years. The Opportunity Funds are managed by the private sector and are tasked to invest at least 90% of their capital in these Opportunity Zones. The Act draws on the low-income community census tracts for determining eligibility for designation as an Opportunity Zone. Up to 25% of these tracts in any one state can be deemed as Opportunity Zones. Reviewing the Policy Map site that displays the eligible census tracts, one can see that the bulk of SE Oregon would comply for the full 25% OZ designation. State governors have until March 21st to nominate regions for Opportunity Zone designation.

This OZ provision also allows for an adjustment upwards in value for investments that are held beyond five and seven years. To attract longer-term investments in these rural communities, the Act exempts patient investors from any additional gains beyond the original deferred amount for OZ investments that are held for at least ten years. This permanent exclusion from taxation on capital gains accrued via the investment in the Opportunity Fund for positions that have been held longer than ten years should a sale or exchange of an investment occur is a very powerful mechanism to match timescales for rural revitalization and investor commitments.

The OZ model is a complementary tool to the New Market Tax Credit (NMTC) and they differ in their approach. While the NMTC is constrained by a limited quantity of government issued tax credits, the Opportunity Zone model encourages unlimited amounts of investment in Funds that target these designated communities. This is designed to unleash innovation to implement initiatives that deliver positive benefits to those communities and are sustainable. Other key differences between the OZ approach and the NMTC model is that investors are offered no guarantee on their investments in a Fund and the OZ program draws on equity capital while the NMTZ primarily sources debt.

Opportunity Funds are given wide latitude on the design of their investment criteria based on what makes sense to that particular OZ. This could pave the way for investments in entrepreneurship, operating businesses, and real estate. I hope to see Opportunity Funds targeting investments in regenerative agriculture to meet increasing consumer demand, while improving the health of our soils and stemming the flow of rural migration to the cities.

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Image credit: Flickr/Mark Jensen