What are Opportunity Zones?

This is Chapter 3 of The Ultimate Guide to Opportunity Zone Investing

Updated October 29, 2020

An Opportunity Zone is a low-income census tract that has been nominated by its state governor and certified by the Treasury Department. The nation’s Opportunity Zones stand poised to receive a huge influx of investment, given the enormous tax incentives that the new legislation has created.

The Investing in Opportunity Act makes a big promise to these zones. But will the promises of economic growth (without too much resident displacement) come to fruition?

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Opportunity Zone facts and figures

On June 14, 2018, the U.S. Treasury and IRS finalized certification of the Opportunity Zones. In total, 8,762 census tracts were certified as Qualified Opportunity Zones. These zones are located in all 50 states, the District of Columbia, and all five inhabited overseas territories. In December 2018, new data from the Census Bureau allowed for Puerto Rico to be granted two additional Opportunity Zones, bringing the final total to 8,764.

Click here for an interactive Opportunity Zone map

A total of 8,534 out of 31,866 census tracts defined as low-income were designated as Opportunity Zones. An additional 230 eligible contiguous tracts (not defined as low-income) were designated as well.

Nearly 35 million Americans live in these zones, per 2015 American Community Survey data. The average poverty rate in the Opportunity Zones is 32 percent, compared to 17 percent for the average census tract.

Here’s the breakdown by state:

Location	Designated Opportunity Zones	Low-Income Tracts	Non-LIC Contiguous Tracts
Alabama	158	153	5
Alaska	25	25	0
American Samoa	16	16	0
Arizona	168	160	8
Arkansas	85	83	2
California	879	871	8
Colorado	126	119	7
Connecticut	72	71	1
Delaware	25	24	1
Florida	427	427	0
Georgia	260	260	0
Guam	25	23	2
Hawaii	25	23	2
Idaho	28	26	2
Illinois	327	327	0
Indiana	156	153	3
Iowa	62	61	1
Kansas	74	70	4
Kentucky	144	139	5
Louisiana	150	145	5
Maine	32	30	2
Maryland	149	145	4
Massachusetts	138	137	1
Michigan	288	283	5
Minnesota	128	127	1
Mississippi	100	95	5
Missouri	161	153	8
Montana	25	25	0
Nebraska	44	43	1
Nevada	61	60	1
New Hampshire	27	27	0
New Jersey	169	169	0
New Mexico	63	59	4
New York	514	497	17
North Carolina	252	241	11
North Dakota	25	25	0
Northern Mariana Islands	20	20	0
Ohio	320	317	3
Oklahoma	117	114	3
Oregon	86	81	5
Pennsylvania	300	289	11
Puerto Rico	863	837	26
Rhode Island	25	25	0
South Carolina	135	128	7
South Dakota	25	23	2
Tennessee	176	170	6
Texas	628	628	0
Utah	46	46	0
Vermont	25	23	2
Virgin Islands	14	13	1
Virginia	212	207	5
Washington	139	132	7
Washington DC	25	25	0
West Virginia	55	52	3
Wisconsin	120	120	0
Wyoming	25	24	1

Opportunity Zone ideals

By design, the Opportunity Zones program targets under-invested low-income communities on the margins — places where private investment would be highly catalytic. The very worst-off places in the nation are just not capable of attractive private investment. Conversely, communities already on an upswing would be a waste of program dollars.

As Annie Lowery puts it in The Atlantic, “Opportunity zones are meant to be Goldilocks-type places: not so distressed that no amount of government incentive would induce private money to them, not distressed but gentrifying and thus already seeing a flood of private money coming in.”

How to invest in Opportunity Zones

Taxpayers wishing to invest in Opportunity Zones are required to deploy capital gains in Qualified Opportunity Funds. Such are structured as corporations or partnerships and invest in Qualified Opportunity Zone Property.

What is Qualified Opportunity Zone Property (QOZP)?

QOZP can be one of two things — 1) an opportunity zone business; or 2) opportunity zone business property. An opportunity zone business can be structured as either a corporation or a partnership and must hold at least 90 percent of its assets in QOZP.

QOZBP is tangible property used in trade or business of a Qualified Opportunity Fund.

Qualified Opportunity Zone Property is explained in more detail in Chapter 4: What are Qualified Opportunity Funds?

Opportunity Zones vs. NMTC

Prior to Opportunity Zones, the most recent place-based economic policy was the New Markets Tax Credit (NMTC) program. Much of the Opportunity Zones regulatory language is borrowed from the NMTC program, but there are a few substantial differences.

Program Mechanics

Each program was developed to incentivize capital investment in under-invested areas of the country. But there are key differences in the mechanics of how this goal is achieved.

Under the NMTC program, a taxpayer invests cash in a special financial intermediary termed a Community Development Entity (CDE), which then invests in businesses within a zone. Each CDE must be pre-approved by the Treasury Department and is required to provide governance rights to community representatives.

Under the Opportunity Zones program, there is much less oversight. A taxpayer invests capital gains into qualified opportunity zone funds, which then invests in businesses within a zone. But unlike CDEs, which must be pre-approved by Treasury, Opportunity Zone funds simply self-certify. There is zero pre-approval process, no community benefit requirement, and no requirement to provide governance rights to community representatives.

Tax Benefit

The tax benefit differs substantially as well. In the NMTC program, a dollar-for-dollar annual tax credit equal to the amount invested in a Community Development Entity (CDE) is granted to the taxpayer. But the taxpayer would still owe tax on any gains realized by the CDE.

But under the Opportunity Zones incentive, investors can deploy capital gains from any asset into a Qualified Opportunity Fund. There are three tax benefits of this program: 1) deferral of capital gains tax until December 31, 2026; 2) reduction of capital gains tax due; 3) elimination of tax due on capital gains from opportunity zones investments.

Financial Impact

The NMTC allocates $3.5 billion in qualified equity investments annually. Conversely, the Opportunity Zones initiative has no limit to the amount of investment that can be made. Because of this, some believe that Opportunity Zones will dwarf the NMTC in terms of financial impact.

EIG’s former CEO Steve Glickman has called the Opportunity Zones initiative “the biggest economic development program in U.S. history.” And Treasury Secretary Steven Mnuchin believes there will be “over $100 billion of private capital” invested in Opportunity Zones.

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Chapter 4: What are Qualified Opportunity Funds?