Reference Document: Leveraging Development Finance Tools to Attract Opportunity Zone Investment
Description: Many communities are looking for strategies to attract investment and support revitalization in their Opportunity Zones. Public sector development finance is an essential tool for attracting private investment. This guidance provides an overview of various development finance tools and suggestions for how communities could use these tools to finance projects in Opportunity Zones. Each section includes additional resources to learn more, along with case studies to illustrate how development finance tools have been used to support revitalization goals in several Opportunity Zones.
Investors place the capital gains in a Qualified Opportunity Fund as equity into a project or business located in an Opportunity Zone.
Investors receive three main incentives:
Defer capital gains taxes owed at the time the gain is realized.
If the investment is in an Opportunity Zone for at least 5 years, only 90% of the original capital gains taxes must be paid.
If the investment is in an Opportunity Zones for at least 10 years, any new capital gains tax on the appreciation of that investment is forgiven.
The image below (from the referenced document) provides a “map” of the types of financing appropriate to different practice areas.
Opportunity Zone Programs
As a primer to the document (PDF) referenced below, the following are “label definitions” per the above image extracted directly from that financial tools guide.
The vertical columns are defined as:
Government projects are exactly what they sound like – roads, bridges, sewers, water facilities, schools, airports, docks, parking garages, broadband, utilities, etc.
Established industry represents our industrial, office and retail sectors (depending on location). Examples such as industrial parks, manufacturing, tech/research hubs and commercial retail centers fall within this category.
Development and redevelopment consists of the projects that require major public resource commitments to catalyze new private sector development. We see this throughout the country with urban revitalization, rural rejuvenation, adaptive reuse, brownfield development and other transformative projects that require significant public capital.
Small Business and Micro-Enterprises are pretty self-explanatory as well. These projects represent our economic engine locally. Generally, a small business is defined as any company with less than 500 employees and a micro-enterprise is any company with fewer than five employees. There are approximately 30 million micro-enterprises in the U.S.
Entrepreneurs represents our future businesses. These are one-two person companies that are working through the early stages of the business life cycle. Typically, entrepreneurs are not ready for traditional financing and need a unique approach to help them find the working capital needed to expand and grow.
The
horizontal bars are defined as:
Bedrock Tools – represent the large debt market generally known as bonds and makes up the foundation of all public finance in the U.S. Over 10,000 bonds are issued nationwide annually representing infrastructure, housing, education, development, non-profits, healthcare and manufacturing.
Targeted Tools – represent tools that target geographic areas through the use of tax increment finance, special assessment districts, government assessment districts, project specific district tools and tax abatements.
Investment Tools – represent tools encourage private sector investment in projects and businesses through tools such as tax credits and the EB-5 investor program.
Access to Capital Lending Tools – represent tools, such as revolving loan funds, mezzanine funds, loan guarantees and microenterprise, seed & venture capital financing programs, etc. represent the resources for supporting small business access to capital on a broad scale.
Support Tools – represent our large federal funding resources provided by the federal government. There are over 175 federal programs to support economic development.
opportunity_zone__development_finance_tools_guide_508.pdf
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beginners-guide-to-opportunity-zones.pdf
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NOTE – ALL Herkimer 9 Program activities are within the
Opportunity Zone per the Village of Herkimer. Therefore, investors that invest in one of the Herkimer 9 Program Qualified Opportunity Fund will receive three main incentives:
- Deferment of capital gains until December 31, 2026.
- A step-up in basis of up to 15 percent on the original gain.
- Elimination of capital gains accrued in the Qualified Opportunity Fund after a 10-year holding period
The purpose of Opportunity Zones is to encourage Opportunity Funds to
invest patient, long-term capital in places that have been historically disinvested, or have struggled to access capital. In exchange for that long term investment, ideally investors will be able to
realize enough gains on their Opportunity Zones investment to pay the taxes owed on their original capital gain and have enough left over to receive tax-free earnings on the remaining balance.
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