Julio Cortez/Associated Press
The federal government’s most powerful economic weapon is the tax code, and its most pressing problem is the ailing American Dream. Enter “opportunity zones,” economically distressed communities where new investments can receive preferential tax treatment. The incentives were quietly inserted into last year’s tax-reform bill. Treasury Secretary Steven Mnuchin recently predicted they could prompt $100 billion in private investment to low-income communities.
Treasury released its first round of opportunity-zone regulations on Friday. Tapping $6.1 trillion in potential capital gains, according to the Economic Innovation Group, opportunity zones could reshape capital markets and reinvigorate dozens of major American cities. Tax benefits for patient capital infusions will encourage U.S. taxpayers to capitalize real-estate projects, infrastructure and businesses in America’s heartland. This includes the offer of tax-free profits for investments held at least a decade.
Opportunity zones sound a bit like Jack Kemp’s enterprise zones or President Clinton’s empowerment zones. But they’re far more ambitious. I co-founded and led the Economic Innovation Group, which developed the concept and structure of opportunity zones and worked to pass it. The old zones were responsible for less than $2 billion in small-business incentives across fewer than 200 zones. Today’s program aims to drive hundreds of billions of private dollars into more than 8,700 designated zones covering nearly 12% of the U.S. and 35 million people. Even if Mr. Mnuchin’s conservative estimate is right, that translates to an average of more than $7,300 in investment for each household in these communities.
Several investors, such as Decennial Group, EJF Capital and Somera Road, have already formed “opportunity funds,” each targeting $500 million or more in capital. Many entrepreneurial fund managers are eager to join them. Yet institutional investors, major wealth managers and the largest investment banks remain on the sidelines.
They’re waiting for comprehensive guidance from the Treasury Department. Congress created the map for the opportunity-zone marketplace, but Treasury must fully implement the rules of the road. The administration’s preliminary regulations are a step in the right direction, allowing investors and fund managers to answer some threshold questions, including what kind of gains receive the incentive (capital), how funds are certified (Form 8996), and how long investors can shield their tax-free profits (until 2047).
Treasury also provided investors with more flexibility, including a 31-month timetable for opportunity funds to deploy capital into large real-estate development projects. It also published more-accommodating definitions for identifying investible businesses and property. Nevertheless, many questions remain unanswered. Foremost is whether Treasury will allow funds to recycle and reinvest capital from asset to asset as Congress intended. That’s a critical feature for scalable business investment through portfolio funds.
The Trump administration’s guidance will shape opportunity zones for years to come, determining whether the new capital flows will live up to their transformative potential.
Mr. Glickman is founder and CEO of Develop LLC, which advises on investing in opportunity funds and the opportunity-zone marketplace.