Opportunity Zones expected to unleash a wave of private capital investment in localities

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WASHINGTON – The finances of local governments around the U.S. and its territories will soon benefit from a wave of private capital investment now that the Internal Revenue Service has released its proposed regulations for Opportunity Zones, experts said.

Many investors were holding back until Friday’s IRS announcement, they said..

“The capital that has been lined up, will now likely be able to move forward and into investments,” Richard Chirls, a partner in the public finance tax group at Orrick, Herrington & Sutcliffe in New York, said in an interview Monday.

Although there is no direct role for tax-exempt bonds in Opportunity Zones, municipalities are looking at them as a way to attract capital investment to economically distressed areas in conjunction with new infrastructure spending and financing packages that may include private activity bonds.

Chirls said the new law provides “a significant incentive to make the investments in 2019.”

Treasury Secretary Steven Mnuchin said last month he expects the zones will spur over $100 billion in investments.

Treasury has certified 8,700 census tracts as opportunity zones in every state and U.S. territory.

Potential investments range from low-income housing projects to warehouses, manufacturers, commercial office buildings and hotels.

“The tax law has no limitation on the type of business that benefits from the opportunity zone investment,” said Chirls. “It can be anything. Somebody talked to me today about farming.”

Opportunity Zones were authorized under the Tax Cuts and Jobs Act enacted by Congress last December to encourage investment and job creation in low-income urban and rural communities.

Unrealized capital gains that are transferred into the new Qualified Opportunity Funds can avoid paying capital gains if the investment is held until the end of 2026 or until that investment is sold.

The law requires 90% of the funds to be spent in an Opportunity Zone. The IRS regulations give the Qualified Opportunity Funds up to 30 months to invest 70% of their money in a zone as long as there is a written plan for that business or construction project.

“Communities that have housing projects or infrastructure projects now have a runway of time to think through these things and still benefit from the tax incentives,” said Christopher Coes, vice president for land use and development at Smart Growth America and a director for LOCUS: Responsible Real Estate Developers and Investors in Washington, D.C.

Coes said some communities are considering ways to use Opportunity Zones in conjunction with federal housing tax credits and private activity bonds for financing low-income housing.

“A state or locality can’t just turn on the light switch and try to do a deal today,” Coes said. “They have a whole process to tap into those resources.”

Dee Wisor, president of the National Association of Bond Lawyers and an attorney at Butler Snow in Denver, echoed that sentiment. Wisor said in an email that state and local economic development staff look for combinations of financing that may now pair the new capital gains tax breaks with other federal tax breaks such as the low income housing tax credit, the housing tax credit and new markets tax credit.

Michael Novogradac, the managing partner in the San Francisco office of the accounting firm Novogradac & Co., used a golf analogy to describe the IRS regulations as widening the fairway for proposed projects.

“A lot of our clients have been organizing funds and preparing to invest,” Novogradac said. “But they have had a variety of questions and been looking through the issues.”

Novogradac said the IRS proposed regulations “provide a lot of clarity” that will begin to free up that capital.

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