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The Great Recession, which ravaged economies around the globe from 2007 to 2009, brought economic hardships that had not been experienced since the Great Depression of the 1930s, requiring years of recovery. By 2015, some key economic indicators in the US had returned to pre-recession levels, which meant many US citizens were able to leave behind the challenges that the Great Recession brought to their lives. Some, however, were not.
As the US emerged from the Great Recession, economic indicators sampled from various geographic regions revealed the US was experiencing an uneven recovery. While some regions were once again experiencing high employment levels and higher-paying jobs, others continued to struggle with widespread unemployment and a lack of business development. Policymakers sought to address the economic hardships in disadvantaged areas by establishing special incentives for economic investment.
In 2017, the work of those policymakers came to fruition with the passage of the 2017 Tax Cuts and Jobs Act (TCJA). The TCJA included provisions for the establishment of a program to support and encourage private investments in low-income communities. The program allows for the creation of Qualified Opportunity Zones (QOZs), where investors are rewarded for practicing what has come to be known as opportunity investing.
“The provision that created opportunity investing is the hidden gem in the 2017 Tax Cuts and Jobs Act,” says Dr. Jim White, Chairman and CEO of Post Harvest Technologies, Inc. “The program it establishes represents an innovative approach to spurring long-term private sector investments in low-income rural and urban communities nationwide. It provides our nation with a new path to bolstering and revitalizing distressed businesses and communities.”
QOZs are nominated by state governors, who must provide support that shows the area is economically distressed. The US Treasury Department evaluates the nominations and determines which areas qualify for a QOZ designation. Since the program was founded, QOZs have been designated in all 50 states, the District of Columbia, and all five US inhabited overseas territories.
To appreciate the potential impact of opportunity investing, consider that the average poverty rate in a QOZ is 26 percent — nearly double the average rate in the US. Initiatives aimed at creating a more favorable economic environment in QOZs have the potential to impact nearly 35 million US citizens who live within their boundaries.
“When investors successfully contribute to the economic revitalization of QOZs, they play a leading role in helping communities to have more jobs and better salaries to offer,” explains Dr. White. “As a result, more people are drawn to these communities, which in turn increases real estate values and breathes new life into local shops and stores. These newly empowered residents and business owners slowly but surely increase their financial resources, giving them more money to spend on beautifying their homes, storefronts, public buildings, streets, parks, and monuments. Spread out over many communities, opportunity investing can help our nation flourish as a whole by improving community infrastructure, decreasing crime rates, and making better health care available for residents.”
Opportunity investing happens through opportunity investment funds, which focus primarily on real estate and business development in QOZs. The financial returns that result from opportunity fund investments are eligible for preferential tax treatment, provided that the fund invests at least 90 percent of its assets in QOZs.
For the growing number of investors who are seeking to have a positive social impact, as well as a beneficial financial return, opportunity investing definitely deserves consideration. The length of time that investors keep funds in opportunity funds determines the extent of the tax relief provided. Investments held for at least five years, for example, receive a 10 percent exclusion of deferred gain, while those who hold investments for 10 years or longer are exempt from federal income tax on the appreciation of their investment.
To date, opportunity investing has brought more than $15 billion into the revitalization efforts focused on disadvantaged communities. For many of those areas, that investment represents a much-needed vote of confidence.
“In many of these disadvantaged areas, the town centers and neighborhoods have become filled with eyesore structures that are constant reminders of the past — good times gone bad,” says Dr. White. “The emotional impact that those reminders have on the town’s citizens cannot be adequately measured, but one can safely say that they engender feelings of frustration rather than hope. It is difficult in those situations to see a light at the end of the tunnel. Opportunity investing provides that light. It communicates clearly to those who are struggling that America is still the land of opportunity.”
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