Local governments can position opportunity zones for strategic economic development

The federal opportunity zones (OZ) program has the potential to be a valuable economic development tool for states and communities during the post-COVID-19 recovery period. Local leaders and economic development professionals in municipalities with designated OZs should take steps to maximize the program’s potential.

Established within the 2017 tax reform package, opportunity zones create an incentive for private investment in designated economically underserved census tracts. The program works by allowing investors to defer and reduce capital gains taxes by reinvesting capital in these areas. For cities with designated qualified opportunity zones (QOZs), the program can help attract outside investments to their communities, support high priority projects and help offset the need for local incentives.    

There are several actions entities with QOZs should take to position their communities to maximize the benefits from the program:  

• Monitor regulatory changes – The opportunity zones program continues to evolve. The IRS recently issued Notice 2020-39, which extends key deadlines and eases regulatory requirements for QOZ investments. Baker Tilly is tracking these changes. In addition to enhancing the OZ tax incentive, federal agencies recently started prioritizing QOZ locations for various federal grant programs from seventeen different departments. Local economic developers should stay abreast of the ongoing changes to the program and serve as a resource to help local businesses, developers and investors take advantage of the program’s benefits.       
• Identify a pipeline of projects – Local governments should work with their business community, local land owners and local real estate developers to identify sites and potential projects within QOZs. Cities should have maps of their designated OZ boundaries with identified priority sites, and they should maintain a list of projects that are well-suited for OZ investment.
• Develop an OZ information packet – Communities with designated QOZs should develop an information packet for potential investors. These packets should include maps of designated OZs, baseline demographic and economic information about the community and information about specific investment-ready OZ projects, including the location, type of project, level of investment and expected return. Baker Tilly can assist in developing an OZ information packet for your community.
• Use online tools – Communities should use online tools to highlight their potential OZ projects and connect projects to investors. There are new OZ online marketplace systems, such as oppnexus.com, where communities can upload and share information about their QOZs and projects on a nationwide map and database. Communities should be proactive in marketing their QOZs, especially with today’s limitations on in-person meetings and events; having a strong online presence is critical.
• Layer OZs with other tools – Municipalities can amplify their QOZs by strategically aligning them with other state and local incentives. A project that can leverage OZ capital with other incentives like tax increment financing (TIF), business tax credits, tax abatement or other local incentives will have a competitive advantage. Further, the OZ geography largely overlaps with eligible New Markets Tax Credits census tracts, creating potential synergies.  Baker Tilly can help communities stack capital using multiple economic development programs to financially unlock high impact projects.
• Understand how OZ financing impacts project feasibility – Municipalities are often faced with the task of reviewing development proposals to determine financial need. When the project uses OZ financing, this task can be even more challenging due to how the incentives affect rates of return. Baker Tilly can help municipalities review development financials to determine how the use of OZ capital impacts the project’s feasibility. This can help cities tailor the use of TIF and other local incentives to an appropriate level.

Opportunity zones have the potential to be a powerful economic development catalyst for communities with designated QOZs. However, the program won’t happen on its own. Getting an area designated as a QOZ is just the first step. The benefits will most readily flow to the municipalities that have an OZ strategy and proactively position themselves for investment.

As an industry leader in using tax incentives and other creative financing tools for economic development, Baker Tilly can help your community maximize the potential benefits of your OZs.

For more information on this topic, or to connect with a public sector economic development specialist, contact our team.