Projects in Opportunity Zones can take advantage of additional government incentives to attract investment and succeed in their impact goals.
We’ve previously discussed how EB-5 capital can be used in conjunction with Opportunity Zones incentives to secure the necessary debt financing for a capital stack. But EB-5 is not the only government program that can be employed to supplement OZ and help projects reach their goals for investment and revitalization in underserved communities.
The EPA’s Opportunity Zones Toolkit
The U.S. EPA Office of Community Revitalization, as part of its Opportunity Zones Toolkit, has made available a number of documents for those interested in OZ, including environmental, health, social, and economic data from government agencies. Each Opportunity Zone is given a walkability score and information about brownfields, air and water quality, food deserts, and other data central to community revitalization.
The toolkit includes “Leveraging Development Finance Tools to Attract Opportunity Zone Investment,” which explores how public sector development finance can be used to attract private investment and help community stakeholders meet their revitalization goals in Opportunity Zones.
One of the biggest criticisms of OZ has been that too many projects have been focused in areas that are already gentrifying. This is because those projects may have an easier time fundraising and face fewer challenges inherent to their construction like dilapidated roads, inadequate public transportation, or unsafe vacant buildings adjacent to the development.
The goal of OZ is to improve these neighborhoods, but in order for economic revitalization to work, it can’t be limited to just one real estate project; community stakeholders need to address a variety of issues, and luckily, there are government programs dedicated to doing just that.
By understanding how to correctly leverage different government incentives, OZ projects that have fallen short of their fundraising goals or that require extra community support to achieve their intended impact can do the good they strive to do while also delivering the stability and returns their investors desire. Here are a few of the programs highlighted, and how they can help in OZs.
Bedrock tools: bonds and debt financing
The first type of incentive highlighted in the EPA report is what they call the “bedrock tools” of bonds. As the report says, “Most development finance agencies and investors report that Opportunity Zone projects often need a debt component to balance out a capital stack.” If unable to secure this financing through EB-5 or other private investors, it’s possible to seek out private activity bonds.
As the report says, “there are thousands of development finance agencies across the United States with the authority to issue PABs,” which can include issuers at the municipal, county, or state level, and there are many types of projects that can qualify. This type of bond does not necessarily have to go directly to construction.
“A development finance agency may want to consider issuing private activity bonds to support infrastructure such as sidewalks, lighting, or roads necessary to support projects in an Opportunity Zone,” the report reads. These types of community improvements could also be eligible for tax-exempt Government Bonds (GOs) and could make the project even more attractive in terms of securing capital.
Targeted tools: TIFs, SIDs, and tax abatements
These “targeted tools” are other sources of government funding that can be used not as the primary capital for an OZ project, but for related community improvements that will make projects more attractive to investors and potentially bring other businesses to the community.
Currently, Tax Increment Finance (TIF) is available in 48 states and the District of Columbia, with different rules in different areas, as well as different names (in California, they’re known as Enhanced Inrastructure Financing Districts, or EIFDs, while in Florida they’re called Community Redevelopment areas, or CRAs).
A TIF is “a mechanism for capturing the future tax benefits of real estate improvements, in order to pay for the present cost of those improvements.” The increased property and/or sales tax generated by a real estate development is redirected to the area surrounding that development in the form of utilities, planning costs, land acquisition, and infrastructure projects. TIFs can’t be used to directly fund a development, but can achieve “funding toward improvements in distressed or underdeveloped areas where development would not otherwise occur.”
Special Assessment Districts, or SIDs, are created by states to use tax revenues to aid in the infrastructure needs of business districts. SIDs can be used to fund graffiti removal, transportation improvements, safety patrols, sewers, and marketing efforts essential to the success of revitalized neighborhoods.
Tax abatements can reduce or eliminate tax liabilities for qualified business activities, which can be a significant driver in attracting businesses to an area, particularly useful for industrial parks. Attracting businesses will improve the overall neighborhood, which will only add to the success of operating businesses in the OZ and increase the value of real estate.
State and Federal tax credits
There are a variety of tax incentive programs at both the state and federal level that can apply to projects in Opportunity Zones. There are tax credits related to specific industries and affordable housing that, depending on the area and type of development, can be combined with OZ tax incentives for investors.
At the federal level, the New Markets Tax Credit (NMTC) is for projects located in low-income communities to help borrowers achieve lower interest rates and potential equity stakes to encourage investment. There is also the Historic Rehabilitation Tax Credit (HTC), available for the preservation and rehabilitation of qualifying historic buildings, and the Low-Income Housing Tax Credit (LIHTC), which incentivizes investments into affordable housing. In some cases, all three of these programs could be used for the same OZ project.
Working with the right partner
The EPA report discusses other possibilities, including Revolving Loan Funds and federal grants, and is a great resource for those interested in OZ. The one thing to remember about the majority of these programs is that regardless of whether they’re based at the municipal, state, or federal level, they need to be applied for, which means projects have to be approved in order to qualify.
To give yourself the best chance of approval, you’ll want to demonstrate a commitment to best practices, compliance, and impact. One way to do that is by working with a fund administrator like JTC. We’ve been the leader in OZ fund administration since the program’s inception, and have pioneered methods for social impact tracking and reporting. When investors and government agencies see that you’re working with JTC, they’ll know you’re committed to positively impacting the community and serving the best interests of all stakeholders.
Downloading our Opportunity Zone Fund Administration Fact Sheet!
