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September 2020 - Part II: Opportunity Zones & Economic Recovery
Part II of a three-part Chestnut Funds’ Viewpoints series on the origin and distinct approach of the Chestnut Opportunity Zone Fund and how investments in Opportunity Zones can play a role in economic recovery.
Place-Based Investments &The Road to Economic Recovery
The first year of the decade brought unprecedented disruption to nearly every facet of daily life, with all nations trying to define and adapt to the “new normal” a global pandemic response requires. The U.S. grapples with high unemployment and escalating business closure rates amidst a public health crisis. As scientists’ race to develop vaccines and identify effective treatments for the novel coronavirus, it is increasingly clear that the recovery of the American economy will be prolonged.
Communities with higher levels of economic distress prior to the pandemic face worsening conditions as the disproportionate nature of COVID-19’s negative impacts to health, small businesses, employment, and household income become clear. Efforts to stabilize the economy and stimulate its recovery have been made through legislation like the CARES Act, and more legislative recovery initiatives are anticipated. Recovery in the nation’s low-income communities will require even greater attention and intentional investments to generate new economic activity.
The Opportunity Zone tax legislation is one tool that is designed to play this role.
The Opportunity Zone initiative, enacted by Congress in December 2017, encourages long-term, private investment in low-income communities across the U.S.in exchange for significant capital gains tax benefits.
There are more than 8,700 designated Opportunity Zones, census tracts with lower levels of income and/or higher levels of poverty or unemployment, across the U.S. Opportunity Zones, which are distributed across the country in urban, suburban, and rural locations, are distinct in their characteristics and needs.
In August 2020, the White House Council of Economic Advisors (CEA) released an initial assessment of the impact of Opportunity Zones, which affirmed the initiative’s promise in increasing the level of private investment in designated low-income communities. The assessment found that by the end of 2019,$75 billion has been raised by QOFs for investment in Opportunity Zones. It is estimated that 70% ($52 billion) of the total raised is new investment that would not have occurred without the capital gains tax incentive. Using a method for estimating economic impacts resulting from the New Markets Tax Credit program, another federal policy to incent investment in distressed communities, the CEA estimates that the $52 billion of new investment will lift 1 million people out of poverty, which would be an 11% decrease in the baseline population of poverty in Opportunity Zones.
The CEA’s analysis helps in understanding the initiative’s macro-level potential. Case study analysis on specific investments in real estate and operating business, which can be found in recent publications like the Milken Institute working paper –From Recovery to Resilience: How Opportunity Zones Can Accelerate Post-COVID Economic Resurgence, is useful for understanding how investment directly impacts an Opportunity Zone through job creation, increased access to goods and services, productive reuse of existing buildings, an increased local tax base, and other positive impacts.
Putting Newly Realized Gains to Work for Financial and Social Returns
In addition to private market transactions, sell-offs during and following one of the longest bull markets in history likely resulted in significant capital gains, which are the fodder for the Opportunity Zone initiative. Investors who sold stocks or any asset in recent months can now redeploy capital in investments in Qualified Opportunity Funds (QOFs) in a purpose-driven and tax efficient way. In connection with COVID-19 response and recovery, the CARES Act provides an extension of the QOF investment window for investors with recent capital gain events.
QOFs are a great fit for investors who seek long-term appreciation as well as tax efficiencies. QOFs are also strong options because long-term investments are attractive during periods of market uncertainty. A summary of the capital gains tax benefits available to QOF investors can be found on the Chestnut Fund’s website.
The information contained in this newsletter is intended for informational purposes only and is not intended to provide personalized investment advice or to constitute an offer or solicitation to buy or sell securities or interests in any investment. The charts, graphs, and other information contained herein should not serve as the sole determining factor for making investment decisions.
This newsletter cannot be reproduced, shared, or published in any manner without the prior written consent of Chestnut Funds (“Chestnut”). Unless otherwise indicated, all statements and expressions in this paper are the sole opinion of Chestnut and are subject to change without notice. Predictions, forecasts, or outlooks described or implied are forward-looking statements based on certain assumptions, which may prove to be wrong, and/or other events, which were not taken into account, may occur. Any predictions, forecasts, outlooks, opinions, or assumptions should not be construed to be indicative of actual events, which will occur. The opinions and data in this newsletter have been obtained from sources believed to be reliable. Chestnut does not warrant the accuracy or completeness of such and accepts no liability for any direct or consequential losses arising from its use.
Investing in securities involves risk of loss and should not be based solely on marketing materials including the information provided herein. Further, depending on the different types of investments there are varying degrees of risk. Private Funds managed by Chestnut Real Estate Funds and their investors should be prepared to bear investment loss, including loss of original investment. There is no assurance that any specific investment or investment strategy utilized by Chestnut will be either suitable or profitable for your portfolio. Chestnut does not provide personalized or customized investment advice, therefor you are urged to discuss your personal investment situation with the financial professional of your choice before making or changing an investment in a Chestnut offering.
Because of the inherent risk of loss associated with investing in any type of securities, Chestnut Real Estate Funds is unable to represent, guarantee, or even imply that its services and methods of analysis can or will predict future results, successfully identify market tops or bottoms, or insulate you from losses due to market corrections or declines.