In the 2017 Tax Cuts and Jobs Act, the U.S. Congress established a new economic development tool to encourage development in low- to moderate-income census tracts by providing preferential tax treatment to investments made in these areas. The legislation created “Opportunity Zones” and “Opportunity Funds” as investment tools to filter funds into areas stricken with high unemployment, poverty, and economic distress.
How were the zones identified?
States made recommendations to the U.S. Department of Treasury for census tracts to be approved as Opportunity Zones. In Michigan, the state looked to local economic development organizations to help with the assignment of tracts and Ann Arbor SPARK connected with community partners to provide recommendations. Twenty-five percent of the low- to moderate-income tracts (as defined by New Market Tax Credit legislation) in Michigan were approved as Opportunity Zones, including 11 tracts in Washtenaw County and one in Livingston County.
Why would investors be interested?
The new legislation allows investors to forgo their capital gains tax liability by investing money into opportunity funds, which support development in opportunity zones. Investors should look in these areas for projects that are low risk and provide substantial community benefit. Although these tracts are in historically economically distressed areas, shifting markets have led to lucrative investment opportunities and future growth potential.
Ann Arbor SPARK has helped to identify a few target areas for investment using Opportunity Funds. In addition, SPARK has worked with our partners at ZoomProspector to create a map that includes Opportunity Zones and development opportunities.
- The American Center for Mobility: The American Center for Mobility is a testing center for connected and autonomous vehicles, with more than 500 acres of infrastructure to serve the in-demand needs of industry and government. The American Center for Mobility will include a new research and technology park with opportunities to invest. In addition, the facility is surrounded by a number of potential development opportunities for companies in the mobility and cybersecurity industries. Located in Ypsilanti Township, just off of I-94, this area has a high potential for growth and development.
- Research Park Drive: Located along the State Street and I-94 corridor, Research Park Drive is a technology park with some of Ann Arbor’s leading research and development facilities, including Honda, Subaru, and Mercedes-Benz. With plenty of low-risk investment opportunities and the ability to attract high tech companies in driving industries focused on innovation and research, Research Park Drive is an attractive place for opportunity fund investment.
In addition to these targeted projects that SPARK is already working on, there are ample possibilities in the nine other census tracts designated as opportunity zones in Chelsea, eastern Ann Arbor, and Ypsilanti. Ann Arbor SPARK can help investors interested in building within an opportunity zone navigate the process and connect you with additional resources.
What Types of Investments are Allowed in Opportunity Zones?
The investment options within opportunity zones are broad, which provides potential investors with a range of options for how to best utilize the tool. Broadly, Opportunity Zone Funds can be used for real estate or running a business (partnership interest or stock) with few limitations.
- Real estate investments using Opportunity Funds must lead to “substantial improvements” (value must double from the adjusted basis in their investment of the initial purchase) within 30 months after the acquisition.
- Investments in businesses such as liquor stores, massage parlors, country clubs, or casinos are prohibited through Opportunity Funds. While marijuana businesses are not listed in the federal legislation, investments of this type are “gray area” and do not likely qualify.
- Real estate improvements for properties acquired before 2018 are ineligible for OZ Fund investment. To utilize the tool, owners of properties purchased before 2018 may consider selling the property to use the realized capital gains to reinvest in the Zone.
How can an investor set up an Opportunity Zone Fund?
According to the IRS, “A Qualified Opportunity Fund is an investment vehicle that is set up as either a partnership or corporation for investing in eligible property that is located in a Qualified Opportunity Zone.”
A Qualified Opportunity Zone must be certified by the IRS. An eligible corporation or partnership self-certifies by completing Form 8996 on their federal tax return.
An additional qualifying requirement is that 90 percent of the assets in a Quality Opportunity Fund must be invested within the Qualified Opportunity Zone property.