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The Trump-era Opportunity Zone tax incentive brought capital gains into community development in a new way. With Congress poised to consider extending the program in a tax package, it is an opportune time to highlight high-impact reforms that could help the tool better deliver much-needed homes, especially in locations with good access to jobs and amenities. 

The 2017 Tax Cuts and Jobs Act created the Opportunity Zones tax incentive (OZs), an economic development tool designed to catalyze investment and growth in designated distressed communities. The OZ incentive, which operates by providing a set of preferential tax treatments to entities who invest capital gains into qualifying investments in underinvested or otherwise distressed communities, has driven a new wave of investment into many places and has had a significant impact on housing production in particular.

Since the initial passage of OZs in 2017, the country’s housing affordability and availability crisis has worsened, a global pandemic has reshaped the office and retail development environment dramatically, and significant increases in interest rates have threatened feasibility on even the strongest projects. These new forces should impact how Congress reshapes the Opportunity Zone program to meet the moment. As a national coalition of real estate developers and investors who advocate for sustainable, equitable, and walkable development in America’s communities, LOCUS is uniquely positioned to provide insight into how the Opportunity Zone program can be extended and reinvigorated to help deliver smart growth outcomes for communities.

How can Congress utilize Opportunity Zones to meet the country’s housing and development challenges? 

1. Extend the Opportunity Zone incentive. In an environment where it is increasingly difficult to build, the OZ incentive has helped bring new housing units online. Residential development is not incidental to the incentive, it’s the core of what it has accomplished–over three-quarters of all OZ investment tracked by the accounting and consulting firm Novogradac included some kind of residential component. Extending the base OZ incentive will also help create additional market-rate units, increasing housing supply, which in turn improves affordability.
2. If Congress wants to further incentivize capital investment in housing, the OZ incentive should be made stronger for projects that produce housing to serve families making less than 100 percent of Area Median Income. Providing an enhanced incentive for Opportunity Zone investments in housing in this price range would help tip the use of the incentive towards the creation of more housing with more affordable units.
3. To support the redevelopment of existing assets and the efficiency of investments made through the OZ incentive, Congress should pursue some changes to the OZ incentive to improve its usability for preservation and rehabilitation projects. As currently structured, it is difficult to utilize the OZ incentive to finance preservation and rehabilitation projects because existing property must be improved by at least 100% of the property’s acquisition cost in order to qualify for the incentive; this threshold could be reduced significantly in the case of occupied properties that serve low to moderate income populations and distressed or vacant commercial assets in OZs.
4. The OZ incentive could also be further optimized to drive investment into downtowns in urban and suburban areas and rural main streets across the country by designating a set percentage of OZs within each state as “Core OZs,” or “COZs,” based on job and population density relative to the broader area as well as transit access (where reasonable).

How could other changes drive smart growth?

In addition to the housing production-focused priority policy changes discussed above, a host of other reforms could help deliver smart growth, including by allowing for broader community participation in a similarly structured tax incentive available to individual community members, providing the data needed to monitor and identify further improvements in the program, or by implementing an assortment of provisions included in the bipartisan Opportunity Zones Transparency, Extension, and Improvement Act (OZTEIA), as introduced in the 118th Congress.

Conclusion

Opportunity Zones are not the panacea for the housing crisis or the sole answer to spurring smart growth in distressed communities. They are, however, a powerful tool to drive capital into housing and redevelopment at a critical moment for the country’s housing stock and downtowns. Addressing the housing supply crisis and supporting sustained growth on our main streets and in our downtowns are needs too urgent to remove a tool that could help deliver solutions.

Read our full whitepaper on how to Reinvigorate OZs to deliver housing and smart growth