The Town of Chapel Hill announced Thursday that it received an "opportunity zone" designation for the census tract near Martin Luther King Jr. Boulevard and South Estes Drive. The Town applied and was approved for the designation last spring.
“The primary goal was to create a tool that encourages people to invest and reinvest in this census tract for the betterment of the census tract, for the betterment of Chapel Hill,” said Dwight Bassett, the Town's economic development officer.
An opportunity zone is a low-income area that aims to attract investors by incentivizing them to reinvest their capital gains, or a profit from the sale of property or an investment. By doing this, the investor can defer their capital gains taxes until 2026, and if they hold the property for at least 10 years, they will not have to pay any of these taxes when they sell it. The investor still has to pay the tax on the initial investment.
The U.S. Department of the Treasury designates certain tracts as opportunity zones, which must meet the income thresholds, meaning the poverty rate is at least 20 percent or the family income is less than 80 percent of median income.
“So now, there’s this additional source of capital to invest in businesses or in redevelopment or development of property, and it’s just a matter of where there are either businesses or development proposals that are ready to receive that investment,” said Tyler Mulligan, a UNC associate professor of public law and government.
The Tax Cuts and Jobs Act of 2017 created opportunity zones, but left some regulations unclear.
“If you were to compare zones, you’d say the zones with the most growth potential would be the most attractive,” said Mulligan.
Mulligan said investors will put their money in places that they think will increase in value the most over the next 10 years. Since real estate development projects are more likely to stay in the zone for the next 10 years than businesses, they are a more secure option with the current regulations given.
Bassett said he is excited because the opportunity zone will encourage investment in parts of the downtown area, improve the income level and boost job creation in the community.
“I think it’s a benefit that Chapel Hill has the only opportunity zone in Orange County — most counties have multiple sites. I think it’s an opportunity for us to see positive reinvestment in our community, which is important to keep our vitality strong, and it’s an exciting program,” said Bassett.
There have been some concerns, however, about the risks of opportunity zones.
“Higher-risk investments that low-income communities actually need — such as affordable housing and job opportunities for low-income persons — are unlikely to receive investment,” Mulligan wrote in “Federal Opportunity Zones: What Local Governments Need to Know,” a blog post for UNC's School of Government.
There are no specific requirements in the Tax and Jobs Act for investments to aid the people already living in the low-income area, according to Mulligan. Though the opportunity zones could be positive, it is hard to determine whether the investments benefit the residents of the zone or not.
“There are concerns that it also could create gentrification, or increased property values, such that it makes it difficult for low-income persons to continue to live in those opportunity zones,” said Mulligan.
Mulligan said when the property value rises, outside investors may buy it and sell it at a higher price, making it unaffordable to the lower income residents. Another negative impact could be the increase in property taxes, which would make it harder on the locals.
Bassett said when any town revitalizes, there is some concern about gentrification, but the opportunity zones are not focused on single-family homes and will therefore not affect them greatly. He said more facts would be needed to determine if gentrification would become an issue.
“The backbone of this whole zone is about people who have capital gains that seek to defer them investing in a community, so someone’s got to put together an investment fund and then they’ve got to attract investors,” said Bassett.
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