Dec 11, 2018
By Erin Robert, Executive Director and Head of Capital Strategies for Sustainable Finance at JPMorgan Chase.
It’s not often a policy spurs equal interest and excitement across the public, private and non-profit sectors. But the Opportunity Zone program does just that.
This new, national investment program seeks to connect private capital to low-income communities. Created at the end of 2017 by the new tax law, the Opportunity Zones program has generated a lot of buzz and questions.
JPMorgan Chase has naturally fielded many inquiries about this program. As a diversified financial institution working closely with real estate developers, fund managers and individual investors, we are looking at how the firm and our clients can use Opportunity Zones to drive economic growth in more communities.
We are also keeping our clients and partners up to date. In that spirit, here are the top seven questions we’ve received so far—and our understanding of current answers.
1. What are Opportunity Zones, and how were they selected?
Qualified Opportunity Zones (QOZ) are more than 8,000 low-income communities across U.S. states and territories that were nominated by the governors of those states and certified by the U.S. Treasury in the spring of 2018. According to the Economic Innovation Group, demographics of the selected census tracts indicate governors nominated areas with high economic needs. Opportunity Zones have an average poverty rate of 31%, compared to a 27% average across all low-income communities.
2. What are the tax incentives and qualifying investments?
Investors are able to defer and reduce taxes up to 15% on capital gains realized from asset sales, if these capital gains are reinvested into Qualified Opportunity Zone Funds within 180 days. In addition, the taxation on the capital appreciation eventually realized on the Fund’s performance may be forgiven if the Fund investment is held for at least 10 years. These Funds must invest 90% of their assets in qualifying Opportunity Zone investments—stock in a company, partnership interests, or equity in real estate. My colleagues at The Advice Lab in J.P. Morgan’s Private Bank prepared a helpful primer on Opportunity Zones, which walks through the tax benefits and qualifying investments.
3. Have investors taken interest in the program?
Our clients have shown tremendous interest in Opportunity Zones. More than 2,000 clients attended our recent webcast on the topic.
While interest is strong, many investors are waiting for the federal government to provide additional guidance clarifying certain program attributes. The U.S. Treasury issued an initial round of policy guidance on October 19, 2018, and is expected to provide another round later this year or early 2019.
The first round of guidance was well-received by investors. However, until additional clarity is provided on key themes—such as ensuring Opportunity Zone Funds have sufficient time to invest and reinvest capital, and to support investments in businesses (not just real estate)—we expect some investors will continue to take a "wait and see” approach.
4. What are the likely investments?
Given the nuances of policy guidance provided to date and investor aversion to taking tax risk, we have seen single-asset real estate funds emerge as the leading investment vehicle. We expect this trend to continue until additional guidance is provided to spark more interest in the development of larger, multi-asset blind pools.
5. What do communities think?
We’ve heard our community and non-profit partners express excitement about the prospect of new capital flowing to the communities that need it most. But there are also some fears about exacerbating gentrification and displacement. As a result, momentum is building to require reporting on the social impacts of the Opportunity Zone program.
6. Will banks invest in Opportunity Funds?
Given that the program enables only capital gains to be invested in equity, it is unlikely banks will emerge as major principal investors in Opportunity Zones. Generally speaking, banks do not consistently generate capital gains and, given regulatory restrictions, have limited ability to make equity investments when compared to other players in financial markets. However, banks will be active in traditional market-making activities. JPMorgan Chase will continue to be a market leader driving investments into low-income communities. We’ll do this work through the firm’s partnership with Community Development Financial Institutions, or CDFIs (which are already active lenders in Opportunity Zones), the monetization of New Market Tax Credits and Low Income Housing Tax Credits, as well as our new AdvancingCities initiative.
JPMorgan Chase has also created an internal working group to assess Opportunity Zone applications for our clients and the broader marketplace.
7. What is JPMorgan Chase doing to invest in underserved communities?
JPMorgan Chase is deploying $1.75 billion over five years in philanthropic capital to drive inclusive growth in communities in need. Our approach applies lessons learned from the firm’s $150 million investment in Detroit’s economic recovery to more cities including Chicago, the Washington, D.C., region and Greater Paris.
One of those lessons for success is the need for the public, private and non-profit sectors to work together to address major economic challenges such as small business growth, employment barriers, financial health, and neighborhood revitalization.
To do this, in September 2018, the firm announced AdvancingCities, a $500 million, five-year commitment consisting of philanthropic capital and low-cost loans to ensure more communities across the world have a chance to share in the benefits of a growing economy. As part of AdvancingCities, JPMorgan Chase recently announced it is deploying its first $10 million flexible capital loan to the Chicago Community Loan Fund, a CDFI whose “Activate Retail” program will increase financing for the development of small businesses and retail storefront in underserved communities on Chicago’s South and West side neighborhoods. These long-term, low-cost loans will enable us and our community partners to continue reinvesting and attract new investors in these neighborhoods for years to come.
INVESTMENT AND INSURANCE PRODUCTS ARE: -NOT INSURED -NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY -NOT A DEPOSIT OR OTHER OBLIGATION OF, OR GUARANTEED BY, JPMORGAN CHASE BANK, N.A. OR ANY OF ITS AFFILIATES -SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED
For Informational/Educational Purposes Only: JPMorgan Chase & Co., its affiliates, and employees do not provide tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any financial transaction. The information presented is not intended to be making value judgments on the preferred outcome of any government decision.
Opportunity Zones: a New Incentive for investing in low income communities:
https://eig.org/wp-content/uploads/2018/07/Opportunity-Zones-Fact-Sheet-7.6.18-Update.pdf Opportunity Zones: A New Tool for Community Development: https:/www.novoco.com/sites/default/files/atoms/files/novogradac_opportunity_zones_fact_sheet_090418.pdf