Opportunity Zones introduced as a fundraising tool

Published 5:52 pm Wednesday, February 14, 2018

Derrick Freeman, mayor of Port Arthur, introduced another fundraising mechanism the city could use. Last week, he introduced Municipal Development Districts as a fundraising tool.

Opportunity Zones are a new community development program established by Congress in the Tax Cuts and Jobs Act of 2017 to encourage long-term investments in low income urban and rural communities nationwide.

The Opportunity Zones program provides a tax incentive for investors to reinvest their unrealized capital gains into Opportunity Funds for zones designated by the chief executives of every U.S. state.

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The program used low income community census tracts as the basis for determining areas eligible for Opportunity Zone designation. The chief executives of every U.S. state and territory have 90-120 days from Dec. 22, 2017 to designate up to 25 percent of the total number of low income census tracts in a state as Opportunity Zones.

Freeman believes the Opportunity Zones have three incentives that encourage long-term investment in low income communities:

  • A temporary tax deferral for capital gains reinvested in an Opportunity Fund. The deferred gain must be recognized on the date on which the opportunity zone investment is sold or Dec. 31, 2026.
  • A step-up in basis for capital gains reinvested in an Opportunity Fund. The basis of the original investment is increased by 10 percent if the investment in the qualified opportunity zone fund is held by the taxpayer for at least five years, and by an additional 5 percent if held for at least seven years, excluding up to 15 percent of the original gain from taxation.
  • A permanent exclusion from taxable incomes of capital gains from the sale or exchange of an investment in a qualified opportunity zone fund, if the investment is held for at least 10 years.

U.S. investors currently hold trillions of dollars in unrealized capital gains in stocks and mutual funds alone. A significant untapped resource for economic development.

Opportunity Zone Funds provide investors the chance to put that money to work rebuilding the nation’s left-behind communities. The fund model will enable a broad array of investors to pool their resources in Opportunity Zones, increasing the scale of investments going to underserved areas.

Governors have 90 days, called a determination period, from the date of enactment to submit a list of designated census tracts for approval. Treasury must approve or provide feedback within 30 days of the governor’s submission, called the consideration period.

The determination period and consideration period can both be extended by 30 days. Once approved by Treasury, Opportunity Zone designations will remain in place for a period of 10 years.

Harold Doucet Sr., District 4 Councilman, said the Opportunity Zone Funds function like municipal bonds.

“It’s another tool. It’s a good thing,” he said.

Willie “Bae” Lewis Jr., District 5 Councilman, said the Opportunity Zones concern him greatly.

“The city is already above in low income housing in Texas. It would be like Carver Terrace we tore down. We’re two and a half times above the state average in low income housing,” he said. “A business can sell it 10 years later and we would be stuck with it (the low income housing units).

“Senior housing is another myth. Anyone can move into there. It’s low income housing.”

Doucet said the Opportunity Zones are geared for Community Development Block Grants, not for housing centered around low income areas.

Lewis said it clearly states Opportunity Zones are for low income areas.

Freeman was to give a presentation on Municipal Development Districts, but he shelved it because he wants to sit down with industrial partners and with Floyd Batiste, executive director of the Port Arthur Economic Development Corp., then get back with the Council.

The city could create a Municipal Development District that would receive sales tax from petrochemical industries in the city’s extra territorial jurisdiction, Freeman said. Thus far, they are unable to do so without a Municipal Development District.

Freeman also said Baytown has MDDs and they’re a growing city.

Lewis said he spoke with the city’s legal department who told him the MDDs are used only in the incorporated areas, not the extra territorial jurisdiction where industries are.

Lastly, Andrew Vasquez, finance director, said during his investment report that the city’s bond rating dropped.

Doucet said this was the first time the City Council heard there was a drop.

“This is something that should have been brought to us upon immediately finding out,” he said. “Give us a briefing what this means to us and where we stand.”

Kaprina Frank, Position 8 Councilwoman, said the finances need to diversify, using low risk products.

Vasquez said Moody’s Investors Service argument with the city was over its liquidity, which he disagreed. He said the metrics Moody reviewed were improving. What they hit the city on is what could possibly happen after the hurricane (Harvey).

“I’m upset with that and I want to beat these guys,” he said.

Freeman said the ratings of more than 30 cities in Texas were lowered.

Doucet said there was a discussion prior to the storm that the bond rating could drop. He added that he wants to understand the city’s financial status.

Freeman said the Texas Water Development Board has low interest loans available. Vasquez said he attended their Harvey Recovery Workshop. He said there is some money out there and Port Arthur needs to go after it.