Developers - and underserved communities - see opportunity in Opportunity Zones program

In 2016, Census Tract 8514 in Elgin, had a population of 7,075, a median age of 28.6, and a poverty rate of 16.7 percent, according to the U.S. Census Bureau. Today, it's also one of 8,700 new Opportunity Zones, or distressed areas eligible for certain tax incentives from the federal government to encourage long-term investment.

Conceived by the Economic Innovation Group (EIG) in Washington, D.C., and created through the 2017 Tax Cuts and Jobs Act, the Opportunity Zones program allows investors to defer capital gains taxes by redeploying proceeds from the sale of an investment into designated Opportunity Funds. The funds will then be used to reinvest in the distressed community - for example, through new real estate developments or small business enterprises that support the local economy.

EIG estimates there are nearly $6.1 trillion in unrealized capital gains that would be eligible for such investments. Even if not all of that money is truly accessible, even a portion could help revitalize communities throughout Illinois and across the United States. Opportunity Zone investments may be an attractive option for the investors sitting on these unrealized gains, potentially even outperforming the stock market.

The longer an investor keeps capital in the fund, the more benefits they and the community they invest in stand to receive. The three primary tax benefits include:

• A temporary deferral. Initially, investors defer taxation of their capital gains by reinvesting into an Opportunity Fund. This capital gains tax deferral results in significant time value of money benefits.

• A step-up in basis. Capital gains taxes decrease as the holding period increases. After five years, investors receive a 10 percent basis step-up. After seven years, investors receive an additional 5 percent basis step-up. If not sold sooner, taxes on 85 percent of the invested gains will be due on December 31, 2026.

• Permanent exclusion. If the fund is held for at least 10 years, no capital gains tax will be collected on appreciation beyond the original investment; taxes are only paid on 85 percent of the original reinvested gains.

While the program carries many benefits, it's important for investors to do their due diligence, as some deals could carry higher risk depending on where they're located. As is the case with most investments, the key is diversification. My law firm, Ginsberg Jacobs LLC, continues to educate and advise clients as early adopters begin to raise funds and identify qualifying investments. At this writing, there are still many details to be worked out, including reporting requirements and deployment timeframes; both public and private entities are awaiting further guidelines from the Treasury Department.

What we do know is that the United States has many communities that are in need: In 2016, 40.6 million people in the United States were living in poverty, according to the U.S. Census Bureau. Governors of each state were asked to submit lists of distressed areas for consideration to be Opportunity Zones. In Illinois, there are 327 Opportunity Zones, including a handful in the north and northwest suburbs of Chicago. They include two in Carpentersville, one in Palatine, three in Waukegan and North Chicago, and three in Elgin, including the one mentioned above. You can view a map of Opportunity Zones here.

In Chicago, there are more than 130 Opportunity Zones, many in low-income, high-unemployment areas on the South and West sides. They include high-profile properties like the former Michael Reese Hospital, the long-vacant U.S. Steel South Works site, a tract north of the United Center near the planned Damen Green Line stop, and many more.

Can private investment help turn around these underserved communities? It remains to be seen. Certainly, at a time of rising interest rates, Opportunity Zone incentives may fill financing gaps for projects that, while transformational, might otherwise be difficult to finance. EIG stresses that success will probably look different in every community, because every community has different needs - and that Opportunity Zone projects alone will not be enough. Ultimately, experts hope Opportunity Zones will better connect communities with equity capital, which in turn will catalyze new business, innovation and opportunity.

• Darryl Jacobs is a founding partner of Ginsberg Jacobs LLC, a Chicago-based law firm that provides comprehensive legal solutions in the areas of real estate, finance, taxation, tax credits, litigation, corporate, and trusts and estates planning. He received his J.D. from Harvard Law School and B.S. from the University of Illinois.