Opportunity Zones: The Pros And Cons For Housing

By ERIN FLYNN JAY

In some urban centers like New York City, Los Angeles, and Miami, Opportunity Zones have led to substantial investments including the revitalization of neighborhoods. These zones attracted developers and investors due to the tax benefits, resulting in new housing developments, commercial spaces, and infrastructure improvements.

However, concerns have arisen about the displacement of existing residents and whether the benefits truly reach the communities that need them most. And while these zones have found success in urban settings, many rural regions have struggled to attract significant investment.

Limited infrastructure, a smaller workforce, and higher perceived risks have made it challenging to draw investors to rural areas. That hurts the low-income neighborhoods Opportunity Zones are meant to strengthen.

What are Opportunity Zones?

Opportunity Zones are defined as census tracts in or alongside low-income neighborhoods that meet various criteria for redevelopment in all 50 states, the District of Columbia, and U.S. territories. Census tracts cover areas that have 1,200 to 8,000 residents, with an average of about 4,000 people.

ATTOM recently released its third-quarter 2023 report analyzing qualified low-income Opportunity Zones targeted by Congress for economic redevelopment in the Tax Cuts and Jobs Act of 2017.

In this report, ATTOM looked at 3,465 zones around the United States with sufficient data to analyze, meaning they had at least five home sales in the third quarter of 2023.

Typical home values in most Opportunity Zones fell well below those in other neighborhoods around the nation in the third quarter of 2023. Median third-quarter prices were less than the U.S. median of $350,000 in 81% of Opportunity Zones.

That was about the same portion as in earlier periods over the past year. In addition, median prices fell below $200,000 in 49% of the zones during the third quarter of 2023.

The Midwest continued to have larger portions of the lowest-priced Opportunity Zone tracts. Median home prices were less than $175,000 in 66% of zones in the Midwest, followed by the Northeast (47%), the South (41%), and the West (6%).

“Like most places with fewer resources, Opportunity Zones remain especially vulnerable to negative forces affecting the housing market or the broader economy,” said Rob Barber, CEO of ATTOM. “But the ongoing tight supply of homes for sale combined with high home-buying demand around the country suggests that Opportunity Zones are in a good position to remain on pace with the broader national trends.”

Andy Kolodgie, owner of Sell My House Fast, said Opportunity Zones provide three tax benefits to individuals with capital gains:

Investors may contribute their current assets, which have accrued capital gains, to Opportunity Funds, the investment vehicle for Opportunity Zones. Until the asset is sold or until the end of 2026, those current capital gains are not subject to taxation.
Investors’ basis on the initial investment rises by 10% for capital gains held in Opportunity Funds for a minimum of five years. Investors’ basis on the initial investment grows by 15% if they invest for a minimum of 7 years.
Investors who hold their investments in Opportunity Funds for a minimum of ten years are exempt from paying taxes on any capital gains.

Since these zones are operational in locations that exhibit a combination of low-income or low-educated residents, empty structures, high unemployment, and population loss, Kolodgie said obligations are imposed on qualifying companies or investors to maintain a particular pay level for zone residents or generate a predetermined number of employees.

In exchange, businesses and investors get advantages like sales tax exemptions, corporate income tax rebates for investment and job creation, or low interest loan assistance. Within these sectors, certain programs also offer advantages including workforce development.

James Heartquist, owner of We Buy Houses Arizona, said the Opportunity Zones program has been controversial, as some critics argue that it benefits wealthy developers and gentrifiers, while others claim that it spurs economic development and job creation in distressed areas.

In his opinion, Opportunity Zones have had minor effects on labor markets so far, with small reductions in poverty rates and increases in employment, but no significant changes in earnings.

“Residential real estate prices increased in zones, but there was no statistically significant effect on transaction volume,” said Heartquist. “Opportunity Zones have not attracted a large amount of investment or generated substantial economic activity in the designated areas.”

Some researchers have noted that the program is still relatively new and that more data and time are needed to fully evaluate its effects. Heartquist added that it is important to continue monitoring and analyzing the impact of Opportunity Zones on different communities and sectors.

Can more investment in Opportunity Zones help solve the nation’s affordable housing crisis?

Marty Zankich, owner of Chamberlin Real Estate School, said that according to his research, 8% of California’s population resides in distressed communities, primarily located in counties such as Kings, El Dorado, Tuolumne, and Tulare.

“Affordable housing remains a persistent challenge for many residents in these counties,” Zankich said. “A significant portion of the individuals I have interacted with have expressed their inability to afford a home.”

To address this pressing issue, investors have joined forces to pool their financial resources and develop affordable housing options. The state has incentivized these efforts by offering tax cuts to investors who commit their funds to affordable housing projects.

Zankich noted that Martin Muoto, a prominent investor, has taken advantage of this incentive, investing $1 billion to construct housing specifically designated for distressed communities in California.

“The impact of these projects is far-reaching,” said Zankich. “It provides much-needed access to affordable housing for those struggling to find suitable accommodations. To effectively address the widespread demand for affordable housing, a substantial number of investors need to participate in Opportunity Zones, thereby providing the necessary funding to make homeownership a reality for many Californians.”