Opportunity Zones: An Investment in Smart Gentrification?

In October 2018, the Internal Revenue Service released regulations for investment in Opportunity Zones, a concept established in the Federal Tax Codes and Jobs Act of 2017. The zones are designed to spur private investment in economic and community developments in economically distressed communities. The State of California now has 890 designated Opportunity Zones out of 8,000 nationwide. The zones would function as a form of impact investing, where private investors are interested in two bottom lines: the capital impact and the social impact.

Map of the San Diego Promise Zone, which includes the same Census tracts as the new Opportunity Zone

Within California, Opportunity Zones have the potential to replace public redevelopment dollars lost by the dissolution of redevelopment agencies. Opportunity Zones also allow private investors to contribute to their local communities. The regulations released by the IRS in October were particularly investor-friendly and include a provision clarifying that all capital gains on investments made in Opportunity Zones before 2048 would be excluded from the capital gains tax. Investors may invest capital gains from an asset in a Qualified Opportunity Fund (QOFs) within 180 days of the transaction. The taxes on those gains are then deferred through the end of 2026.

Given the incentives, investors’ interest in Opportunity Zone funds has grown rapidly. Community advocates, especially those concerned with equitable development, have expressed growing concerns about gentrification and displacement within the Opportunity Zones. Given that the tax subsidy grows as property values increase, investors in quickly gentrifying neighborhoods will receive the highest return on investment. The Brookings Institute suggests that with some guardrails, such as tenant protection policies, Opportunity Zones could lead to “smart gentrification,” or gentrification that does not displace existing residents. The long-term impact of Opportunity Zones is yet unknown, but housing advocates hope it could mean the return of redevelopment.

Liz TraceyLiz Tracey, Senior Principal, is an expert on affordable housing and community development finance using tools such as the Low-Income Housing Tax Credit and New Markets Tax Credits. For information about community development financing resources, contact Liz Tracey at liz@lesardevelopment.com.