Opportunity Zones were enacted as part of the 2017 tax reform package (Tax Cuts and Jobs Act) to address uneven economic recovery and persistent lack of growth that have left many communities across the country behind. In the broadest sense, the newly enacted federal Opportunity Zone (OZ) program provides a federal tax incentive for investors to invest in low-income urban and rural communities through favorable treatment of reinvested capital gains and forgiveness of tax on new capital gains. In Colorado, Opportunity Zones may help address a number of challenges:
This economic and community development tax incentive program provides a new impetus for private investors to support distressed communities through private equity investments in businesses and real estate ventures. The incentive is deferral, reduction and potential elimination of certain federal capital gains taxes. U.S. investors currently hold trillions of dollars in unrealized capital gains in stocks and mutual funds alone— this is a significant untapped resource for economic development. Opportunity Funds provide investors the chance to put that money to work rebuilding the nation’s distressed communities. The fund model will enable a broad array of private equity fund managers and investors to pool their resources, increasing the scale of investments going to under-served areas.
RESOURCES FROM COLORADO OPPORTUNITY ZONE CONFERENCE (6/28/2018)
OEDIT was delighted to have so many stakeholders from around the state engage, share ideas, and learn from the policy, tax, and legal experts shaping this new incentive for private equity investment. We appreciate the partnership of The Governance Project to put on a very informative event that resulted in clearer understanding and ideas for shaping projects and investments that might benefit from the OZ incentive for private capital investment and help catalyze private equity investment in Colorado’s OZs.
Conference materials may be accessed by clicking on the links below:
Opportunity Zone Fundamentals Presentation Kenan Fikri, EIG; Marc Schultz, Snell & Wilmer; and Steven Mount, Squire Patton Boggs
How States Can Maximize Opportunity Zones – Bruce Katz, The Governance Project
Creating an Investment Prospectus – Jeremy Nowak, The Governance Project
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The U.S. Treasury is finalizing their regulations to implement this new law and guide the Opportunity Funds. Investment groups are organizing and contemplating opportunities.
Opportunity Funds are a new class of investment vehicle that must be organized as a corporation or a partnership. The funds will specialize in attracting investors with similar risk/reward profiles to aggregate and deploy their capital in rural and low-income urban communities. Opportunity Funds will be comprised of private capital and guided by market principals. The funds must invest 90% of their assets in opportunity zone assets. Funds may invest in opportunity zones via stock, partnership interests, or business property.
Fund assets must create new business activity. If invested in an existing business, the fund must double the investment basis over 30 months. The funds can create new businesses. or new real estate or infrastructure. Funds may not be invested in certain types of business like golf courses, country clubs, gambling establishments, and a few other specifically excluded types of business.
Program details are in development. We encourage you to search the web and to review the links below on our web-page.
Some investors have a social investment drive – they want their capital to improve communities they know and love. The Opportunity Fund creates an additional incentive to invest in communities by deferring and possibly eliminating the capital gain tax on long-term investments. Volatility in the stock-market has many investors sitting on unrealized capital gains; they can transfer these into Opportunity Funds putting the full value of the capital gain to work.
The law allows for the temporary deferral of inclusion of the capital gain in gross income for those capital gains that are reinvested into Opportunity Funds. The law sun-sets in 2026; therefore, investments will need to occur in the near-term for investors to realize the full capital gains tax benefits.
Capital Gains Incentives:
Colorado’s Office of Economic Development and International Trade (OEDIT) conducted an inclusive and rigorous process to nominate census tracts for Opportunity Zone status. OEDIT produced metrics for evaluation, took public input, and collaborated with regional economic development partners who brought extensive human intelligence to the table to select census tracts with need and opportunity characteristics that present a good case for private capital investment. Colorado’s Opportunity Zones present a portfolio of investment opportunities from urban to rural, and business starts to infrastructure. A majority of the census tracts are outside of the Front Range and touch much of the state with the goal of raising up our rural economies. The census tracts nominated have been approved. Colorado’s OZs are now set for the duration of the program (through 2026).
Every state and territory could designate up to 25% of eligible census tracts as OZs; Colorado has 126 census tracts designated as Opportunity Zones. Private equity in Opportunity Funds will seek the best investment opportunities aligned with their missions and return requirements – it’s important to remember that OZs in Colorado will frequently be competing with OZs throughout the United States for capital investments.
Opportunity Zone census tracts available here.