Opportunity Zones Have Transformative Potential

Lisa Ferrell Commentary


Opportunity Zones Have Transformative Potential

The 2017 tax reform included a rare bipartisan creation to direct capital investment to emerging communities, strengthen businesses, create jobs and offer investors generous capital gains tax treatment. The Opportunity Zones were backed by more than 100 legislators from both sides of the aisle, including Sen. Cory Booker, D-N.J., and House Speaker Paul Ryan, R-Wis.

The program seeks to unleash the capital markets’ trillions of dollars of current unrealized gains. If even a portion of these gains are invested in communities, they could be transformed. Arkansans should take advantage of this opportunity to position the state to realize significant long-term economic growth.

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Gov. Asa Hutchinson designated 85 low-income Arkansas census tracts as Opportunity Zones. All total, 9,000 U.S. census tracts have been designated as Opportunity Zones, where capital gains tax incentives will encourage private investment. But the time to act is now: the zones expire in 2026.

Economic growth, vitalized cities and economic opportunities are at stake. Through Opportunity Zone Funds, investment can flow into a wide range of businesses that communities need to thrive. This could lead to business growth, new startups, badly needed infrastructure upgrades, better housing, advanced technologies, and improved delivery of goods and services.

This breadth of investment can accelerate growth for those who live and work in Opportunity Zones while potentially drawing more businesses seeking to capitalize on accessible funding and favorable returns.

Elected and civic leaders should partner with investors, businesses and stakeholders to create the infrastructure, housing, jobs and innovation their cities and counties need.

People in these communities with good business plans will have the chance to access capital, and businesses can take advantage of the favorable capital gains treatment and its attractiveness to investors.

Investors will be more likely to choose a promising business in an Opportunity Zone because of these tax benefits. Businesses seeking capital would be wise to move to Opportunity Zones. Savvy investors and venture capitalists will soon look to Opportunity Zones, which will be poised to attract start-ups and early stage companies.

Investors who put their recently realized capital gains into Opportunity Zone Funds are eligible for three tax benefits — deferral, reduction and tax-free growth of the proceeds of the investment. An investor who invests eligible capital gains in these funds defers paying taxes on that gain until the asset is sold or Dec. 31, 2026, whichever comes first.

In addition, capital gains tax on the original investment is reduced 10 percent if the investment is held for five years, and a total of 15 percent if held for seven years. If an investment in an Opportunity Zone Fund is held for 10 years, the investor does not pay capital gains tax on the growth of the initial investment. The Economic Innovation Group, using Congressional Research Services numbers, estimates that these tax benefits could add up to an extra 3 percent to the annual rate of return.

Investments in a fund rather than directly in businesses let fund managers adjust investments throughout the life of the fund while investors maintain their preferential tax treatment.

At a recent conference in D.C. for investors and Opportunity Zone stakeholders, investors made clear that communities coupling vision with a well-conceived plan are more likely to get investment dollars.

The crafters of this legislation see it as a tool to benefit communities attracting significant private investment. Through public-private partnerships, Arkansas’ leaders should work to position their communities to garner a large share of this investment through planning, offering additional incentives and supporting growing businesses. This bipartisan approach to development offers leaders in Arkansas the rare opportunity to lay the groundwork for strong economic growth for next generation.

 


Lisa Ferrell, CEO of North Bluffs Development Corp. of Little Rock, is the founder of Southern Cap Opportunity Zone Fund LLC, a team of tax, legal and fund professionals, connecting investors with eligible Opportunity Zone projects. Email her at LisaFerrell@SBCGlobal.net.