Sensible Investments: 3 Pros and Cons of Opportunity Zones

In December 2017, a law was passed that provided tax incentives for investors to certain areas that were economically distressed. These areas are called opportunity zones. There are approximately 8,700 opportunity zones in the United States.

Opportunity zones are unique in several ways. First, they are more demographically diverse than the country as a whole. Opportunity zones have a 56 percent minority share as compared with 36 percent for the nation as a whole. When it comes to returns on investment, however, opportunity zone investors are in for a pleasant surprise. Read on for more pros and cons of these investment opportunities.

The Pros of Opportunity Zones

Opportunity zones provide an incentive for investors to put dollars into areas where residents are underprivileged—areas where there is little or no incentive to invest. Research shows that there is more than $6 trillion in unrealized capital gains. That money could be at work improving communities with the right incentives.

The average poverty rate in the U.S. is 12 percent, but in areas were opportunity zones exist, the poverty rate is nearly 31 percent. Most of the recovery that took place post-recovery happened in wealthy areas, but with opportunity zones, economic growth has a chance to take hold in lower-income areas as well.

Another pro of opportunity zones are the guidelines that have been issued by the creators of the program that show how to deploy funds so they have the greatest chance to create positive outcomes.

These guidelines have been implemented through a reporting framework that is flexible and designed to provide the best chances to deliver on the potential of opportunity zones.

Cities have almost always had ways to provide incentives to those who wish to invest in underdeveloped areas, but with opportunity zones, they now have a “carrot” that is needed to attract investors.

The Cons of Opportunity Zones

The guidelines provide no incentives for investors to include leaders of the community in their planning processes. This is a concern voiced by many critics since many investors are completely removed from the areas their investment dollars are supposed to be benefiting.

This often leads to a clear lack of understanding by investors of what could really benefit those who currently live in these underserved areas. Instead, the only benefit to the investor is making money, which is often better done by investing in luxury condominiums and the like.

Another con of the opportunity zone programs is that these zones are not often selected based on the greatest need. It is true that some states did due diligence in selecting areas that would be well served by investment dollars, but other states treated the program like it was a windfall of money. The ultimate result of this was an influx of money without the benefit of the investment in needy areas.

For example, states such as South Dakota, Idaho, and Mississippi designated areas that could benefit by investment dollars, but these areas were often not the neediest of areas. According to a Brookings Institute study, Mississippi had selected areas where lower poverty and child-poverty rates were omitted.

Many of the issues related to the opportunity zone program stem from the relative speed at which it was implemented. As a result, the guidelines were hastily created and implemented. It is hoped that, as the program continues, improvements will be made that will turn these cons into pros.