Understanding Opportunity Zones

Opportunity Zones were created by the Tax Cuts and Jobs Act of 2017 to provide tax incentives for investments in underdeveloped and lower income areas. The program allows investors to defer and reduce capital gains taxes that otherwise would be owed by reinvesting proceeds into businesses and real estate projects located in an Opportunity Zone. Because universities, especially those that are public, very rarely generate capital gains or associated tax obligations, it would be easy for university leaders to dismiss the opportunity zone incentive as something of questionable relevance. That would be a big strategic mistake.

Opportunity Zone investors are equity investors – they fit into the portion of the capital stack that requires a “return profile” to justify their investment. Opportunity Zone investors are unique in that, in addition to any return profile they get out of the project, they also get a series of powerful tax incentives that can make a project far more attractive. As a result, a project located in an Opportunity Zone might have an easier time attracting private investors (from P3 developers to interested alumni) than an identical project outside an Opportunity Zone.

Here are the basic benefits that accrue to an Opportunity Zone investor:

Tax Deferral

On gains you roll into an Opportunity Fund (until 2026 at the latest).

Tax Reduction

Up to 15% on gains rolled into your Opportunity Fund.

No Tax on Appreciation

If you “cash out” of your Opportunity Fund after 10+ years.

Opportunity Zones are a highly place-based program. The legislation required governors across the US to nominate up to 25% of certain designated low-income Census tracts as “Opportunity Zones” back in early 2018. That map was finalized by the Treasury Department in summer 2018, and the designated Opportunity Zones will remain in place for the next decade. Check out this map of universities and OZs to find the closest one near you.

There are two main types of projects that fall into the parameter of eligible investment: real estate and active businesses. As a result, Opportunity Zones could equally be used to create a fund to invest in on-campus P3 opportunities, off-campus real estate developments, or even an alumni-backed startup fund to invest in commercialized technology coming out of university research programs. See more in our Opportunity Sponsor section.

While OZs are not a grant program or a tax credit program, the incentive can be used alongside grants and tax credits in your deals. Using other programs, such as New Markets Tax Credits,in combination with OZ incentives can make deals more attractive for investors and lower the cost of capital.

Your tax-exempt institution may become a direct beneficiary of the Opportunity Zone tax incentive in the event of experiencing an unrelated business taxable income (UBIT) capital gain that your institution decided to delay taxes due and employ it towards an OZ investment. Any trade or business, such as selling a building, that is not substantially related to your organization’s exempt purpose is considered UBIT.

For more on Opportunity Zones, see the Opportunity Alabama Resources Page.