Opportunity Zones Set to Help Distressed Communities

Secretary Carson says program will provide incentives for more affordable housing

Dr. Ben Carson, secretary of Housing and Urban Development, in Washington on March 14, 2019. Charlotte Cuthbertson/The Epoch Times

WASHINGTON—Housing and Urban Development Secretary Ben Carson said the “opportunity zones” program, passed as part of the Tax Cuts and Jobs Act of 2017, has already started to revive underserved communities.

On a visit a few months ago to Vicksburg, Mississippi, Carson saw a closed sawmill being reopened by new investors. In an interview with The Epoch Times on Mar. 14, Carson said that the new owner of the sawmill heard about opportunity zones and wanted to take advantage of the new tax breaks.

The mill has hired more than 100 people, and new housing is now being constructed for the people coming to work there.

A long-awaited clarification of rules governing opportunity zones to be released in the coming weeks may help transformations, such as happened in Vicksburg, spread across the nation.

Carson said the second tranche of regulations will be out within the next month, based on information from Treasury Secretary Steven Mnuchin, and “the third and final tranche should be out early this fall.”

The U.S. Treasury released an initial round of rules for investors in October 2018 and was expected to release additional guidance before the end of 2018. However, the recent partial government shutdown has delayed the process.

Incentives

Through special tax breaks, the opportunity zones program incentivizes Americans to invest in economically distressed communities. And the proposed regulations provide guidance on how investors can qualify for special tax incentives in opportunity zones.

Last summer, the Treasury Department certified 8,761 U.S. census tracts as opportunity zones, based on nominations received from each state, territory, and the District of Columbia. The designation will apply for 10 years. The program allows investors to defer taxes on capital gains, if the gains are reinvested in a qualified opportunity fund, an investment vehicle created to invest in any of these designated zones.

Excitement is running high among investors. Many funds have already been formed, raising money to invest in these distressed communities.

“There’s been a lot of interest in housing, in multifamily housing,” Carson said. “That’s actually a good thing because we have quite a shortage of affordable housing right now, particularly in economically depressed areas.”

“And the supply of housing obviously has a lot to do with the pricing,” he said, adding that supply and demand imbalance would be corrected “enormously” through this program.

Carson argued that these developments would help create new businesses in these communities as well.

“One of the things that I’ve noticed as I’ve traveled around the country—and I’ve done a lot of traveling around the country—is when you create these beautiful multi-family dwellings other things tend to pop up around them to support them,” he said.

A significant portion of the program is devoted to spurring more investments in small or startup businesses, not just real estate.

The Greektown neighborhood of Baltimore, Md., on Feb 3, 2019. The area is designated as opportunity zone as part of a tax incentive program introduced by the Tax Cuts and Jobs Act of 2017. Samira Bouaou/The Epoch Times

The idea is to “give small businesses an opportunity to get the kind of funding that they never have been able to get before,” Carson said. “There are a lot of people who have very good ideas. But they just don’t have anybody who’s been interested in backing them or who even comes into contact with them and would know to invest in them.”

Through this program, he said that the businesses and funds would come together and “that will automatically germinate and create something good.”

The Internal Revenue Service held a public hearing last month, seeking feedback on the first round of regulations. During the hearing, investors and advisors raised concerns about the proposed rules related to investing in opportunity zone businesses.

The proposed rule states that 50 percent of the sales or gross income of a business must be derived from the “active conduct of a trade or business” in the opportunity zone to qualify.

However, some companies in the sectors of e-commerce, biotech, or manufacturing may struggle to meet this requirement, according to experts. Hence, some private investors remain on the sidelines, hoping for further clarification from the Treasury on such rules.

The White House Council

In December last year, Trump signed an executive order to establish the White House opportunity and revitalization council. The council, which is led by Carson, will coordinate all existing federal programs to economically distressed areas, including opportunity zones, to avoid inefficiencies.

Unlike many government programs, however, there’re no job requirements for opportunity zone investors. Hence, investors don’t have to meet certain job creation requirements to receive tax breaks.

“If in fact, you have an economic investment in an area, that means that there’s going to be building going on there,” Carson said. “And if there is building going on there, somebody has to do it, and somebody has to support it. So, the jobs come automatically.”

Carson also said that the Department of Housing and Urban Development would revamp Section 3 of the Fair Housing Act of 1968, which requires that recipients of certain federal funding provide training, employment, and contracting to low-income people in the area.

“That’s been on the books for 50-plus years but has hardly been used, because it’s encumbered with so many regulatory and bureaucratic barriers,” Carson said.

The new rules, which will be out within the next few weeks, “severely trim all those negatives and make it much easier for employers to utilize.”