Economic Development Equity Land Use

Opportunity Zones

Headline

Near the intersection of S. Saunders St. and I-40, there’s a large patch of underdeveloped land that could soon undergo some transformational change. At a press conference on June 25, developer John Kane and businessman Steve Malik formally unveiled their proposal to channel an estimated $1.9 billion of private investment into the creation of a mixed-use development and entertainment district on 55 acres of land resting immediately south of Raleigh’s Caraleigh neighborhood.

It’s a promising location for new development—near Dix Park, adjacent to the Walnut Creek Greenway, and along the planned north-south corridor for the Bus Rapid Transit (BRT) system Wake County will be developing in the next decade. But there was one other factor that Kane and Malik said made the site especially attractive—its location within something called an “Opportunity Zone.”

Malik called the existence of the Opportunity Zone “extremely important” to the business case for the development and said that the project would be able to attract more interest from investors in large part because of the tax advantages it created.

The proposal may or may not ever come to fruition, but it illustrates how the little-known Opportunity Zone benefit recently inserted into federal tax law has the potential to change when, where, and how Raleigh develops. This article will get you caught up on what OZs are, how they might shape the future of Raleigh’s growth, and in particular what they might mean for promoting transit-oriented development along the region’s planned transit corridors like the BRT.

What are OZs?

Let’s start by explaining why Kane and Malik are so jazzed about this Opportunity Zone stuff. OZs were created as part of the big Tax Cuts and Jobs Act of 2017. The goal is to entice investors to invest money in economically distressed areas, in the hopes that this will generate economic growth in areas that really need it—although, as we’ll soon see, the definition of “economically distressed” gets a little fuzzy at times.

The law offers three main perks to people who invest in OZs. First, let’s say you buy some stocks and then later you sell them for more than you paid for them. That’s called a capital gain and ordinarily you need to pay taxes on that profit. But the new law lets people defer paying taxes on capital gains until 2026 if they take those profits and invest them into a special fund that in turn invests that money into OZs. (Obviously, you’d much rather put off paying taxes until 2026 than pay them today.) Second, if you keep the money invested there long enough, the IRS will knock as much as 15 percent off your eventual capital gains tax bill to boot. So that right there is pretty nice.

But the third and final incentive is the really big one. If the investment into an OZ ultimately turns a profit itself, the investors can potentially forgo paying any taxes at all on those profits. So if a new tech venture starts up in one of these zones and grows into a billion-dollar company, some of its investors might be able to bank their profits totally tax-free. Similarly, if Kane and Malik’s group turn a tidy profit on their new project, they won’t have to pay any taxes on those profits.

So you can see why some people are excited about this, and why people with money to invest are looking for ways to get into OZs—and why cities like Raleigh are trying to help them do it.

How is Raleigh going to use OZs?

So how did they decide which areas get to be OZs? It’s actually a funny story. Congress left that up to the U.S. Treasury Department and the Treasury Department delegated the job to the states. North Carolina’s Department of Commerce, like a lot of states, delegated most of that work to its counties. And Wake County further delegated the job to its municipalities, creating the likely unprecedented situation where small-town city councils have been put in charge of shaping federal tax policy.

The U.S. Census Bureau divides the whole country up into thousands of little subdivisions called Census tracts that usually have around 4,000 people (but it can vary a lot), and the Census Bureau keeps very detailed statistics on all of them, including the median income and the percentage of people living in poverty. If a tract had a low enough median income or a high enough rate of poverty in the last Census, it was eligible to be designated as an OZ. States could designate up to 25 percent of their qualifying Census tracts as OZs. Raleigh had 42 qualifying tracts, so it could, and did, choose 10 of them to become OZs.

Raleigh used a couple of factors to pick its ten tracts, but the biggest consideration was that it tried to pick ones that run along proposed transit corridors, primarily the planned BRT line along Wilmington St. and the long-discussed commuter rail that would run from Garner to Durham. The city’s hope was that designating those tracts as OZs will promote and incentivize Transit Oriented Development (TOD) along those lines. (There’s also an OZ that touches part of the planned BRT line along New Bern Ave.)

The city also intentionally tried to choose tracts that had some promising redevelopment opportunities. But because there’s already a lot of development happening in Raleigh as it is, the city also tried to pick tracts that wouldn’t have been sure-fire development candidates even without the law. All in all, the city’s strategy seems pretty sensible, although one thing that really stands out when you look at the map is that there’s not a single OZ within the inside-the-Beltline portion of southeast Raleigh, where there’s currently a lot of poverty—but also a great deal of concern about rapid gentrification, which an OZ designation might accelerate. You can see a full list of zones here, for reference.

But will it work?

That’s the big question. Nothing like this has ever been tried in our country’s history, so it will certainly be interesting to see if the law really does end up promoting economic development that truly benefits low-income communities. As Kane and Malik’s proposal shows, the law is already having an effect in the real world. But the federal government is almost certainly going to forgo a lot of tax revenue as a result of the law, and the people who most obviously stand to benefit from the law are the wealthy investors who can profit from the tax breaks. No one really knows how much poverty-reducing bang we get for our tax break bucks.

Another potential concern is that many Census tracts, even if they have pockets of poverty within them, also have areas that already doing quite nicely and designating a tract as an OZ is an all-or-nothing proposition. Will economic development occur in the places that are struggling or will the development cluster in the areas that are already doing well? Again, nobody really knows.

There’s one area where the early indicators have thus far been discouraging and that’s in relation to the creation of more affordable housing. City officials would like to see the program used as a tool to spur the development of affordable housing but so far it’s been challenging to find developers who are interested in doing that. You need to find developers that are specifically interested in those sorts of projects and so far that hasn’t really intersected with investors’ attraction to OZs.

One thing is for certain, though—we’ll certainly end up with tons of fascinating data to help us answer that question. For example, the train tracks on which the proposed commuter rail would run actually forms the boundary between two Census tracts just south of the Beltline. (Tracks between tracts, you could say.) The tract to the west of it was designated as an OZ while the tract to the east of it wasn’t.

Will we see a bunch of TOD on the western side and comparatively very little on the east side? Will the law help finance the creation of affordable housing? How big of a deal are Opportunity Zones going to be, really? By 2026 at the very latest, we should have at least a pretty good start on answering many of those questions.

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