By Graham Allison
The Tax Cuts and Jobs Act of 2017 established what could be the most impactful economic incentive of the 21st Century – Opportunity Zones. From real estate developers to wealth management funds to government officials, interest in this innovative economic development engine is sky-rocketing.
Qualified Opportunity Zones enable investors to obtain special treatment of capital gains on the sale of an asset if the proceeds are reinvested through a Qualified Opportunity Fund (QOF) within 180 days into one of 8,700 low-income census tracts designated by the U.S. Treasury. There are several benefits to making investments in QOZs, including: An initial deferral of capital gains tax until the sale of the acquired asset, or Dec. 31, 2026, whichever comes first. If held 5 years, investors obtain a 10 percent step-up in basis, and if held seven years, the step-up increases to 15 percent, effectively reducing the capital gains tax, which is paid Dec. 31, 2026. Finally, and most importantly, if held 10 years, there is no tax on the profits from the QOF investment.
Designed to spur long-term investments in low-income urban and rural communities across the country, Treasury Secretary Mnuchin estimated 2019 Opportunity Zone investment could reach $100 billion. For perspective, there is an economic development heuristic that indicates that for every $1 billion invested, 10,000 jobs are created. If the Secretary is correct, that level of investment will create 2.5 million jobs in Opportunity Zones.
THE IMPACT OF OPPORTUNITY ZONES
While not unprecedented, Opportunity Zones will be transformational and could be as impactful as the Marshall Plan in today’s dollars. Real estate developers and Wall Street see the tremendous value of Opportunity Zones. How do non-profits and social enterprise fit into the picture to further their community development mission? The answer is through impact investing.
Impact investing refers to investments made into companies, organizations, and funds with the intention to generate a measurable, beneficial social or environmental impact alongside a financial return. Impact investments provide capital to address social and/or environmental issues. This is a perfect match for Opportunity Zone investors.
For example, a local non-profit in Columbus, Ohio recently received a generous gift from one of its members, who passed away. Had Opportunity Zones existed previously, the donor would have been able to deploy capital gains into a social enterprise business established to fulfill the mission and receive returns for his investment. He might have even gifted the tax savings to the non-profit. Imagine if he had been able to see the impact of his investment during his lifetime, rather than waiting to honor the non-profit’s mission in his will.
JOINT VENTURES WITH A MISSION
How does this fit into real estate development and how does it become more inclusive? A minority-owned development company could develop a QOZ project as a joint venture with a faith-based nonprofit Community Development Corporation to provide affordable housing solutions and a range of economic empowerment initiatives designed to alleviate poverty and revitalize neighborhoods in low- and moderate-income communities.
The QOZ project could be a transitional housing development established to assist ex-felons in reentering communities via a holistic strategy that incorporates meaningful employment, soft skill development, community connections and an array of support services. Innovative non-profits utilizing this approach have driven re-offense down from 43 percent to 5 percent and have provided 100 percent employment within two months versus the national average of 43 percent.  In impact investment like this would assist in fostering the First Step program recently discussed at the State of the Union address.
In order to make this project happen, a developer could establish a new for-profit social enterprise joint venture to develop the real estate. There would be numerous beneficiaries, from the state, which could save thousands, and perhaps millions, of dollars per year once the project is fully occupied by the men and women seeking a second chance. If the increased employment rates continued to hold true, the former inmates could generate millions of dollars in payroll, which would cut costs due to payroll taxes paid to the state.
More than the economics, projects like these will change lives. Often when speaking about Opportunity Zones, the Opportunity Zone community talks about the What and the How. Impact investing is about the Why. If Opportunity Zones have the benefits they intend, it will be critical for community and faith-based organizations to enter into the market. As Opportunity Zone investment requires a for-profit entity in order to obtain the tax benefits, creating public-private partnerships and social enterprise partnerships are key components to fulfilling the goals.
For investors, impact investing into QOFs is the chance of a lifetime. How often do individuals get the chance to target an investment that will make his or her community better? Consider how it would feel to invest in your own backyard to tackle some of our most pressing public problems and earning financial returns to do it! This might provide more personal satisfaction than tracking a stock ticker.
The clock is ticking for non-profits to engage in this once-in-a-generation program. The QOZs expire on Dec. 31, 2028 and investors will miss out on 5 percent of the step-up in basis if capital gains are not invested in 2019, so think about your goals as an investor, community leader or responsible citizen. Providing someone a second chance, housing, safety, or any other benefit through a targeted impact investment is the true “why” of Opportunity Zones. How can you use Opportunity Zones to leave a legacy?