Opportunity Zones: An Overview

In the first post of our Opportunity Zones blog series, Summit Senior Consultant Joe Bateman breaks down the legislation introducing the tax incentive, and how governors can efficiently determine which census tracks should be Opportunity Zones.

The legislation introducing the new tax benefit for investing in low-income communities includes some details on what areas qualify, what general types of investment qualify (equity), and what some of the tax the benefits are. However, many questions remain about much of the program’s eventual implementation, including what the criteria will be for certifying Opportunity Funds, what level of oversight the investments will have to ensure benefit to low-income communities, what capital gains are included when considering the step-up in basis (step-up on the basis of the rolled-over investment with deferred capital gains or step-up on the investment and capital gains resulting from the Opportunity Fund investment), and whether there will be guidelines for the types of investments or asset classes allowed. Many of these questions will hopefully be answered by pending rules and regulations published by the U.S. Department of the Treasury and the Internal Revenue Service.

Despite the large number of questions surrounding the implementation of Opportunity Zones, it is clear from the legislation that the tax benefits increase the longer the investments remain invested in the Opportunity Funds, with benefits increasing for investments held for five, seven, and ten years. Summit will continue to follow developments related to Opportunity Zones and any rules and regulations published by the U.S. Treasury and the IRS, and Summit will publish updated information accordingly.

Summit has produced a two-part blog series on the new legislation creating the Opportunity Zone tax benefit to shed light on some of the most pressing questions about how Opportunity Zones and Opportunity Funds will work. The blog series covers the following two topics, and this blog specifically addresses the first topic.

• What and where are Opportunity Zones?
• How are Opportunity Zones similar to other federal tax incentive programs, such as the New Markets Tax Credit (NMTC) Program or the Low Income Housing Tax Credit (LIHTC) Program? How can Opportunity Fund investments be leveraged with other resources to attract capital to low-income communities?

What and where are Opportunity Zones?

While additional requirements may result from the to-be-written regulations from the U.S. Treasury, the first step of implementing the legislation will be for governors to designate which census tracts will be classified as Opportunity Zones until the expiration of the tax payment deferment at the end of 2026. The legislation states that the governor of each state and territory can designate up to 25% of qualifying low-income community census tracts as Opportunity Zones (or up to 25 census tracts if the state or territory has fewer than 100 census tracts).¹ The legislation’s definition of low-income census tract is the same as the definition used for the CDFI Fund’s New Markets Tax Credit (NMTC) Program:

• Poverty rate greater than or equal to 20%, and
• Median family income no greater than 80% of the area median income.

Additionally, the legislation allows governors to include non-low-income census tracts (up to 20% of Opportunity Zone census tracts) if they meet the following criteria:

• Census tract is adjacent to a low-income census tract
• Median family income is not greater than 125% of the area median income.

Because the legislation allows governors to choose from both low-income and contiguous census tracts, nearly half of all census tracts qualify to be chosen. The CDFI Fund has provided data and a map of NMTC qualified tracts (same criteria as Opportunity Zones), which provides a resource for understanding where low-income census tracts are located. But so far, there have been few resources provided to governors on how to choose specific census tracts within those that qualify for Opportunity Zone designation. In states with higher poverty rates, nearly all census tracts are eligible for designation either due to low-income status or adjacency to low-income census tracts.

How should Governors decide which census tracts to designate as Opportunity Zones?

Governors are now faced with the daunting task of choosing which qualifying census tracts they will and will not designate as Opportunity Zones. Congress only gave governors until March 22, 2018, to do so, with a possible one-month extension. The legislation passed by Congress provides information on which census tracts qualify, but not which census tracts need investment the most. Summit performed extensive research on census-level economic distress for the NMTC Program, which included a new, rigorous methodology for ranking census tracts based on overall distress score. Summit scored census tracts on a scale of 1-100, where a score of 90 would indicate that the census tract is more distressed than 90% of the nation’s census tracts, based on five different indicators:

• Poverty rate: Percent of population living below the poverty line.
• Unemployment rate: Percent of civilian labor force unemployed.
• Median family income ratio: Ratio of tract median family income to state or metropolitan statistical area median family income.
• Educational attainment: Percent of population 25 years and older without a high school degree.
• Housing vacancy rate: Percent of habitual housing that is vacant, excluding housing that is vacant for seasonal, recreational, or occasional use.

Summit’s distress score methodology, included in the Appendix of Summit’s Report on NMTC Compliance, could be extremely useful for governors as it provides a way to understand which census tracts are in the most need of additional public and private resources. While there might be other compelling reasons besides economic distress to designate a census tract as an Opportunity Zone, this methodology could provide an insightful, data-driven input for the decision-making process.

Do you have questions about Summit’s Distress Score Methodology or wish to receive data related to census tract distress scores? Please contact Joseph.Bateman@summitllc.us

1: The Bipartisan Budget Act of 2018 designates all low-income community census tracts in Puerto Rico as Opportunity Zones, which means that over 90% of the island’s census tracts will be designated as Opportunity Zones.