Throughout the United States, large regions have continued to lag behind the economic and industrial growth seen their neighboring communities.
Even within these successful communities, a number of tracts remain classified as low income while being surrounded by prosperous industries and high-income communities.
Introducing Opportunity Zones
With the introduction of Opportunity Zones (and subsequently Opportunity Funds) the Federal government is hoping that private investors will finally be incentivized to assist in building up the communities most in need.
On February 2, 2017, a bipartisan effort known as the Investing in Opportunity Act was put forth before the House Committee in order to address impoverished areas by allowing for private investment to directly assist disadvantaged communities. Later that same year, President Trump signed into law the Tax Cuts and Jobs Act, defining the creation of both Opportunity Zones and Opportunity Funds (Sec. 13823). These systems were developed in hopes that these areas could direct positive investments towards localized improvements without the use or need of tax payer dollars.
Opportunity Zones are located within distressed communities, identified by the “2011-2015 LIC Census Tract”, as outlined by the Tax Cuts and Jobs Act, and then finalized by each state.
Up to 31,849 Low-Income Communities were identified in the United States. Another 10,313 were identified as Eligible Non-LICs.
Figure 1: Designation of Low-Income Communities in red.
Up to 25% of low-income neighborhoods that meet the income qualifications of the program (and up to 5% of non-low income tracts that meet some other income and geographic requirements) in each state, district, or territory could be designated as Opportunity Zones.
Within the state of Texas, a total of 2,510 tracts were deemed eligible to be declared Opportunity Zones. Of those, 628 tracts across 145 counties were chosen. The Governor’s office maintains that key factors for selection included areas with chronic unemployment, lower population density, and significant economic disruptors such as natural disasters within the past two years.
How They Work
Opportunity Zones are designed to incentivize private investment in order to lift up impoverished population centers. Until recently though, their existence remained relatively confusing and unknown due to the volume of changes contained within the tax bill.
This has quickly changed within the last as the IRC continues to iron out the details of the act and solidifies the playing field.
As currently understood, investors are incentivized to take capital gains acquired from the sale of stocks, bonds or real estate, and invest in Opportunity Funds specified for a singular Opportunity Zone. These investments must hold at least 90% of the capital gain acquired from the sale into the fund in order to qualify.
By placing the capital gains into a fund, investors gain a temporary tax deferral on their capital gains, and can then subtract a percentage of that capital gain from being eligible for taxation in the future if they keep the investment in the Opportunity Fund for a period of time. The timeline below provides more insight as to important milestones and incentives.
Figure 2: Timeline of Qualified Opportunity Fund and incentives.
To better illustrate this concept, the following example is given for an investment which netted a $500,000 capital gain rolled into a Qualified Opportunity Fund:
|Capital Gain||5 Years (10%)||7 Years (Additional 5%)||Total Capital Gains Withheld from Taxes||9 Years (Taxable Capital Gains)||10 Years|
|$500,000||$50,000||$25,000||$75,000||$425,000||Remove taxes from Capital Gained in Opportunity Fund (excluding original Capital Gain)|
Figure 3: Key milestones of Opportunity Funds and benefits derived from the investment of capital gains.
As previously explained, Opportunity Funds are investment tool used to direct capital gains towards Opportunity Zones.
Entities such as banks, community development financial institutions, venture capital groups, developer consortiums, regional economic development organizations, and even individual taxpayers can establish an Opportunity Fund as long as it operates under the statutes and US Treasury.
Please note that this process is still being finalized.
To become a Qualified Opportunity Fund, one must self-certify by completing Form 8996 and submitting it, along with one’s current federal income tax return to the IRS. The instructions to fill out Form 8996 are provided by the IRS as well.
Please remember that to qualify as a Oportunity Fund, 90 percent of assets must be held in qualifying Opportunity Zone property.
Also, note that 90 percent of assets are not required to be invested solely in one Opportunity Zone. Investments may be spread throughout multiple qualified Opportunity Zones. Opportunity Funds will be tested at the 6-month and year-end points to gauge compliance with this order.
The policy enables funds to be responsive to the needs of their communities, allowing for investment in operating businesses, equipment, and real property.
For example, Opportunity Funds can make equity investments in new or expanding businesses by purchasing original-issue stock inthe company if all of the company’s tangible property is and remains located in an Opportunity Zone.
Opportunity Funds can also take original interests in partnerships that meet the same criteria.
Opportunity Funds can also invest directly in qualifying property, such as real estate or infrastructure, if the property is used in the active operation of a business, and if either the original use of the property originates with the fund, or the fund substantially improves the property by investing at least as much as the investor’s initial expense in renovations.
Galveston County holds eight individual Opportunity Zone Tracts located throughout the cities of Texas City, La Marque, Hitchcock and Galveston. Each tract is located near a contains significant transport and logistics hub, due to their proximity to both the Ports of Galveston and Texas City, as well as Interstate 45, Highway 3 and Highway 6.
Figure 4: Map of Opportunity Zones within Galveston County marked in blue.
The map in Figure 4 displays the interconnectedness of the Opportunity Zones within Galveston County and their inherent disposition for further development based on their logistical strengths.
As noted, qualifying investments can include improvements to property, purchasing the stock of a domestic company, or holding partnership interest in a business located inside an Opportunity Zone.
The county’s robust Texas City Industrial Complex allows for a wide portfolio of stock investment options.
Notable companies in the Texas City Industrial Complex include: DOW Chemical Company, Oxbow Energy Solutions, The Port of Texas City, Texas City Terminal Railway, INEOS Styrolution Texas City, Ashland, Marathon Petroleum, Marathon GBR, NuStar Energy LP, Eastman, BP Texas City Chemicals, Aggreko, Valero, Oiltanking, TNMP, and more.
Tracts within the City of Hitchcock also offer a number of possibilities as wide swaths of land are available with close access to the bay and Interstate 45, with direct access Highway 6 and railways.
Investments within the area have propelled economic expansion across the region and have attracted some of the world’s largest players in the petrochemical industry.
Marathon Petroleum has committed to major upgrade and expansion of facilities expected to reach over $1.2 billion through the next three years. NextDecade has also announced the construction of an LNG plant to be located on Shoal Point within Texas City with investment estimated to reach over $2 billion. Another major employer in the community, Ashland Chemicals, has continued to enhance its facilities and as recently as 2015 had invested well over $100 million towards expansion operations and infrastructure.
Future expansion and investments are planned throughout designated Opportunity Zones which will solidify the region as a hot bed for private investment and use of the Opportunity Fund program.