Dr. Clifford A. Lipscomb

Broadly speaking, Opportunity Zones (OZs) are low-income Census tracts nominated by each state and certified by the US Treasury Department as areas of targeted economic development.  Then, an OZ fund, also known as a Qualified Opportunity Fund, can be established to pool equity investments that are then deployed into certified OZs.  These funds can be corporations, partnerships, or limited liability companies (LLCs).

 My take on OZs is that there will be additional capital deployed into those OZ designated areas than would be in the absence of the legislation (2017 Tax Cuts and Jobs Act) that created OZs.  However, because these OZs only give tax benefits to investors who place unrealized capital gains in those OZ funds within six months, a large proportion of US households will not share in the benefits that accrue to OZ fund investors (i.e. staggered reductions in capital gains taxes paid on those unrealized gains based on the number of years that an investor chooses to keep unrealized gains in an OZ fund).  Research by Leonard E. Burman at the Tax Policy Center suggests that “[c]apital gains taxation does create an incentive to hold assets too long.”  In other words, his research suggests that cutting capital gains taxes would not entice investors to re-invest those capital gains into more productive assets or uses.  So, coupling the idea of investors’ general tendency to hold on to assets too long with the staggered reduction in capital gains tax liabilities in OZ funds (which becomes 0% or tax-free after ten years) may have unintended consequences for investors and taxing authorities.  Therefore, it is important for investors and fund sponsors to be wary of the range of possible unintended consequences associated with these kinds of investments.  That’s why an analysis of the possible social impacts, such as gentrification, of these OZ fund investments needs to be considered by investors and fund sponsors.

Qualified OZ funds can only make equity investments in deals, which opens up opportunities for so-called “sidecar” debt deals; this could be attractive for private foundations and municipal governments (e.g. county funds that have social motivations) that often use general obligation (GO) bonds to finance public infrastructure.

 Contact: Cliff Lipscomb