Rural Opportunity Zones - Phase 1

This site is intended to provide users with valuable background information about the establishment of Opportunity Zones in the U.S. and the implementation of this program in Indiana. 

Aside from background on this federal legislation, the site showcases key data on six Opportunity Zone sites that have been selected to be part of a special Rural Opportunity Zones Initiative (ROZI) in the state. The data are intended to guide the investment plans of the local ROZI teams that have been selected on a competitive basis to be part of this program.

The Indiana Rural Opportunity Initiative is funded by USDA Rural Development and is being spearheaded by the Purdue Center for Regional Development (PCRD) and the Indiana Office of Community and Rural Affairs (OCRA). 

What are Opportunity Zones and How Did They Come About?

The Opportunity Zones Program was established as a product of legislation passed by the U.S. Congress under the banner of the 2017 Tax Cuts and Jobs Act. The intent of the Opportunity Zones (OZ) legislation is to attract private sector investments in economically distressed and underserved areas of the country. By infusing funds into these areas, the hope is that such resources would help jump-start local community and economic development improvement efforts (Jeff Andrews, 2018). 

How Were Opportunity Zones Selected in Each State?

As the accompanying chart notes, all states were asked to identify census tracts that met certain criteria in terms of median family income and individual rates of poverty. Next, the Governor of each state could designate 25 percent of these tracts as Opportunity Zones. However, 5 percent of the OZs could be non-low-income sites as long as they bordered a qualified tract that was selected by the Governor and had median family income that did not exceed 125 percent of the family income of the adjacent qualified Opportunity Zone tract.  

The sites nominated by the Governors were submitted to the U.S. Treasury Department for final approval. In the end, 8,766 census tracts were ultimately designated as Opportunity Zones by the Treasury Department. This designation is now in place for 10 years. As of now (2020), there is no mechanism available for states to approve new census tracts to be added to their list of Opportunity Zones.  

Indiana’s Opportunity Zones

Some 156 census tracts have been approved by the U.S. Treasury Department as Opportunity Zones in Indiana. Of that number, 46 sites (38 percent) are located in nonmetropolitan areas of the state – rural areas with no city or town of 50,000 or more and not adjacent to a county with city of 50,000 or more people.

How Opportunity Zones Work?

As noted already, the OZ program is intended to attract private sector investments into census tracts that have suffered from economic stagnation, especially since the Great Recession of 2007-2009. The program is intended to attract investments with the financial resources to invest in projects that have a good chance of providing a return on that investment.

The typical scenario is that an investor has sold an asset (such as stocks) and wishes to re-invest the/his capital in some other way. With the Opportunity Zone program, an investor has 6 months (180 days) from the time in which she/he sells an asset to invest in a Qualified Opportunity Fund (which is explained in forthcoming slide). Funds from a Qualified Opportunity Fund (QOF) may be invested in a variety of eligible activities/projects in OZ sites -- places that could benefit from the infusion of such funds into their communities.

Tell Me More about the Qualified Opportunity Fund

A Qualified Opportunity Fund (QOF) is a mechanism that is now in place to invest in eligible property or projects located in an Opportunity Zone. The fund uses investors’ capital gains from prior investments as the financial resources needed to support the Opportunity Fund. What is important to note is that the QOF has six months to deploy 90 percent of its capital in Opportunity Zones.

To become a Qualified Opportunity Fund, an eligible corporation or partnership self-certifies by filing Form 8996: Qualified Opportunity Fund with its federal tax return (see  https://www.irs.gov/forms-pubs/about-form-8996 ). No approval or action by the Internal Revenue Service is required. Any taxpayer who would like to participate in the OZ program can do so by investing in a Qualified Opportunity Fund.

Benefit to the Investor: Increases Over Time

As of 2019, the benefits to the investor is dependent upon the length of time of their investment. As the accompanying chart indicates, a person who invests in a QOF is able to defer payment on the original capital gains. If the investment is held for 5 to 7 years, the tax on the existing capital gains is reduced by 10 percent. If it held for 7 to 10 years, 15 percent of the taxes on the existing capital gains is canceled. For investments held for more than 10 years, not only does the investor realize a 15 percent reduction in her/his existing capital gains, but any capital gains accrued after an investment in an Opportunity Fund (that is, after the sale or exchange of an investment in an Opportunity Fund) are not subject to any taxes. For more information, check out the following fact sheet produced by the Economic Innovation Group:  https://eig.org/wp-content/uploads/2019/10/Opportunity-Zones-Fact-Sheet.pdf 

Possible Areas of Investment

QOFs can be targeted to a variety of areas, as noted in the chart. Funds can be used for single or multi-family housing, to support startups or small businesses, for various industry sectors, mixed-use activities, and more. To date, the lion’s share of funds have been dedicated to real estate of some kind. What is important to make note of, however, is some key requirements, as noted by the Economic Innovation Group, when it comes to QOF investments:

Funds can make equity investments in new or expanding businesses by purchasing original-issue stock of the company if substantially all of the company’s tangible property is and remains located in an Opportunity Zone. Funds can take original interests in partnerships that meet the same criteria. Funds can also invest directly in qualifying property, such as real estate or infrastructure, if the property is used in the active conduct of a business, and if either the original use of the property commences with the fund or the fund substantially improves the property by investing at least as much as the investor’s basis in refurbishments. (See  https://eig.org/opportunityzones/faq ).

Examples of QOF Activities and Other Valuable Information

The Economic Innovation Group has an excellent site that captures Opportunity Zone activities across the nation. Go to:  https://eig.org/oz-activity-map . In addition, several agencies, organizations and private sector firms have banded together to establish the Opportunity Investment Consortium of Indiana. The intent is to build strong working ties across these various entities and to advance investments in Indiana’s Opportunity Zones. For more information, go to:  https://www.opportunityinvestmentconsortium.com/ .

Questions?

To learn more about the Rural Opportunity Zone Initiative in Indiana, please contact the representative of the Purdue Center for Regional Development or the Indiana Office of Community and Rural Affairs.