The Tax Bill “Opportunity Zones” will use tax incentives to draw long-term investment to distressed parts of America. The Qualified Opportunity Zones give capital gains tax exemptions to investors for encouraging business growth in poverty stricken areas. The estimated cost is a $7.7 billion. The bill truly encourages long term investment to bolster economically depressed areas because the investor gets deferred taxes initially and then significant tax breaks for continued investment for a decade in the low income area. Financial institutions will probably set up Opportunity Funds to sell to clients. This will provide clients a way to keep their money tax deferred for ten years. While the return will be low, it will provide tax free gains.
There are four reasons to be positive about the impact that Opportunity Zones can have on distressed areas.
First, we are witnessing a trend in the use of philanthropic capital to promote innovation, collaboration and capacity building. Bank regulators are so supportive of these collaborative ventures, they give extra credit to bank leaders for facilitating this cooperation in the bank’s Community Reinvestment Act Performance Evaluation. Put simply, philanthropic and capital based collaborations promote community capacity building. Bank Trust Departments are likely to work more closely with Foundations in achieving client driven revitalization investment. Family Offices, which are increasing dramatically in number and have a national coalition, and their fund managers will be attracted to the tax advantages of Opportunity Zone Investment.
Second, Opportunity Zones include the old New Market Tax Credit Zones as well as some distressed Middle Income Tracts and even Upper Income Census Tracts, located near Low Income Tracts. This is promising because New Market Tax Credits are a success. Between 2003 and 2015, there has been $42 billion in NMTC investments generated and $80 billion total project financing, according to the NMTC at Work in Communities Across America report published in December 2016. According to the Community Development Financial Institution Fund, a Division of the Department of Treasury, the NMTC Program has been very effective, noting that since 2003, the NMTC Program has:
Third, financial institutions will gain by working closely with foundations and wealth management clients on Opportunity Zone Investments because they receive:
Fourth, developers and bankers will be more assured of a long term commitment in light of the long term capital gains privileges from the Tax Bill. This extended commitment of resources is exactly what a distressed community needs to work itself out of poverty.I
n other words, the emergence of “Opportunity Zones” is a positive financing vehicle because it helps the large community of NMTC developers gain new partners and continue their noteworthy success.