WASHINGTON — In passing President Trump's tax cut bill, Congress approved a new program that allows investors to defer paying taxes on capital gains if they invest in "Opportunity Zones."
The Investing in Opportunity Act, sponsored by Sens. Cory Booker, D-N.J., and Tim Scott, R-S.C., allows community development financial institutions to create Opportunity Funds that invest in Opportunity Zones.
Under the new program, individuals and corporations that want to defer taxes on capital gains can sell their stocks and invest in the federally chartered Opportunity Funds.
The money put into the funds can be used to finance a variety of projects in the local areas targeted by the Opportunity Zones, including new construction and redevelopment of blighted properties (including multifamily and affordable housing), local infrastructure development and funding for new businesses.
But it is unclear if commercial banks can create Opportunity Funds that will make equity investments in state-designated zones to foster economic development and business expansion.
"I don't think we know the answer to that question yet," said Joseph Pigg, senior counsel at the American Bankers Association. That will depend on the rules the Treasury Department writes to implement the Opportunity Act.
As passed by Congress, Opportunity Funds are supposed to focus 90% of their funds on equity investments in state-designated zones in rural and low-income Census Bureau tracts.
To qualify as an Opportunity Zones, a Census tract must have a poverty rate of at least 25% and median family income of no greater than 80% of the overall region. State governors are supposed to designate 25% of eligible Census tracts as Opportunity Zones by March 21. The Treasury Department can approve requests for 30-day extensions.
The new Opportunity Act relies on patient capital and patient investors.
"Holding seven years is kind of the minimum," Pigg said. "If you are willing to be patient and invest for 10 years, it looks like a pretty good deal. So it could be a pretty significant investment tool for distressed communities and a pretty good tax management tool from those entities that want to participate."
The eligible Census tracts will generally match up where New Markets Tax Credits are allowed, according to Jennifer Vasiloff, chief external affairs officer for the Opportunity Finance Network, a national network of community development financial institutions.
"The next step is to certify Opportunity Funds. A number of CDFIs are trying to figure out if there is a role for them in directly establishing these funds or partnering with other Opportunity Funds," Vasiloff said.
For banks, a lot will depend on what the Treasury Department decides in writing the rules.
"I would anticipate that Treasury would certainly allow banks to invest in Opportunity Funds," Pigg said. But it is unclear if banks will be able to create their own Opportunity Funds.
During the comment period on the rule, "I would think we would advocate that the rules be written so that banks could create Opportunity Funds," Pigg said.
Meanwhile, the tax cut bill has taken a bite of the low-income housing tax credit program due to the reduction in the corporate rate from 35% to 21%.
Pricing dipped after President Trump's election in 2016 and again after the passage of the tax bill in December, according to Benson Roberts, president and chief executive of the National Association of Affordable Housing Lenders.
For a corporate investor, that represents a 40% cut in the tax savings they receive from investing in low-income housing tax credits.
"So that is having a significant impact" on the demand for low-income housing tax credits, Roberts said in an interview.
However, Roberts says low-income housing tax credits and Opportunity Funds can work together.
"We think there are some opportunities there to combine that incentive with low-income housing tax credits," he said.
"It is not a deep subsidy or a substitute for" low-income housing tax credits, Roberts said. "But it could augment rehabilitation of multifamily properties" that already have tax credits.