Recent research has shown that those who live in Southern states tend to experience higher income inequality, especially among minority communities. The 2018 map of economics growth shows that more than 50 million Americans live in a distressed community (shown in red in the above image).
To attract more investment to those underperforming areas and create sustainable economies, the Investing in Opportunity Act became law in December 2017 as part of the new tax overhaul. The Act offers developers substantial tax breaks to encourage investment in “opportunity zones” designated by each state.
These opportunity zones are often labeled as distressed areas. They may see low economic mobility, high poverty numbers, and loss of jobs over time, despite the U.S. economy’s overall upward trajectory since the 2008 recession.
Under the Federal Opportunity Zones program, investors have the opportunity to defer capital gain taxes if they reinvest in one of the designated opportunity zones in their home state. Currently, U.S. investors currently hold an estimated $2.3 trillion in unrealized capital gains , according to public policy organization Economic Innovation Group.
Under the program, those underutilized dollars could be put to work in areas that need long-term investments to begin to move the needle on development. Investments held for a minimum of 5 years will be taxed at reduced rates — 90 percent for investments held at least 5 years and 85 percent for investments held at least 7 years, according to the Economic Innovation Group.
A 10-year investment’s gains during that decade will not be taxed and will be permanently excluded from your income.
Opportunity zones across the Southeast
The city of Atlanta provides a good case study for how federal opportunity zones could be used to encourage equity in a large metro area. In 2018, Atlanta was named again the most unequal city in the United States. Implementation of the federal opportunity zone program could bring a much-needed support to low-income communities around the city. The economic and community development program is helmed by Invest Atlanta, the city’s economic development authority.
“Recognizing that the Federal Opportunity Zones incentive has the potential to create a large amount of economic activity within the city, we hope to see socially-minded investments in businesses that help our city and business owners prosper,” Dale Royal, VP of Investment Services at Invest Atlanta, tells Hypepotamus.
“We hope to see investments into affordable housing, entrepreneurship, disinvested commercial corridors, and small business growth and expansion would boost both economic and community development in the city,” he says.
There are 64 designated federal opportunity zones In the 29-county metro Atlanta area, 26 of which are in the southwest Atlanta area. Royal shares that real estate projects, including operating businesses, are currently the top transaction under the designated opportunity zones. However, startups in all industries can greatly benefit by operating within these zones as well.
“Atlanta has several Opportunity Zones that are severely distressed, and we hope to see these neighborhoods gain most from Opportunity Zone incentives. With such a powerful tool, this is a great opportunity for impact in our most disinvested neighborhoods,” says Royal.
In Tennessee, the recently-appointed CEO of public-private entrepreneurship support organization Launch Tennessee spoke of plans to use the state’s 125 opportunity zones to connect with investors.
“We have to wait for the regulations to come out so we understand the rules completely. Then, how do we connect investors with those Zones and encourage entrepreneurship and innovation efforts that will revitalize those economies?” Margaret Dolan told Hypepotamus last October.
Alabama secured 158 designated opportunity zones (one in every county). 24 are located in the state’s largest city, Birmingham, with zones in the Innovation District, the Civil Rights District, and the Fourth Avenue Business District.
“I think the Opportunity Zone incentive that’s been created holds tremendous potential for Birmingham, especially since most of the city was able to be designated an Opportunity Zone,” David Fleming, CEO of economic development organization REV Birmingham, told Alabama Newscenter last August.
“This is not just an incentive for downtown, but it’s an incentive that could encourage business investment as well as physical redevelopment in a wide range of the territory of the city.”
Are all opportunity zone investments good?
While opportunity zone investments could be a vital catalyst for underserved areas, community leaders have expressed concerns that they could also be abused by those seeking a tax haven without giving much back to the community.
“The legislation provides investors with the ability to invest without regard to the social impacts of their investments,” wrote Deborah Kasemeyer, Senior Vice President at Northern Trust, on the Georgia Social Impact Collaborative website.
Kasemeyer signals a lack of restrictions on the usage and contribution of tax breaks. For example, currently the only requirements for the funds is that they don’t invest in liquor stores, massage parlors, and similar “sin” businesses.
These community leaders’ concerns have been validated by ongoing media investigations into certain opportunity zone transactions around the country in areas that don’t necessarily need incentive-driven investment. For example, one New York-based real estate investment firm is conducting transactions only in areas “where both populations and incomes are already set to rise faster than the national average,” according to the AP.
Others have expressed concern that investors may be using opportunity zone legislation only as an opportunity for good PR.
Opportunity zone-focused investment funds, like South Carolina real estate fund Emergent Communities or Atlanta native Ross Baird’s Village Capital have attracted investors interested in early-stage startups.
To help oversee local investments, Invest Atlanta has created an Investor Registry to keep track of what types of projects and businesses investors are interested in and how to connect them with those businesses in designated areas. They also plan to launch a website where project sponsors and business owners will be able to showcase what they’re working on and connect, says Royal.
As the Southeast continues to attract more investment dollars from across the country, cities will begin to understand the true impact — whether positive, neutral or negative — of the federal opportunity zone program and adjust their frameworks accordingly.
Featured image via Economic Innovation Group