Six years ago, Opportunity Zones officially became a reality. The program was part of the Tax Cuts and Jobs Act of 2017, signed into law by former President Donald Trump in late December 2017. It was hailed as a success—a rare moment of bipartisanship that saw representatives on both sides of the aisle championing the program. Overseen by the Treasury Department, the Opportunity Zone Program went into effect at the start of 2018 and was immediately a hot topic in the commercial real estate industry. But ever since it was created, the program has been plagued with criticism over whether it is working the way it was intended to work: to lift up and revitalize disinvested communities through new development projects. Reforms have been proposed by public officials recently, which could make a big difference if enacted. Still, six years after the program began, what kind of impact has it actually made?
‘The hottest thing’
The U.S. Department of Housing and Urban Development (HUD) defines Opportunity Zones (OZ) as economically distressed communities that have been disinvested in for decades. There are 8,764 Opportunity Zones across the U.S., all of which are defined by individual census tracts and are nominated to be included in the program by state governors. “The Opportunity Zones initiative is not a top-down government program from Washington but an incentive to spur private and public investment in America’s underserved communities,” HUD says of the program.
The concept of Opportunity Zones was an idea that has been widely attributed to two key figures: Sean Parker, the tech entrepreneur most known for being the co-founder of Napster and one of the early leaders of Facebook, and Tim Scott, the Republican Senator from South Carolina. In 2015, the Economic Innovation Group (EIG), an organization co-founded by Parker, published a whitepaper that outlined what would later become the OZ program. Two years later, a bill sponsored by Scott and Democratic Senator Cory Booker was passed into law as part of the Tax Cuts and Jobs Act of 2017.
In laying out the roadmap for OZs, the EIG focused on the country’s recovery from the Great Recession and how it differed widely depending on geographic location. High unemployment rates in cities like Fresno, California, and Detroit, Michigan, often lead to cascading effects on the people who live there, including an increase in death rates, suicide rates, and even cancer, according to the report. And those pockets of struggling areas could have an outsized impact on the country as a whole.
The solution, the paper’s authors argued, was to incentivize private development in these areas. “A federal subsidy for private activity can knock the community out of the bad equilibrium and help it back on its feet,” the EIG wrote. The program offers significant tax advantages. Investors can defer paying taxes until the end of 2026 as long as they place realized capital gains into a qualified opportunity fund (QOF). Investors will also have reduced taxes on those capital gains depending on how long they keep their assets in a QOF. For five years, investors will get a 10 percent reduction, and for seven years, they will see taxes lowered by 15 percent. Lastly, investors are free from paying any capital gains taxes on gains realized from the QOF as long as the investment is held for 10 years.
In the years since it was enacted, the program has gotten a ton of attention from the commercial real estate community. It has led to major developments and neighborhood revitalization in places across the country, notably in Erie, Pennsylvania. According to the EIG, $48 billion has been invested in around 4,000 OZs across the country through the end of 2020, and figures from 2021 and 2022 are also expected to be sizable.
The big tax breaks come at a big cost to the federal government. The OZ program is expected to cost the U.S. government $8.2 billion in forgone tax revenue between the fiscal years 2020 and 2024, according to the Congressional Joint Committee on Taxation. After 10 years, the program, which is the largest ongoing federal community economic development program in the U.S., could cost up to $103 billion. “They’re the hottest thing you’ve seen,” former President Donald Trump said about the program in February 2020. “Tremendous amounts of money being put into areas that hadn’t seen money for decades and decades.”
Since the program’s launch, the transformation of downtown Erie, Pennsylvania, has so far been the most prominent example of how successful OZs can be if done right. It’s been called a “national model” for how to revitalize a community and is often cited by supporters of the program as proof that OZs work. Erie, a Rust Belt town located along Lake Erie in the northwest corner of Pennsylvania, had a strong manufacturing industry until the 1970s when job outsourcing led the city to a decline and a population downturn.
By 2016, the city had hit “rock bottom,” said Tom Hagen, chairman of Erie Insurance, the city’s largest employer. That year and the following year, city leaders and officials began building a path forward, creating the Erie Innovation District with help from local grant money and the nonprofit Erie Downtown Development Corp. As the push to rebuild the downtown grew, the Opportunity Zone program was launched. Erie became one of the first cities to take part in the program, and eight tracts in Erie were designated as OZs. Now, the city has the Flagship Opportunity Zone and $750 million in ongoing private, public, and philanthropic investment. Among the notable projects is Erie Insurance’s new $135 million headquarters in downtown Erie, which was recently completed.
But despite the billions invested in OZs, some say the program has not been used in the way it was intended. “It’s being used to do things in places that don’t really fit the purpose,” said David Wessel, a senior fellow in Economic Studies at Brookings and director of the Hutchins Center on Fiscal and Monetary Policy, pointing to self-storage projects and a bid to build the world’s largest Pickleball complex in Arizona. Critics have also pointed to projects like the $600 million Ritz-Carlton Hotel project in downtown Portland, Oregon, and a Virgin Hotel project in New Orleans’ already gentrifying Warehouse District as further proof of this.
“There’s nothing in the law that requires it to benefit the residents of a low-income neighborhood, but since there’s nothing to require that, it’s not surprising the money is tending to go to places that are most attractive,” Wessel said. He has studied Opportunity Zones for years, and he wrote a book on the subject in 2021, “Only The Rich Can Play: How Washington Works in the New Gilded Age.” Elected officials, including Senator Scott, Cory Booker, and others, touted how the program would serve historically underserved and rural communities that had been left behind. But, according to recent data, the investments have been highly uneven.
It’s been nearly six years since the Opportunity Zone tax incentive program was launched. Since then, there have been sporadic reports and updates on the impact it has had on a wide scale. Though the initial legislation for the program had provisions that would require reporting, which was later cut before it was passed into law, it can be difficult to take a true measure of the scope of the program. But the most recent data comes from some solid sources: The Department of the Treasury and federal tax returns. “They can really see what others can’t,” said Wessel. According to a report from the Treasury’s Office of Tax Analysis, just 1 percent of Opportunity Zones received 42 percent of investment. Zooming out further, 78 percent of all investments went to just 5 percent of the nation’s zones.
In general, the study found the program is benefiting a “narrow subset of tracts” where conditions were already improving before the program came along. In terms of urban vs rural, the report found that there is a significant bias toward urban areas for investment. As of 2020, 95 percent of OZ investments were in urban areas. One of the aims of the OZ program was to help new businesses get off the ground. But, the vast majority of projects that have taken place in the zones have been real estate developments. Data from the Joint Committee on Taxation and the Office of Tax Analysis shows that around two-thirds of investee businesses were in the real estate, construction, or hospitality industries. “The way the Treasury wrote it and how the real estate industry sees opportunities and takes advantage of tax law, it seems largely a real estate play,” Wessel said.
While OZs may not be the hottest topic in commercial real estate at the moment, the program is still on the minds of many in the industry. There are a number of newsletters, podcasts, and websites dedicated to investing in Opportunity Zones. Across the U.S., there are 1,848 Qualified Opportunity Zones as of September 2023, according to the accounting firm Novogradac. Some of the largest real estate firms in the world are investing in OZs, including Blackstone, Brookfield Properties, and Greystar. However, unless the program’s term is extended, the incentives will end in 2026, leaving only two more years for investors to take part. In late September of this year, a bipartisan group of Congressional representatives introduced the Opportunity Zones Transparency, Extension, and Improvement Act, legislation that could have a big impact on OZ investors.
The legislation includes a series of reforms to the OZ program, including increased transparency around reporting and an extended timeline for the program. If enacted, the legislation would extend the program’s deferral period. Investors in Opportunity Zone projects would be able to defer taxes on capital gains for two extra years until December 31, 2028. Crucially, it would reinstate the reporting requirements originally included in the original OZ legislation that was cut from the final draft. The requirements would mean reporting additional information on investors in QOFs and the businesses in which they invest, and the Treasury would be required to publish an annual report on OZ activity. Penalties would also be set for failing to report under the requirements, ranging between $500 and $250,000.
Other changes to the program under the proposed legislation include allowing QOFs to invest in other, smaller QOFs, and a $1 billion fund would be created to help promote projects and businesses in low-income communities. However, while there seems to be a lot of support for the reforms, similar proposals have been proposed every year since the program was enacted, and none have passed.
The EIG, the engine behind the creation of OZs, said in an analysis it published earlier this year that more time is needed to see the program’s full impact on communities. “It will be years before we know whether the economic effects observed to date prove durable,” the group wrote. “Likewise, we are perhaps a decade or more away from knowing the longer-term effects of OZs on local poverty rates, employment, housing, or business creation.” The EIG, which supports the legislation introduced last year to add more transparency to the program, said the wait for answers underscores the need for more data about the nature and location of investments in the neighborhoods within OZs.
New research is giving us a better understanding of the impact the OZ program has had across the U.S. Billions of dollars have been invested in projects within thousands of the country’s OZs. There have been notable successes, like in downtown Erie, PA, which has been revitalized and reimagined through several development projects that have received program funding. The real estate industry continues to look favorably at OZ investing, with a growing number of media and resources dedicated to the subject. It’s a program that still has bipartisan support from elected officials, and with recently proposed legislation that would increase reporting requirements and improve accountability of OZ incentives, reforms may be on the way. But the big question is whether these reforms will help fine-tune the program and lead to more success for OZs in doing what they were built to do.