The Colorado Opportunity Zone Program encourages long-term private investments in designated low-income communities by giving investors tax incentives for investing in real estate projects and operating businesses.
Investors receive tax incentives in the form of deferrals, reductions, and possible elimination of certain federal capital gains taxes.
OEDIT supports the opportunity zone program by:
- helping economically distressed communities use this program
- educating investors, community leaders, developers, and other stakeholders
- connecting investors and projects through Colorado’s Investment Database
Investors receive tax credits when they reinvest capital gains, or profits from the sale of an asset, into opportunity zones. Investors may benefit in three ways.
- They can defer paying taxes on the original capital gain until they dispose of the investment or until 2026.
- If they hold the investment for at least five years, they will have to pay 10% less taxes on the original capital gain.
- If they hold the investment for at least ten years, they will not have to pay any capital gains tax on their opportunity zone investment.
For example, an investor sells their company stock for $1 million and has $100,000 in capital gains from that sale. The investor puts the $100,000 into an opportunity zone fund that invests in a new business in an opportunity zone.
The investor can defer paying capital gains tax until they have disposed of the opportunity zone investment or December 31, 2026, whichever comes first.
If they hold the investment for five years, they can reduce the deferred capital gains tax owed on the original gain by 10%. This would mean that only $90,000 of the $100,000 gain is taxable. Assuming a 20% capital gains tax, they would owe $18,000 instead of $20,000.
If they continue to hold the opportunity zone investment for another five years, they will not have to pay any capital gains tax on that investment. If their $100,000 opportunity zone investment appreciates 100% over 10 years, they owe $0 in capital gains tax instead of $20,000. Investors are able to hold funds there until 2046 before needing to pay capital gains tax on the opportunity zone investment.
Businesses will need to meet these qualifications to take advantage of this program.
70% of the business’ tangible property needs to be:
- acquired after 2017 from an unrelated party
- used in any opportunity zone 70% or more of the time
- original use property or be substantially improved
A business needs to:
- get 50% of its revenue from active conduct in any opportunity zone
- use 40% or more of its intangible property in any opportunity zone
- not hold non-qualified financial property
- not operate a sin business
These qualifications are borrowed from Opportunity Alabama’s summary of regulations (PDF). For more information and legal definitions, go to page seven of their summary.
You will also need to consider whether you are:
- willing to give up equity in your business
- likely to grow significantly over the next 10 years
- likely to remain in a qualified opportunity zone for the 10 years
Not all projects are a good fit for opportunity zones. We encourage communities to think about how this program fits into your existing economic development tools.
We recommend that communities:
- be proactive – the best way to ensure that your community attracts the investment it would like is to make projects attractive and easy to find
- respond quickly – an OZ investment needs to occur before the end of 2021 for the investor to realize the full benefits
- think like an investor – focus on projects that will help investors realize a return
- layer additional programs and incentives
Communities will need to follow this process to attract investment.
- Build community investment prospectuses (see below).
- Consider applying for the Opportunity Zone Technical Support Grant (see below).
- Structure deals.
- Work to engage investors.
Build a community investment prospectus
A community investment prospectus helps communities market opportunity zones to local, regional, and national investors. It combines marketing strategy, economic development analysis, and a private investment memorandum.
A community investment prospectus should:
- include a data-driven perspective on interplay among sectors, communities, and institutions
- describe specific areas or projects where there is a demand for capital
- articulate both the opportunities (growth potential, additional incentives) and the risks of those projects
Community investment prospectus examples:
- San Luis Valley Opportunity Zone Prospectus (PDF)
- City of Pueblo Opportunity Zone Prospectus
- Colorado Springs Region Opportunity Zones Prospectus
- City of Fountain Opportunity Zone Prospectus
- City of Colorado Springs: Pikes Peak Investment Prospectus (PDF)
Apply for opportunity zone technical support grant
Opportunity Zone Technical Support Grants help develop community-oriented opportunity zone projects. You can use the grant for services including:
- project feasibility studies
- developing a project request for proposal
- developing an investment memorandum or marketing materials
- legal or accounting support on project structure (firm need to give government discount)
We expect most Opportunity Zone Technical Assistance Grant applications to be less than $10,000, although communities can ask for any amount. If you are requesting less than $2,000, please apply for an Opportunity Zone Mini Grant.
Webinar powerpoints for communities
We recommend communities review these webinar powerpoints:
Invest in Colorado
If you are looking for projects to invest in, visit Colorado’s Investment Database. You don’t have to live, work, or have a business in an opportunity zone to invest there.
Qualified opportunity funds
A qualified opportunity fund specializes in attracting investors with similar risk and reward profiles to collect and place capital in rural and low-income urban communities.
Qualified opportunity funds:
- need to be funded by private capital and guided by market principals
- need to invest 90% of their assets in opportunity zone assets
- may invest in opportunity zones via stock, partnership interests, or business property
- need to use assets to create new business activity
- need to double the investment basis over 30 months if investing in an existing business
- can create new businesses or new real estate or infrastructure
- may not invest in certain types of business like golf courses, country clubs, gambling establishments, and a few other specifically excluded types of business
If you have realized capital gains, you need to invest your gains within 180 days into a qualified opportunity fund. Then the fund needs to place 90% of the funds into qualified opportunity zone property or business within six months.
Due to COVID-19, the following rules about opportunity zones and qualified opportunity funds are temporarily changed:
- Qualified opportunity funds need to report 90% of funds steered into designated opportunity zone projects. These funds are now allowed to hold their funds until June 30, 2021.
- Previously, developers and investors had 30 months to make improvements to their opportunity zone property to qualify for tax benefits. As of June of 2020, this deadline has been extended to 39 months, discounting April through December 2020 as a grace period.
- Previously, investors had to invest capital gains within 180 days to be eligible for tax benefits. Investors now have until the end of December 2020 to qualify. After this period, the 180-day rule will apply as usual.
When the U.S. Tax Cuts and Jobs Act of 2017 passed, the federal government asked each state and territory to nominate up to 25% of its low-income community census tracts to be opportunity zones. We consulted with mayors, county commissioners, and local economic development organizations to ensure that our state’s nominations matched local priorities.
A commission reviewed local submissions, and the governor submitted final 126 opportunity zone nominations to the federal government. The federal government certified Colorado’s opportunity zones in April 2018. Current opportunity zone designations are active for 10 years through 2028.
The following criteria defined how those zones were defined. Definitions used 2011-2015 American Community Survey data. Low-income community census tracts are defined as tracts which meets one of these criteria:
- poverty rate is at least 20%
- median family income does not exceed 80% of the statewide median family income if located outside of a metropolitan area
- median family income does not exceed 80% of the statewide median family income or the metropolitan area median family income, whichever is higher