Treasury releases first round of rules on Opportunity Zones, giving flexibility to developers

The Louisville census tracts in blue were certified as Opportunity Zones by the U.S. Treasury | Photo via Kentucky Cabinet for Economic Development

The U.S. Department of Treasury on Friday released its first round of rules and guidance on the federal Opportunity Zones program, which was created in the tax cut bill passed by Congress last year and uses large capital gains tax breaks to incentivize investment into designated low-income areas.

While there is one final round of federal guidance for the program expected before the end of the year, a number of groups invested in the outcome of Opportunity Zones hailed last week’s rules for providing clarity on what type of investments would qualify for the tax break, and allowing flexibility for how and when such investments must be deployed into development and business projects.

Many large investors have held off on deploying up the hundreds of millions of dollars in capital until the rules are finalized or at least significantly clarified, with Treasury Secretary Steven T. Mnuchin stating in a news release announcing the guidance Friday that “we anticipate that $100 billion in private capital will be dedicated towards creating jobs and economic development in Opportunity Zones.”

Over 8,700 low-income census tracts across the country were designated by governors and approved by the Treasury this year as Opportunity Zones, or areas in which qualified opportunity funds could invest unrealized capital gains. Those rolling over their capital gains into the funds could have them deferred by up to seven years, plus pay no taxes on gains from within these zones if such investments are held for at least 10 years.

Kentucky has 144 census tracts designated as Opportunity Zones, with 19 in Louisville. Mayor Greg Fischer’s economic development team is embracing the new program, pitching potential developments projects in the city that could take advantage of it, like the proposed track and field facility in west Louisville and the new soccer stadium and district in Butchertown.

John Lettieri, the president and chief executive of the Economic Innovation Group — a nonprofit public policy group that has long championed the concept of Opportunity Zones — said in a media conference call on Friday that the new federal guidance is only a first step, but praised the flexibility it gives to investors.

“In our review, based on the conversations we’re having with both investors and community stakeholders around the country, we see a lot to like about this first effort,” said Lettieri, “even though there are still many things with urgent need for clarity that remain.”

One piece of clarity from the guidance is how much investment from a fund must take place in an Opportunity Zone. While the law already stated that up to 10 percent of a fund’s assets can be invested outside of a zone, the Treasury’s rules go further to say that up to 30 percent of a specific investment in a property or business could also be located outside of a zone.

Taken together, this means that up to 37 percent of a fund could actually be invested outside of a designated Opportunity Zone.

More flexibility was also given to when a capital investment to a fund would have to be deployed into a development project within a zone. While the law suggested that this would have to take place within six months, the regulations released last week extended that period to 30 months, so long as they release a plan for how the funds will be invested in a specific project within a zone.

Lettieri added that one large question mark that remains for the second round of guidance for the Treasury is how it treats the redevelopment of vacant properties.

Local capital investment group Access Ventures announced this summer that it is exploring national partnerships to create an opportunity fund to invest up to $100 million in capital within the Opportunity Zones of Louisville and several other cities, hoping to replicate some of the work it’s done in Shelby Park on a larger scale.

One of those partners with Access Ventures, Ross Baird of Village Capital, told Insider Louisville in a statement that “we are encouraged to see these regulations give investors 30 months runway to build inclusive and thoughtful strategies, and provide the flexibility in operating business investments that we need to back entrepreneurs.”

While most fund managers shared such optimism — especially those specializing in real estate — some observers remain skeptical about the potential outcome of the program, and whether the zones will serve more as tax shelters or facilitate the subsidizing of gentrification than their intended purpose of helping people in poor neighborhoods.

Adam Looney of the Brookings Institution — among those more skeptical of the new program — told The Wall Street Journal that “we’re about to embark upon a tremendous social experiment” that transforms these zones, as “it’s a little uncertain whether that’s going to be good for the people who live in those neighborhoods.”