How rural areas can benefit from the new federal tax program that incentivizes investors to develop in low-income communities.
A product of the Tax Cuts and Jobs Act of December 2017, opportunity zones were created to spur development in disadvantaged communities nationwide by offering investors incentives in the form of capital gains tax breaks.
With the right combination of factors in place, opportunity zones can truly live up to their name by igniting sustainable economic activity that lifts prospects for communities, and offers transformative potential to operating companies and startups.
Opportunity zones are designated low-income communities based on median family incomes or poverty rates. Oregon’s 834 low-income census tracts are largely urban, with 21% in rural areas. The state has 86 designated opportunity zones. While Multnomah County, including downtown Portland, claims 17 of the zones, 31% are in rural areas.
Given the development already underway in Portland, some have questioned the state’s nomination of tracts already in the path of investment.
While urban communities have a distinct advantage in attracting dollars over rural counterparts because they have greater potential to support projects, any development should be viable and stand on its own merit without relying on special tax benefits.
All markets and sub-markets have some combination of unique qualities, natural resources and infrastructure, which can be leveraged to create investment opportunities.
For rural projects, which are disadvantaged due to lower population, four combined elements can turn an opportunity zone designation into an economic boon: engaging a champion; securing community support; promoting public and private partnership; and tapping the next generation of leaders.
A successful, long-term project needs a champion to shepherd it from vision to fruition. Consider Detroit, which — although by no means rural — faced an uphill battle in attracting investment after declaring bankruptcy in 2013.
The city’s champion, Dan Gilbert, moved the headquarters of Quicken Loans, a company he cofounded, into downtown and invested more than $5 billion in projects. While unresolved issues remain, the downtown core is virtually unrecognizable today in its relative prosperity. Potential investors are noticing.
A champion should rally support and resources to get a project to its final goal and be willing, like Gilbert, to share in the risk and reward. The tax benefit of investing in opportunity zones, through opportunity zone funds, increases the longer an investment is held.
Investments held for at least 10 years result in permanent exclusion of capital gains from taxable income in the investment. This provides financial incentive for investors, but also necessary time for a rural project to gain traction and begin generating results.
Rural communities have resources available to them beyond the traditional investor community. Project leaders can influence the sourcing and direction of capital. For instance, community development corporations are the champions of community development efforts at the local level.
These nonprofit, community-based organizations cater to low-income and underserved populations, often in areas with a history of disinvestment.
In addition, community development financial institutions are key financial providers for development efforts, while development finance agencies lead the charge in financing economic and community development efforts across the U.S.
The vast financing capacity provided by these agencies makes them a crucial partner for financing an opportunity zone strategy, such as infrastructure and small business development.
Finally, rural communities can hold state and local governments accountable for creating regulatory frameworks for community development and participating through financing tools or incentives, favorable policies and capacity-building programs.
In Oregon opportunity zone dollars can benefit specific critical challenges, including homelessness, addiction, affordable housing, education and infrastructure.
Several excellent models around the country tackle each of these issues, showing how they can be addressed productively through the right support. Rural areas should turn to cases with similar characteristics to make convincing arguments for investment dollars in their own projects.
Attracting private dollars alone can be challenging. Bringing public and private dollars together can help direct capital toward a specific project in a specific location.
One example is The Opportunity Project, offered through the U.S. Department of Commerce, which provides a programmatic approach for engaging government, communities, technology and industry to create digital tools that address communities’ greatest challenges.
While such collaborative efforts may be easier to build in urban areas with greater diversity, rural markets can take note and bring together seemingly disparate entities to leverage complementary resources.
For instance, in Klamath County, home to two designated zones, an initiative could bring in stakeholders from the Oregon Institute of Technology, the Klamath Falls campus of Oregon Health & Science University, the Oregon Air National Guard and the area’s wood-products companies.
The government now offers more resources through opportunity zone funding. Both urban and rural communities must dig deep, perhaps get out of their comfort zones, to create attractive investment prospects.
Leaders will need time to step back, survey their community’s needs and strengths, and apply the latest thinking and tools to create a solution.
Opportunity zones are a new avenue for injecting economic stimulus, one that may also require embracing a new generation of leaders with fresh and innovative perspectives on issues that have historically plagued communities.
Such leadership must provide real guidance and compelling reasons for investors and developers to come.
Have a question on Opportunity Zones? Contact Michael Sander.