Opportunity awaits those willing to invest in Opportunity Zones
Mar 04, 2019 11:21AM
By Kathleen Maris
By Emily Hodge
Research and Existing Industry Manager, Oconee Economic Alliance
The term Opportunity Zone may be one of the biggest economic development terms you will be hearing in South Carolina for the next few years.
Opportunity Zones are low-income census tracts that have been certified by the U.S. Department of the Treasury to receive federal capital gains tax advantages. These are received when investors finance new projects and enterprises through capital investments called Opportunity Funds. Essentially, this will encourage more long-term investment in areas that have not experienced the economic growth and prosperity that many other parts of the country have seen.
Established through the Tax Cuts and Jobs Act of 2017, economic development groups and local governments were given the chance to submit their low-income community census tracts for this designation. Out of the 538 eligible tracts in South Carolina, only 25 percent were selected, meaning the competition was fierce for these designations.
There are five focus areas that South Carolina looked at when deciding where to grant Opportunity Zones:
- Promoting economic vitality in parts of the state that have not shared in the general prosperity over the past few years.
- Funding the development of workforce and affordable housing in areas with escalating prices and inventory shortages.
- Funding new infrastructure to support population and economic growth.
- Investing in startup businesses which have the potential for rapid increases in scale.
- Upgrading the capability of existing underutilized assets through capital improvement investments.
So what happens next? At the recent Opportunity Zones Summit in Columbia, hundreds gathered to learn more about these zones and hear from Gov. Henry McMaster and U.S. Senator Tim Scott (R-SC.). One of the recurring conversations centered on the uncertainties surrounding the regulations of the Opportunity Zones and the funds associated with them. The U.S. Department of Treasury is continuing conversations around this, and updated regulations are expected in the near future.
From the private sector side, Kyle Putnam, chief investment officer at Greenville-based RealOp Investments, said many companies are in the preliminary phases of evaluating potential investment opportunities in high-quality opportunity zones throughout the region.
“While there are still many unknowns about the final regulations, we believe there will be ample opportunity for transformational real estate investments in these areas that are seeking to stimulate economic growth while achieving adequate risk-adjusted returns with significant tax benefits,” he said.
How does it work?
Opportunity Funds are private sector investment vehicles that invest at least 90 percent of their capital in Opportunity Zones. This capital comes from investors who have existing capital gains that they choose to invest into Qualified Opportunity Funds. This allows a deferment on the taxes owed on those capital gains while providing resources to be put to work rebuilding the communities that need it most. The longer funds are held, an increasing portion of the taxes on the original capital gain are forgiven. If the fund is held for 10 years, any additional gains or appreciation that occurs is not taxed at all.
It is estimated that there is approximately $6 trillion in unrealized capital gains in stocks and funds throughout the United States. Even if only a portion of this money finds its way into Opportunity Funds, it could make a substantial difference in underserved areas. One of the largest hurdles to putting these funds to work is uncertainty surrounding the rules and regulations of the funds. An updated list of regulations is expected to be released in the coming weeks.
The new Opportunity Zone designation will add yet another incentive for development in these areas. The way we see it, when an opportunity like that comes knocking, you have to answer the door.
Emily Hodge is the Research and Existing Industry Manager with the Oconee Economic Alliance, which is a public-private nonprofit effort to accelerate job creation and capital investment, increase per capita income, diversify the local tax base, and generate awareness of Oconee
County as a business location. To learn more, visit www.InvestOconeeSC.com.