Quote By: Brett Theodos, Principal Research Associate, Urban Institute
Brett Theodos is a principal research associate in the Metropolitan Housing and Communities Policy Center at the Urban Institute, where he directs the Community Economic Development Hub.
With 12 percent of census tracts now designated Opportunity Zones, the federal incentive has the potential to spur substantial new capital flows into communities across the country. Investors are provided with targeted capital gains tax breaks in return for investment in selected low-income and undercapitalized communities. Restrictions on what projects qualify are minimal. Only a few “‘sin’ businesses are excluded outright. Any properties acquired must be ‘substantially improved’—"with improvements totaling at least the value of the underlying land. Given the lengthy investment horizon for excluding taxes on new gains (at least 10 years), the Opportunity Zone incentive is set up to reward patient investors. Likely this means that investments centered on physical assets will best fit into this model to achieve maximum return on investment while minimizing risk. Consequently, we would expect the incentive to spur a sizable degree of real estate investment, especially in areas with existing market demand.
To harness the power of Opportunity Zones, local government leaders should first understand the types of neighborhoods in their jurisdictions that are Zones, then explore what strategies can best serve these different groupings, and finally activate available policy levers to compel private action in line with community interests.Communities would be wise to undertake a thorough market analysis. There is a clear distinction between Zones that have seen very little capital and those that have experienced a significant infusion of new investment post-recession. For the former, strategies should be developed to jumpstart and accelerate growth. Whether through locally provide subsidy, public land disposition, or risk mitigation approaches, local leaders will need to incentivize Opportunity Zone investment. In the case of the latter, guardrails must be put up to ensure that newly attracted investment does not simply benefit land speculation and fuel gentrification that upends low- and moderate-income residents.
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