By Vernoy July
With the extension of the Opportunity Zone (OZ) tax benefit as part of the 2025 Reconciliation Act, also known as the One Big Beautiful Bill Act (OBBBA), now is the time to strategize to maximize the flow of transformational funds to the communities that stand to benefit the most—but first, the narrative must change.
OZs, introduced in the 2017 Tax Cuts and Jobs Act, were met with divergent views. While some recognized the potential of OZs to spur development in underinvested communities, others viewed the legislation as the newest mechanism to bring about gentrification. In many communities, the skeptics won, and the legislation did not materialize into the transformational change its proponents believed possible.
Much of the skeptics’ concern was valid. On its face, the legislation allows wealthy people—those likely to have capital gains—to invest in properties and assets located in low-income census tracts, and to thereby gain a significant tax benefit in the form of both a deferral of taxes and the potential to generate gains from such investments tax free. However, the consternation about the benefits to those with capital isn’t the full picture. Those with capital will always have means and availability to deploy such capital and to seek to maximize returns. What is not so available is the capital sources willing and able to fund projects in distressed neighborhoods. While it is true that OZ investors stand to gain a significant benefit, so too do the communities that currently struggle to attract capital. More focus must be placed on the mutually beneficial nature of the relationship.
As I mentioned in another article, the real power of the legislation would only be seen in future iterations. This is because it requires time for those actively working in the field to develop models based on the law, and for the initial surge of investments—those viable even without tax benefits—to subside.
With the passage of the One Big Beautiful Bill Act, we now have the opportunity to utilize the true potential of OZs. Rather than focusing solely on the benefit to the wealthy, we should instead add equal focus to the potential of these low-income communities, their residents and importantly, the small developers already doing work in those neighborhoods.
OZs provide a form of patient capital not often available in these communities. Traditional equity investment is scarce, in large part because investors often have less risky options. Loans from traditional lenders are similarly scarce, as financial institutions often do not have the appetite for providing loans at the scale necessary to make substantive change. As such, smaller developers trying to do the work in these neighborhoods are often left to borrow capital from:
- Hard money/private lenders that charge higher interest rates to balance the perceived risk, adding increased burdens to already precarious capital stacks.
- Community Development Financial Institutions (CDFIs) which often have limited lending capacity.
Even with these limited options, developers continue to be faced with the financial burden of developing properties in under-resourced neighborhoods, all while racing against the clock of short-term loan maturity and interest payments. The result is that for all the good intentions of developers and the communities that would benefit, the lack of available capital often stifles plans or such plans die on the vine under financial burden.
The very nature of OZs requires that the capital be patient. OZ investors only receive the benefit of the 100 percent tax basis step-up if they are invested for 10 years. The reality is that transformative real estate development takes time.
The OZ provisions from the 2017 Tax Cuts and Jobs Act provide a unique opportunity for developers in underserved communities to access long-term patient capital specifically geared towards low-income census tracts. This type of capital changes financial models. If structured correctly, it provides developers breathing room by limiting monthly debt obligations. It creates opportunities to build housing and business options without the same dependence on government funds. Additionally, it empowers small developers to reimagine and maximize potential reuses of previously dilapidated spaces. This should be the focus, but the process has to start now.
The opinions expressed in this commentary are those of the writer and not necessarily those of the AFRO.