Designation period opens July 1 for new Opportunity Zones

Key Takeaways

Counties are taking another shot at Opportunity Zones as the program’s second iteration, made permanent by H.R. 1, prepares to start its second designation period. 

Each governor can nominate up to one-quarter of a state’s economically distressed census tracts between July 1-Sept. 28. If certified by the Treasury Department, those zones will be included in a 10-year cycle, lasting through 2036. The program aims to attract private investment in economically distressed areas that otherwise struggle for financing. 

“To be crass about it, it brings in cheap money,” HUD Regional Administrator Duey Stroebel said on a NACo webinar about the program. “It is all part of the capital stack that can really make things happen in an Opportunity Zone, in an area that hasn’t maybe had investment for years, because so much of that return is coming from the tax benefit to the investor. So, their cash-on-cash return doesn’t need to be as great. That’s really what makes things hum with this mechanism for Opportunity Zones.”

Within Opportunity Zone census tracts, private individuals or institutions can invest capital gains and defer or reduce taxes on those gains depending on how long they invest. 

“I’ve been talking about this as a tool, an additional layer on top of our other economic development work,” said Joe Arriola, a senior fiscal and policy analyst for Kern County, Calif. Economic Development. “We are intentionally targeting key industrial sectors that we believe we have competitive advantages in.”

The previous program, which included 8,764 census tracts, runs from 2018-2028 and has attracted $150 billion in investment in those zones, according to HUD Regional Administrator Ashlea Quinonez, who also estimated that the program had lifted 1 million people out of poverty. But critics of the program point to 63% of eligible census tracts received no investment, and 78% of what was invested went to 5% of eligible tracts. 

Newberry County, S.C. struck out in its first attempt. 

“If there’s someone who’s taken advantage of the opportunity zone, I’m not aware of it, but I’d love to see it happen,” said Rick Farmer, director of the county’s economic development department. 

Newberry County, however, did not have much funding to advertise its Opportunity Zone tract. 

Opportunity Zones 2.0 will apply more rigorous criteria to economically distressed census tracts. Median family income in the designated census tract must now be less than 70% of area or statewide median income, down from 80% in 2018. Just 60% of OZ eligible census tracts will qualify in the second cycle. 

HUD Senior Management and Program Analyst Erich Yost predicted greater investment owing to the program’s permanence in the second cycle. And because of the program’s simplicity. 

“There are compliance and monitoring requirements and some new reporting requirements that are coming out, but nothing is as onerous as some of the existing tax incentive programs like low-income housing tax credits or new market tax credits that currently exist,” he said.

For Mohave County, Ariz., Opportunity Zones present a chance to help a troubled community turn the page on its past. More than 20 years ago, the town of Colorado City became notorious as the refuge of an abusive cult leader. After his prosecution, the population drained, but left behind buildings, businesses and infrastructure, which is slowly repopulating.

“It’s a cute, fun little area that needs investment and is ready to develop and grow, so it’s exciting to see some of those areas and the money invested,” said Tami Ursenbach, director of the county’s economic development, tourism and film office. “It’s not as much as some of the others, but what is being invested is huge for the area.” 

Ursenbach is excited about the second iteration of the program and has adjusted her expectations based on results of the first.

“We found from Opportunity Zones 1.0 that people may not want to wait five to 10 years with their projects, but they have funding that they want to invest, so they will look for an Opportunity Zone that would be ready to go, knowing that the infrastructure’s probably going to be there, everything’s ready in that particular census track,” she said.

The state of Arizona instructed counties to nominate only census tracts that have projects that are ready for investment or close to it. Mohave County consulted with cities and developers to come up with a consensus for the five best nominees. 

Kern County is also working with its cities to put together the best lineup of census tracts.

“We’re definitely taking a collaborative approach,” Arriola said. “We looked at each zone’s competitive advantage, particularly if there are other programs in place that fit with our strategic priorities.”

Those include building on progress in aerospace, defense and energy industries. Arriola has also taken some lessons from the first Opportunity Zone cycle.

“When we’re looking at industrial development, we’re looking to things like, ‘Does it have rail access? Freeway access?’ The types of things that make those developments and those parcels particularly attractive toward investors, he said.

“All of the evidence we have is that the vast majority of investments went toward multifamily development,” he said. “That has been a key consideration in both the state’s evaluation of which zones to designate.”

Arriola also likes changes to the program that make it more attractive for rural areas, which accounts for most of Kern County outside of the city of Bakersfield.

“I’m trying not to oversell it, but I think the rural benefits are quite significant with 2.0,” he said, noting that the threshold for earning tax benefits reduces in rural areas when considering improvements to buildings or property.

Arriola also recommends designating tracts that have existing initiatives that can act as a force multiplier, including tax-increment financing and other place-based initiatives. 

“What we’re looking for is local, state and federal alignment on economic development priorities and the ability to deliver on this priority,” he said. “A vision plan for an area goes a long way to showing it’s ready for investment.”