Joseph Hoffheimer, NCGrowth Analyst, UNC-Chapel Hill MCRP Student
Opportunity Zones (OZ) represent one of the most significant federal community development initiatives in recent years. Created as part of the 2017 federal tax reform package, the program intends to incentivize investors to place capital in businesses or real estate in census tracts designated as economically distressed. According to the IRS, Opportunity Zones “are designed to spur economic development and job creation in distressed communities.” Over time, investments in these areas are eligible to benefit from tax deferrals, deductions, and cuts. So far, investors have primarily used Opportunity Zones for real estate investments compared to business investments.
This report examines:
Investments in operating businesses and real estate qualify for Opportunity Zone (OZ) benefits. However, we find that businesses have received significantly less investment by OZ investors compared to real estate deals. This is because businesses wishing to attract OZ investments face several specific challenges when it comes to attracting investors compared to real estate. In general, business investments in OZs are considered riskier because businesses are less likely to remain in operation long enough to realize the OZ tax benefits. Confining program guidelines, which limit the types of businesses eligible for OZ investment, further encourage investors to place capital into real estate rather than businesses.
We find that overarching challenges to the Opportunity Zone program as a whole include recent and ongoing regulatory changes, investigations regarding how some Opportunity Zones were chosen, low transparency into how investments are made, relatively high transaction costs for smaller deals, and significant administrative barriers for small-scale investors.
Despite the limitations mentioned, the investment climate may improve in the future as regulations are finalized, more Qualified Opportunity Funds (QOFs) get started, and other challenges are resolved. In the meantime, communities and businesses can take proactive steps to prepare for Opportunity Zone investments. Because the initiative currently incorporates few guidelines for investments, it is in the best interest of communities and businesses to be prepared and advocate for themselves.
With an eye on preparing for future investment, NCGrowth has offered the following set of nine guidelines to help communities best prepare for and leverage business investments in Opportunity Zones. These guidelines were determined through case study research, prospectus analyses, and expert interviews:
1. Community Engagement and Planning
2. Investment Proposals and Prospectuses
3. Financial and Institutional Partnerships
4. Innovative Funding Approaches
5. Data Provision and Business Targeting
6. Guides and Resources
7. Improved Collaboration Among Practitioners
8. Identifying and Educating Local Investors and Entrepreneurs
9. Current Place-Based Business Types