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Making Opportunity Zones Work for Black Communities

The IRS and the Treasury Department recently released a second set of proposed regulations on the federal Opportunity Zone program, which was created by the 2017 tax law to spur investment in economically distressed census tracts.

The Opportunity Zone law provides significant long-term tax benefits for investors who put capital gains into Qualified Opportunity Funds, investment vehicles set up to deploy funds into eligible property and businesses in designated Opportunity Zones.

Most Opportunity Zones are in majority black and brown neighborhoods, giving rise to concerns about risks of gentrification and displacement of low-income families from their neighborhoods if the program does not adequately protect the interests of existing residents. Some worry that struggling communities will continue to be left behind, while outside investors enjoy the rewards of Opportunity Zone tax preferences.

As this debate plays out, those concerned about ensuring the democratization of the benefits to be provided by the law should be strategic about making the most of the potential benefits, rather than simply throwing up our hands in despair. Through creativity and collective action, black and brown investors and social entrepreneurs can make use of the most favorable aspects of the Opportunity Zone legislation to launch innovative investing initiatives aimed at building wealth in our communities.

Long Timelines for Acquiring Capital Gains

At face value, possessing capital gains is the minimum requirement to take advantage of the tax incentives in the Opportunity Zones program. This ultimately creates an effective barrier to entry for many black and brown people. Capital gains are generated by sales of stock, other equity interests or assets, or real estate (generally investment properties, since the first $ 250,000 of proceeds from sale of a primary residence is not recognized as capital gains).

However, the long timelines built into the legislation provide an opening for participation down the road, even for those not currently sitting on unrealized capital gains. Investments made within a 10-year period of the Opportunity Zone’s designation can potentially reap tax benefits until 2047, provided the regulatory requirements are met. This offers a substantial time period for generating capital gains over the short or long term for later Opportunity Zone investment.

opportunity zones

Fully interactive Opportunity Zones map available here from eig.org. 

Collective Action to Build Wealth

So much of the black experience in America has been about the organizations that connect our community, such as churches, black fraternities and sororities, and service clubs. These groups have played crucial roles in various social movements throughout our history.

The Opportunity Zone legislation offers a unique opportunity for these organizations to make strategic investments aimed at both financial return and social impact.  The law in its design incentivizes pooling of resources: for an Opportunity Zone investment to receive tax benefits, it must be made through an Opportunity Fund, which is defined as a corporation or a partnership. (Limited liability corporations taxed as partnerships also qualify.)

Collective action to address systemic barriers to advancement is often discussed within these communities. With Opportunity Zones, incentives for collective action are actually built into and align with the legislation.

Cycling the Dollar

Along with collective investing, the Opportunity Zone program allows for cycling of investment dollars — the second set of regulations served to confirm this.

Imagine a scenario where an organization pools resources, in compliance with required securities laws, acquires properties and renovates them for sale to members of the community. Each home sale would help the homebuyer begin to accumulate assets that might even be passed on to the next generation.

At the same time, assuming a profitable transaction, the group selling the home could generate capital gains that could then be reinvested in an Opportunity Fund, which would then be utilized for additional investments not only in additional housing but also potentially into businesses of the neighborhood residents or other businesses interested in the reaping the benefits of being located in an Opportunity Zone. In keeping with the regulation, investments would need to be held for the required time periods to reap the full tax benefits of the law, but this strategy could be utilized to truly be transformative for these communities and the people who live there.

Cycling investment funds in this way has the potential to increase returns on various fronts: making money for the investment collective, expanding homeownership in low-income communities, strengthening neighborhood stability, and promoting intergenerational wealth transfer that can help to close the wealth gap.

Although the Opportunity Zones program will almost certainly lead to gentrification as property values increase in areas targeted for investment, it can also offer new paths to black economic empowerment. With innovative approaches, a solid understanding of the risks and rewards of Opportunity Zone investing, and careful attention to regulatory requirements for maximizing tax benefits, we can leverage the Opportunity Zone program to build wealth for black families and revitalize our communities.


Disclaimer: This is for general information and is not intended to be and should not be taken as legal advice for any particular matter. It is not intended to and does not create any attorney-client relationship. The opinions expressed and any legal positions asserted in the article are those of the author and do not necessarily reflect the opinions or positions of Miles & Stockbridge, its other lawyers or Black Enterprise.  

 

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What Black Investors Need to Know about Opportunity Zones

Black investors have historically invested in land to build wealth. Real estate is generally seen as a solid investment because property values typically rise over time. Property can be passed from one generation to another; used to diversify an investment portfolio; and is considered less risky than the stock market. Now, there is a new option for blacks to become investors and receive tax breaks with a new real estate asset class: Opportunity Zones.

Opportunity Zones are low-income areas the U.S. Treasury classifies as “qualified opportunity zones.” Investors can make these asset investments through Qualified Opportunity Funds.

The investments are geared to accelerate economic development in almost 9,000 designated areas in America and Puerto Rico, says tax attorney Steve Moskowitz, a founding member of the San Francisco-based tax law firm Moskowitz L.L.P.

Opportunity Zones were added as part of the 2017 Tax Cuts and Jobs Act. They allow investors to defer tax on any capital gains until 2026 and avoid a capital gains tax on the sale of an Opportunity Zone. Those funds are then invested in property and businesses located or operated within the designated QO Zones.

What Exactly are Opportunity Zones?

According to the Economic Innovation Group, the 2017 tax provision provides “a tax incentive for investors to re-invest their unrealized capital gains into dedicated Opportunity Funds.” African American Sen. Tim Scott (R-S.C.) played an integral part in including the zones in the tax law.

The ante is high as there is a massive amount of capital gains that could be invested in Opportunity Zones. Based on estimates that U.S. households and corporations possess over $ 6 trillion in unrealized capital gains, some officials contend that the program has great potential to trigger an influential change in distressed communities.

Even if a portion of that amount of money was committed, it could possibly mean billions of dollars for poor areas across the country. That is because the program is specifically designed to increase economic opportunity by incentivizing new development in low-income urban and rural areas, says Leslie Anderson, president and CEO of the New Jersey Redevelopment Authority (NJRA).

opportunity zones

Leslie A. Anderson, executive director, NJRA

The NJRA is a multimillion-dollar independent financing New Jersey authority created to transform urban communities through direct investment and technical support.

In New Jersey, where the NJRA is based, many of these designated neighborhoods are predominantly black and have suffered from systemic inequality, Anderson says.

How Low-Income Communities Could Benefit

Anderson says Opportunity Zones give residents in these communities a chance to benefit in several important ways. First, the program can create new development with the potential to generate increased employment opportunities, more affordable housing, improved property values, and more comprehensive and higher quality services.

Unfortunately, without incentives, Anderson says investors often see low-income areas as too high-risk, making it very difficult for needed projects to attract the capital necessary to move forward.

“Opportunity Zones offer investors an incentive to invest in projects that can help to redevelop and transform these neighborhoods,” explains Anderson.

Yet, concerns remain from community advocates who feel the program could create gentrification pitfalls in some neighborhoods populated by low-income residents and minority groups.

For instance, these advocates foresee rising prices for housing or other new real estate development in targeted Opportunity Zones forcing current residents to leave those areas.

Anderson says she understands those concerns as does New Jersey Gov. Phil Murphy and Lt. Gov. Sheila Oliver. She says that New Jersey created an inclusive process that intentionally engages the communities that have been designated as Opportunity Zones.

The governor’s office is holding a series of community forums to educate residents and local businesses, answer questions, understand community needs, and address concerns.

Additionally, the NJRA will meet with local mayors to advise them on leveraging Opportunity Zones to generate projects that directly impact the people who need them most.

Anderson says the NJRA has used its financial resources to leverage nearly $ 4 billion in new investments, helping to redevelop some of New Jersey’s most economically challenged neighborhoods.

“We are also working to ensure that community-based organizations and existing businesses are full participants in the local implementation of the program and can partake in development opportunities.”

Another issue the NJRA is addressing is one of investors mainly focusing on larger cities to the detriment of smaller urban areas.

“We are making a major strategic push to help investors understand the value and importance at looking at all of the designated zones in the 75 municipalities in the state of New Jersey,” Anderson says.

The NJRA, in partnership with the Governor’s Office and the Department of Community Affairs (DCA), recently launched a website that serves as an online mapping tool and a comprehensive resource for residents, local governments, and potential businesses and investors.

Information for Black Investors and Taxpayers

Black investors looking at Opportunity Zones may do well to ponder these questions:

How does one become an Opportunity Zone investor?

Is there a minimum amount of income or capital gain from the sale of stock or other assets they must have to become such an investor?

In order to invest in an Opportunity Zone, Anderson says an investor must create a Qualified Opportunity Zone Fund, which is any investment vehicle organized as a corporation or partnership with the specific purpose of investing in Opportunity Zone assets.

The fund must hold at least 90% of its assets in the qualifying Opportunity Zones property.

Any tax-paying individual or entity can create an Opportunity Fund, through a self-certification process, which is an IRS form submitted with the taxpayer’s federal income tax return for the taxable year.

Anderson says it is important for black investors to know that they can pool their resources and form a Qualified Opportunity Zone Fund, something the NJRA can assist with.

If you are interested in how such an investment may impact your portfolio and taxes, contact a tax attorney and also get more information here.

The post What Black Investors Need to Know about Opportunity Zones appeared first on Black Enterprise.

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