What is the role of the Public Sector in the #OpportunityZones Marketplace? Their commitment to their city, today, and ten years down the road.

While the governors of each state were involved in selecting the oz's in their state, the opportunity zone law applies to federal cap gains, full stop. It offers tax incentive for private parties with capital gains to reinvest those gains into new business and real estate opportunities in the zones.

There is no requirement that the pubic sector participate in any project for the opportunity zone tax laws to apply to the funds being invested.

In fact, it is assumed that most governments are completely in the blind to the opportunity zone investments being made in their jurisdiction. There are no special capital stack reporting requirements when a new business opens or expands in town... do you know of any local government that has the right or responsibility to examine the sources of private money being invested into new businesses? New real estate projects?

So then, what is the role of the public sector?

In reality, the levers of government influence in the opportunity zone space are actually no different in that it is in attracting and incentivizing new business and real estate projects in non opportunity zone locations. But that doesn't mean that governments that want to attract opportunity zone investment to their communities don't have strategic steps they can take.

BIG PICTURE - Governments that want to attract opportunity zone capital should focus on the future: today, tomorrow, and 10 years down the road.

SHORT TERM - Clear the obstacles, support project progress.

Governments and economic development organizations are accustomed to bringing land and/or money (in the form of incentives, TIF, tax sharing, fees etc) to the table. While these can be valuable to opportunity zone investors to make a deal pencil financially, the most valuable currency that the public sector brings to this particular marketplace may be their ability to remove obstacles to getting projects underway. Here's why:

Opportunity zone investors (supposedly) take on more risk by investing in low income locations, and they (supposedly) offset that risk by deferring capital gains tax on their initial investments, lowering the capital gains tax they pay on their initial investment if held for five or seven years, and ultimately, if the investment is held for a minimum of ten years, they can sell their equity to capture the appreciation on the new investment completely free of federal capital gains tax.

To this end, opportunity zone investors maximize their gains and offset their risk *over time*. To maximize their financial returns, investors need their projects to get underway quickly, and to progress (show 'significant improvement' in accordance with the law) in a fixed time frame in order to remain in compliance.

If I were a government or economic development professional trying to attract opportunity zone capital to new projects in my community, I would look to ensure investors that I understand the project lifecycle and risk from their perspective. This would include a clearly defined plan to review and approve new projects in rapid fashion. This could include everything from zoning and entitlement support for real estate projects, as well as direct connections to local lenders, business support, logistics, legal support etc for new businesses. I would also assure them that any future unforeseen issues that arise which could potentially cause delays to their projects would have the full attention of local department staff and expertise.

LONG TERM - Become a Partner. Improve overall prosperity in districts and neighborhoods over the long run.

The big play for opportunity zone investors is not the 10% or 15% reduction in capital gains tax they pay on their initial investment, but the ZERO capital gains tax they pay on the appreciation of new business or real estate assets when they divest after ten years.

Today's savvy opportunity zone investors are playing a long game. They've set their horizon line at ten years, and are betting on overall appreciation of their investment over that timeframe. Said another way, they're projecting what a buyer might be willing to pay them, ten years from now, for their shares of the new businesses and real estate projects they build in your community today.

Said differently, the greatest possible financial win an opportunity zone investor is to invest in an asset that sees a huge amount of appreciation over the next ten years, so that they can be sold for profit, and that profit is returned to investors, tax free! Said differently, there isn't much difference in paying 0%, 15% or 20% in long term capital gains tax on an asset you hold for ten years, if it doesn't appreciate very much.

Remember, generally speaking, most opportunity zones are areas that have not seen much by way of economic growth compared to other areas. To this end, Governments can pledge and plan to focus their efforts to improve the quality of life, and the associated quality of the economy, in their zones, read: rising tide et al...

If i were an opportunity zone investor comparing projects in different opportunity zones, I'm looking not only at my projections for my project, but I'm looking hard at where I think the neighborhood is headed. I'm looking at the buildings and the businesses next door, I'm looking at the block, I'm looking at the neighborhood, I'm looking at the public space, I'm looking at the transportation, I'm looking at the eduction, and I'm looking at you, the Government, to hear your pledge, to see the details of you plan, to know where you stand.

Show me the investments you will make in the built environment: the public realm, facade improvements, in streetscapes and in transportation over the next ten years.

Show me your plan for assisting your most underserved residents: What will you do to improve mobility? What is your strategy for equity? Where are you ten year plans for expanding access to education and to job training?

Show me your ten year plan for improving your city! You want me to invest? Well, I want you to invest too.

That's what a savvy government can do. 

Ian Ross

CEO OppSites

OppSites hosts a national marketplace and networking platform for people to improve cities, everywhere. We also host the national opportunity zone marketplace.