As part of the Tax Cuts and Jobs Act of 2017, the U.S. government identified areas across America that are low income, lacking in investment, or in need of redevelopment. The federal government defined these spaces as opportunity zones, and to help spur investor interest, certain related tax subsidies were put in place.
Under the plan, investors interested in launching projects in an opportunity zone could see either a reduction or complete elimination of any capital gains tax liability incurred on the project based on several factors related to the nature of the development.
In 2018 when the U.S. Treasury released its map of designated opportunity zones, many investors and organizations in Lane County were interested in launching projects in one of the five newly designated opportunity zones in the Eugene-Springfield metropolitan area. But even with the tax incentives, questions remained on how to finance projects and whether they would “pencil out” to be profitable.
Enter the 12-month Master of Science in Finance (MSF) Program at the Lundquist College of Business, which launched in summer 2017. Students completing the MSF program undertake a real-world project or analysis as part of their final “capstone” course. A project on opportunity zones seemed like a natural fit.
“Both investors can benefit and the community can benefit,” said Barry Miller, program manager for the Cameron Center for Finance and Securities Analysis and instructor of finance, who co-taught the MSF capstone course in spring 2019.
In 2018, one organization interested in opportunity zones was Cornerstone Community Housing. Cornerstone builds affordable housing in Lane County on a nonprofit basis, and they were looking for new and innovative ways to finance projects. Opportunity zones seemed like a natural fit.
“This departure from traditional funding is exciting and will create new homes for families in need. We’re grateful to the students and UO for their dedication in tackling affordable housing from a different perspective,” said Cornerstone Executive Director Darcy Phillips.
What students essentially delivered to Cornerstone was a proof of concept analysis for how to fund opportunity zone projects through a combination of private investments, grants, and normal real estate financing. Cornerstone is now applying the analysis and recommendations.
“We are piloting the model that the students came up with last year for funding one of our new development,” said Phillips.
The project was such a success that in spring 2019 a new cohort of MSF students completed a second opportunity zone project for another client, evaluating a potential investment under opportunity zone rules, categorizing construction issues and costs, and making recommendations as to how to pursue the investment given the clients’ desires. This culminated in a written report of the analysis (along with an analytical engine in Excel) and a presentation to the principals to explain the methodology, assumptions, and conclusions.
Though the results of the analysis are private, senior instructor of finance Jon Moulton, who taught the spring 2018 MSF capstone courses and co-taught the 2019 capstone, explained that what the students ultimately created was a general framework for evaluating a variety of real estate investment projects that might be appropriate for opportunity zones.
The methodology developed by the students could also be applied to opportunity zone projects outside the Eugene-Springfield area even though local communities might have additional incentives for redevelopment and different states have different tax codes, Moulton explained.
“They have the economic model. It’s just a matter of changing the numbers,” he said.
Most of all, the opportunity zone projects gave MSF students hands-on experience working with real people on a real project—an invaluable experience.
And Miller said that he and the students came away from the courses feeling like opportunity zones make sense.
“Invest in an impoverished area; you get tax benefits,” Miller said. “The opportunity zone sees benefits like increased employment opportunities, and investors enhance their after-tax returns.”