When it comes to Opportunity Zones and the funds to invest in them, there seem to be more questions than answers. At least for now.
Opportunity Funds were created as part of the Tax Cuts and Jobs Act of 2017 to offer incentives to people willing to invest in Opportunity Zones, tracts of land designated by state and federal government ripe for economic development.
By using Opportunity Funds to invest capital gains in projects in areas designated as Opportunity Zones, investors can defer paying taxes on those capital gains until Dec. 31, 2026. In addition, investors who keep their money in an Opportunity Zone project for five years, can reduce the amount of those taxes by 10 percent, with another 5 percent reduction if they stay committed to the project for a total of seven years. As an added bonus, an investor can pay as little as nothing in taxes on gains from an investment in an Opportunity Zone project if they wait at least 10 years to sell their share in the project.
In return, the investments are supposed to give areas in need of economic development a boost by supporting projects that bring in attainable housing and businesses offering living-wage jobs.
The federal government says exact details of the program, especially from an investor standpoint, are still several weeks away. But developers, investors and Opportunity Fund managers are already connecting, according to Ian Galloway of the Federal Reserve Bank of San Francisco.
"I think the clock has started," Galloway said. "The race is on."
Rocking in Rockwood
The federal Opportunity Zone program appears to be almost custom made for a community like Rockwood, a neighborhood in the northwest corner of Gresham.
On the Community Needs Index, Rockwood is the only neighborhood in Oregon that scores a 5, the highest level of need. Without a local grocery store — most people buy their groceries at a convenience store — the community is considered a food desert, according to Brad Ketch, president of Rockwood Community Development Corp. Most of the affordable housing in the area was placed in Rockwood, but that status will end soon and Ketch says he expects rents will rise higher than most locals can afford.
Rockwood CDC has already started making a difference in the community. A few years ago, when a building on East Burnside Street was in danger of being turned into a strip club, Rockwood CDC stepped in, bought the building and turned it into the Sunrise Center. In addition to offering community meeting space for a range of diverse groups and organizations, the center features an incubator kitchen that local residents use for their food-related small businesses.
Ketch is holding out hope the momentum the Sunrise Center has created will keep going through the Opportunity Zones program. His group has created Oregon Community Capital Inc. The for-profit B-corporation plans on offering two pools of money for Opportunity Zone investment: a micro-cap limited partnership fund for investment in businesses and a real estate limited partnership.
Ketch hopes the funds initially can be used to convince developers of two market-rate apartment projects already under construction in Rockwood's Opportunity Zones to make a portion of those units affordable. But he also hopes to be able to support investments in affordable housing and job-creating businesses throughout the state.
More than 8,700 tracts across the county have been designated in the Opportunity Zones program — 86 of which are in Oregon.
Tracts were identified from a five-year census survey. Once a list of all qualifying tracts was compiled, the information was sent to local jurisdictions. Cities and counties then identified their top picks.
The list of prioritized tracts eventually ended up on the desk of Gov. Kate Brown, who compiled a list of the state's nominations before sending the final list to the federal level for approval. Opportunity zones for Oregon cities and counties were announced a few months ago.
Some of the tracts included on the final list raised eyebrows. In Portland, for example, tracts in the Pearl District and the Central East Side — areas of the city that have already seen heavy development with some hefty rents — were included on the Opportunity Zone list. Meanwhile, in Tualatin, the first of that city's two Opportunity Zones boasts a median family income of nearly $93,000.The area may hardly seem like an area in need of investment to boost jobs and incomes. But closer examination identifies that area's poverty rate at 35 percent.
"That means there's a lot of disparity between income levels there," Jonathan Taylor, economic development manager for the city of Tualatin, said.
Tualatin's second Opportunity Zone encompasses most of the city's downtown area. While Portland and the west side suburbs have seen steady growth in recent years, Tualatin has been quieter lately. Most of the city's growth and development occurred in the 1980s, Taylor said. That means many of the buildings in the city are ready for renovations and upgrades. They city also is getting ready to undertake a housing needs assessment to determine what
types of housing are most needed by residents.
The city of Beaverton has already embarked on an economic development plan, which coincides with one of two Opportunity Zones in the city, Mike Williams, Beaverton's economic development manager, said. The zone includes the Beaverton Round, the area where a new community center will be constructed, the Rise Central apartment project and a planned future hotel. Although the city can't require developers who decide to build private projects in that Opportunity Zone to focus on affordable housing and businesses that help raise area incomes, Beaverton does have some leverage. The zone also includes an urban renewal area, Williams said. So there's an opportunity for developers with projects that fit urban renewal parameters to layer benefits from that designation with Opportunity Fund investment.
Risks and rewards
Critics of the Opportunity Zones program and Opportunity Funds predict they're ripe for misuse. Reid Thomas with NES Financial said that's a fair concern, given that the program is still in its infancy.
"It's a new program; the rules are still being refined," Thomas said. "Check a box on your tax return, self-certify... there're all sorts of opportunities for fraud and abuse."
That's why Thomas and his company recommend taking care when selecting a third party administrator for Opportunity Funds. Reid advises investors and fund owners to take a close look at what tools the administrator is providing and how those tools let an investor not only track her money, but the progress and focus on the project being funded. For OCCI's two funds, for example, NES has created a website where investors can examine enterprise zones, track their investments and evaluate the progress of the project.
Using due diligence is also the best way for an investor to make sure a developer is pursuing a project in an Opportunity Zone for the right reason.
"I understand the primary motivation to invest in Opportunity Zones is a return on investment, the tax benefit. But it would be really great if some funds were really to take a haircut," the Federal Reserve Bank's Galloway said. "It's really important as funds get going to solicit authentic community input. It would be a real shame if all it did was build luxury condos."
Opportunity Zones in Portland
• Downtown area
• Gateway (2 tracts)
• Innovation quadrant (near OMSI, etc.)
• Inner east side
• Lower Albina
• Pearl District
• Portland State University area
• Port of Portland area
• South Waterfront
Source: Business Oregon
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