Enhancing Returns from Opportunity Zone Projects by Combining Federal, State, and Local Tax Incentives to Bolster Community Impact

Blake Christian
Holthouse, Carlin & Van Trigt (HCVT)

Hank Berkowitz

The opinions expressed in this article are those of the authors and do not necessarily reflect the views and policies of HUD or the U.S. Government.

Skeptics may call the federal Opportunity Zone (OZ) program a tax dodge for the wealthy, but there is strong bipartisan support for the program at the federal, state, and local levels. Furthermore, underserved communities (and the small businesses therein) could benefit from billions of dollars in new investments in long-term capital that they might not have received through conventional bank loans or government programs—especially given the current unique and challenging economy. The findings noted in this article are based on the authors’ presupposition that President Biden’s proposed tax increases have increased interest in the deferral and ultimate tax exemption aspects of the OZ program, and investment momentum is likely to continue for the foreseeable future.

The authors’ data and interviews show that because the OZ program is not structured for real estate speculators and flippers to trade during the OZ reinvestment period, the long-term investment requirement of the OZ program makes it stand out from other place-based incentive programs that have generally failed to live up to expectations. Furthermore, the authors dispute the notion that the OZ program only benefits real estate investors. They believe that OZ investments have funded hundreds of clean energy projects, biotechnology and medical infrastructure projects, active businesses, solar energy projects, and many successful public-private partnerships.

The authors also show that Congress placed no limits on the amount of federal, state, and local tax benefits, grants, or other incentives that can be layered into the OZ investment. As a result, OZ structures are being used in combination with Low-Income Housing Tax Credit (LIHTC) projects, New Market Tax Credit (NMTC) projects, Historical Tax Credit (HTC) projects, research and development, solar energy, cost segregation, and other alternative energy projects that generate accelerated depreciation and credits. This is generally referred to as “twinning” of various tax programs.

The authors anticipate further extensions of the OZ investment window that will give taxpayers and fund managers sufficient time to make important investment decisions that result in significant economic impact for underserved communities. How many other economic development initiatives can generate win-win results for underserved communities, municipalities, small businesses, and investors alike?