When Congress passed its massive $1.5 trillion tax cut bill in December, few had heard of a provision tucked into the bill allowing the creation of “Opportunity Zones” — low-income areas in which major investors would be incentivized by significantly reduced capital gains taxes.
At a meeting that was billed as a “business roundtable” in west Louisville’s Portland neighborhood on March 7, Gov. Matt Bevin and two individuals affiliated with the campaign of President Donald Trump made passing references to the possibility of economically distressed areas in that part of the city being named Opportunity Zones in the near future, suggesting that this would spur a welcome flood of private capital investment.
Under the provisions of the new tax law, governors have the sole authority to designate which low-income census tracts are named Opportunity Zones, and the deadline to make those nominations to the U.S. Department of Treasury is Wednesday. The Kentucky Cabinet for Economic Development is assisting Bevin’s office in forming the state’s submission, which included asking local governments to propose census tracts they deem worthy.
Mary Ellen Wiederwohl, the head of Mayor Greg Fischer’s economic development office Louisville Forward, tells Insider Louisville that the city proposed roughly 20 census tracts to the state, expressing hope that this very new program could inject much-needed investment in the city.
But there are still many questions about how Opportunity Zones will work and if the needed investment will materialize, as the Treasury is still ironing out details about how eligible funds will work. Additionally, the Brookings Institute wonders whether the program will lead to investors being subsidized for gentrifying neighborhoods, as their tax incentives and rate of return are greater with rising property values and rents, which could displace low-income residents.
What are Opportunity Zones, and how do they work?
The concept of Opportunity Zones was mostly pushed by the Economic Innovation Group think tank in recent years, gaining bipartisan support in the U.S. Senate before it was slipped into the tax cut bill without any significant discussion or fanfare.
Here’s how the new program would work.
Census tracts are eligible to be named Opportunity Zones if their poverty rate is at least 20 percent, or if the median family income does not exceed 80 percent of the statewide median. In metropolitan areas like Louisville, the median family income of eligible tracts cannot exceed 80 percent of the median income of the metropolitan area.
The governor of each state is allowed to designate up to 25 percent of eligible census tracts as Opportunity Zones, as well as a smaller number of certain census tracts that are not low-income but are contiguous to an eligible tract.
The program also allows the creation of Opportunity Funds, which are private sector investment vehicles that must invest at least 90 percent of their capital in Opportunity Zones.
The tax provisions of the program then encourages those holding large amounts of unrealized capital gains — investment profit that exists on paper, like an open stock, but has yet to be sold for cash or closed for profit — to place those funds into Opportunity Zone investments. According to EIG, individuals and corporations are estimated to currently have more than $2 trillion in unrealized capital gains.
These tax incentives take three forms, each encouraging the investments to be long-term. First, investors get a temporary deferral on any capital gains that are reinvested into an Opportunity Fund, which is only recognized when their investment is sold, or after 10 years.
Secondly, those who hold their investment in an Opportunity Fund for five years get 10 percent off the amount in capital gains they pay taxes on, with that amount reaching 15 percent if the investment is held for seven years.
Lastly, if an investment is sold after 10 years, the investor does not have to pay any capital gains taxes on the appreciation of that Opportunity Fund over that time. According to EIG, that means for every $100 invested into an Opportunity Fund in 2018 and held for 10 years, the after-tax value of that investment would be $176 by 2028 — $44 more than if they invested $100 in a traditional stock portfolio.
In Kentucky, Bevin will have many census tracts to choose from when it comes to designating Opportunity Zones, as nearly 58 percent of the state’s nearly 1,000 tracts are eligible due to being low-income, and nearly three-quarters of the tracts are eligible when contiguous tracts are included. Almost all of eastern Kentucky is eligible, while much of the “golden triangle” bounded by Lexington, Louisville and Cincinnati is not.
Bevin can designate a maximum of 144 tracts as Opportunity Zones, which could include up to eight contiguous tracts. According to Jack Mazurak, the spokesman for the Cabinet for Economic Development that is working with the governor’s office, Bevin plans to submit the maximum 144 tracts to the Treasury by the March 21 deadline this week.
On Feb. 12, the cabinet released a request for information to local governments around the state, asking them to assist in identifying census tracts as potential Opportunity Zones by Feb. 26, in addition to listing them by priority.
Mazurak added that the administration’s submission to the Treasury is considered a preliminary document and not subject to public disclosure.
In Jefferson County, just over half of its 170 census tracts are eligible due to being low-income, in addition to 12 by way of contiguity. This includes most of the western half of the county, while nearly all of the wealthier East End is ineligible.
A closer look at the Jefferson County map shows that the entire West End would be eligible as an Opportunity Zone, but so would some surprising areas that are considered up-and-coming with rising property values — including Germantown, NuLu, Irish Hill, Butchertown, Clifton, and even parts of Crescent Hill.
Jean Porter, the spokeswoman for Mayor Greg Fischer, told Insider last week that the mayor’s office provided the Bevin administration with a response listing recommended Opportunity Zones in Louisville, but denied Insider’s request for the submission because it is considered preliminary. Porter declined to provide further details, other than stating that “you can be sure it includes census tracts in west Louisville and other downtown edge neighborhood areas that fit into the zone descriptions.”
Bevin and Trump allies tell west Louisville to embrace outside investors
The March 7 meeting at the Caudill Seed facility in Portland was criticized by some civic leaders who attended as both confusing and condescending, especially the first hour when Darrell Scott and Kareem Lanier — leaders of the National Diversity Coalition for Trump — sparred with members of the audience.
In addition to heaping praise upon both Trump and Bevin, both listed priorities for what they called the group’s “13-Point Program for Urban Revitalization,” suggesting the city could serve as its initial pilot program and lure major corporations to west Louisville. However, both remained vague about how this program — which has the apparent backing of the president — would actually work.
Much of this discussion was overshadowed by Scott’s suggestion in a heated question-and-answer session that redlining — the well-documented denial of loans to those living in black neighborhoods during the mid-20th century — was a figment of African-Americans’ imagination and an excuse to blame white people, in addition to mocking a woman who said she was proud of her adjacent Russell neighborhood.
Amid this confusion, Lanier did make a passing reference to the possibility of west Louisville becoming an Opportunity Zone because of the new tax law, which he said “created a way for Wall Street titans to invest in urban America.”
Briefly explaining how Opportunity Zones work, Lanier said the Treasury was “still working out the language” on how exactly the tax incentives for Opportunity Funds would work, in terms of have capital gains taxes deferred, reduced or eliminated.
Lanier said these policies would bring “corporations back to our urban neighborhoods,” referring to Triple Five Group — a major shopping mall owner and operator — and New York-based Community Federal Savings Bank as the group’s “partners.” He also referenced BlueSky Capital as a partner, pointing out executive Christos Marafatsos as being in the room and joking that “he’s got checks for everybody. Run by him if you want some money.”
The BlueSky Capital that Marafatsos works for bills itself as a global investment brokerage and consulting firm that is based in D.C., but there is also a BlueSky Capital based in Louisville, which is a venture fund tied to Access Ventures and Samtec, an electronics manufacturer based in New Albany.
The second hour of the event mostly consisted of Bevin speaking about what was needed in west Louisville — economically and culturally — though, he also made a passing reference to the Opportunity Zones made possible by the new tax law, saying they “create a tax advantage for communities exactly like this.”
Bevin told the audience that he did not have checks to hand out to them, but said that his “commitment from the state standpoint” would be to “make sure that all dollars that can be marshaled, can be marshaled … that we take advantage of these Opportunity Zones.”
“I don’t have a bag of tricks, a bag of money, a bag of promises,” said Bevin. “A lot of people have showed up through the years with some of all of the above. I don’t have a bag of that. I have a bag of willing to commit myself personally, to be here personally, to work personally with those of you who are serious about finding a way to look out the windshield and create better economic opportunity for the people of west Louisville.”
The governor — who had earlier lamented the cynicism of questions and comments directed at Lanier and Scott — then warned that for that economic opportunity and dollars to be marshaled, the community must show a “united front” that those wanting to invest in west Louisville will be welcomed, rather than questioned and run off.
“Capital goes and money goes where it’s welcome,” said Bevin. “Period. Straight up. Always has, always will … Are we going to be a community that welcomes those who come out of the graciousness of their heart to help us, because they want us to be a model, because if we can do it so can other people? I say we should do that.”
Bevin noted that three of his cabinet secretaries were in attendance — Terry Gill of Economic Development, Hal Heiner of Education and Workforce Development, and Derrick Ramsey of Labor — which shows that “we’re not blowing smoke.”
The governor — who spent much of his time lamenting that men in this area had become complacently dependent on government assistance for food, housing and health care — added that “this is not a partisan issue.”
“This is not a neighborhood that voted overwhelmingly to make me the governor,” said Bevin. “I get that. I’m not here to change that, that’s probably not going to change. That’s OK.”
Bevin said he would fight for those in the community whether they are with him or not, “but I’ll fight a whole lot smarter and a whole lot more effectively if you’re my allies. And if we take advantage of these men and women who have come from all over the country, who care about this community and other communities like it, then I think we’ll be crazy not to take advantage of them.”
In the Cabinet for Economic Development’s news release on the event — billed as a roundtable discussion of Louisville business owners about west Louisville revitalization — executive officer Vivek Sarin stated that it was “a first step and we were here to listen and dialogue. We planted seeds today and will look to water them with our partners as we go forward together.”
Fischer administration open to possibilities of Opportunity Zones
Wiederwohl of the city’s economic development office told Insider after the meeting that the Fischer administration had submitted around 20 eligible census tracts for the state to consider designating as Opportunity Zones, but had yet to hear any feedback from the Bevin administration. She said this figure would be roughly proportionate to Louisville’s portion of the eligible census tracts statewide.
While declining to share which census tracts were recommended, Wiederwohl said the city “submitted things that you would not be surprised by. When you look at the census tracts that are eligible, it’s not going to surprise you.”
Asked about the meeting in Portland, she added that “obviously, west Louisville and the area around Shippingport, Portland, other areas would be great Opportunity Zones. So we’re just going to have to wait and see what the governor’s office decides to do with the designations.”
While questions remain about how and whether or not Opportunity Zones will work, Wiederwohl said that city and state economic development leaders are ahead of the curve nationally in terms of understanding and working proactively on a program that could potentially provide great benefits.
“My colleague and I at the state level, Terry Gill, both think that there is an interesting opportunity here,” said Wiederwohl. “And any time you can get new capital into areas that have been historically distressed or disadvantaged, this should be a good thing. It should be a great opportunity.”
She added that Bevin administration officials “have also been receiving recommendations from the private sector, from folks who have projects that could potentially benefit. Also from potential investors, who are thinking about putting together funds.”
While there is a good deal of attention around the Opportunity Zone designation, Wiederwohl said the big questions will surround the Opportunity Funds, such as “who will put together these funds, who will have money to put into these funds, and how will these funds operate? Because we don’t have anything like this in our quiver of community development finance right now. This is a brand-new and brave new world.”
Wiederwohl noted that it is not clear what investors in these funds will be looking for, “because this is not a charity, they’re going to want their money back. So they’re going to put them into projects that will pay them back.”
“This is not free money,” she said. “This is not philanthropy. These are not grants. They could be patient capital. They could be social impact capital. But right now, we don’t know how people will choose to deploy these funds.”
As for what kind of investors could take advantage of the capital gains tax incentives in the program, Wiederwohl said: “We are talking about people who have an enormous tax liability to offset. We are talking about people who regularly deal in seven- and eight-figure transactions.”
In addition to questions about who will use the funds and for what purpose, Wiederwohl added that “there are still Treasury rules that have to be written, too.” She expects that the federal government will not create a heavy regulatory scheme in order to be a lighter and “nimbler” tool than the two decades old New Markets Tax Credit Program, another revitalization program to incentivize investment that she described as “maddening to use.”
Incentivizing investment, or subsidizing gentrification?
Gill Holland, the businessman whose investments over the past decade have transformed the NuLu neighborhood just east of downtown, also attended the meeting at Caudill Seed in Portland — the neighborhood that is the focus of his new multimillion-dollar mission to redevelop and revitalize.
In an email exchange, Holland said that Opportunity Zones may be helpful in getting major investors to invest in areas that need it, while still raising questions about how the program will work and whether it would focus on the right areas.
Noting the program’s potential, he said, “if it helps investors take money out of their Goldman Sachs portfolios (where it is not creating new jobs or helping Louisville) and put that money to work in Louisville, that would be a huge win.”
Holland said that Portland was “certainly worthy” of such an Opportunity Zone designation, noting that while there is a lot of private sector investment and citizen participation already happening there, “on some levels we are still at the tip of the iceberg, so anything like this could be very helpful to get some (of) the investors sitting on the sidelines to commit to an impact investment in their community.”
Whether or not Portland is named an Opportunity Zone, he added that “we are still working hard every day and not relying on the government for anything!”
While stating that the potential of Portland receiving such a designation “has come up in some meetings with city folks,” Holland added that “there are lots of areas in 502 worthy to qualify, so we in Portland are not really lobbying hard for it at the city level.”
Holland also noted that what the program should avoid is having already booming, yet still-eligible areas named Opportunity Zones, such as NuLu.
“What the country doesn’t need is certain areas (like NuLu) that may still technically qualify based on 2010 census data getting certified and just give tax benefits to developers already committed to areas that are already experiencing positive economic activity and reduced crime and higher property values,” stated Holland.
This concern raised by Holland was similar to one raised by Adam Looney of the Brookings Institute in an article last month, as he said that Opportunity Zones could be used by governors to boost investors who have already committed to developing up-and-coming neighborhoods, instead of the most distressed neighborhoods.
Additionally, Looney wrote that the new program could amount to a “subsidy for gentrification” — pricing low-income residents out of the area — as the value of the tax incentives is “based on capital appreciation, not on employment or local services, and includes no provisions intended to retain local residents or promote local housing.”
“The value of the tax subsidy is ultimately dependent on rising property values, rising rents, and higher business profitability,” wrote Looney. “That means a state’s Opportunity Zones could also serve as a subsidy for displacing local residents in favor of higher-income professionals and the businesses that cater to them — a subsidy for gentrification. Indeed, the highest returns to investors, and thus the largest tax subsidies will flow to those investing in the fastest gentrifying areas.”
Noting that the new tax law did not come equipped with guard rails promoting policies to retain local residents and preserve low and middle-income housing, Looney wrote that “it’s imperative that states establish a transparent framework for selecting and evaluating the efficacy of their zones before they submit their selections to the Treasury.”
The deadline for governors to submit their nominations for Opportunities Zones is Wednesday, though they can request a 30-day extension. The Treasury is expected to make the designations official before the end of this year.
Caitlin Bowling contributed reporting for this story.