Posted on October 18, 2019
Opportunity Zones provide investors with a Federal Tax Incentive and work to encourage re-investment of unrealized capital gains into designated low-income census tracts known as Opportunity Zones.
The initiative launched in 2017 with the passage of the Tax Cuts and Jobs Act to spur private development in postindustrial cities that have been plagued by dwindling populations, blight, and decades-long economic decline, such as Erie, Pennsylvania. Though Opportunity Zones are being leveraged to garner millions of dollars of investment for Erie, critics of the Incentive claim that, as a whole, Opportunity Zones have only added to the capital stack of deals that would have been made regardless of the Tax Incentive—and they’re not completely wrong.
The final regulations for Opportunity Zones were released in April 2019, so investors who relied on this Incentive to ensure that their deals penciled-out -- primarily the second-tier market investors -- waited to make their final calculations until after this date. Meanwhile, first-tier market investors with deals that were all but closed were quickly claiming the Opportunity Zones Incentive as extra padding to their capital stack. This left those analyzing the effectiveness of Opportunity Zones up to this point with a heavily nuanced sample from which to draw their conclusions.
Since the release of the final Opportunity Zones regulations, a second wave of investment has begun in the second and third-tier markets for which the Initiative was originally intended. Knox Law Public Strategies contends that there are Three Waves of Opportunity Zones Investment:
Opportunity Zones provide a unique tool for which to help rebuild certain portions of our nation. As we assess the effectiveness of the Incentive, it is important to remember that the Second Wave of Opportunity Zones Investment has yet to crest. It has taken decades of economic struggle to produce the need for an Incentive like Opportunity Zones, and we cannot expect that need to be remedied overnight.