Opportunity zones are one of Tim Scott’s signature initiatives, but how successful are they?

COLUMBIA, S.C. — Columbia’s Middleton family, leading developers in the downtown area in recent years, made a sizable profit when they sold their share in a local hospice business two years ago. Rather than pocket the income, the family invested those earnings in one of their biggest development ventures to date: a 65,000-square-foot production brewery and restaurant north of downtown.

Downtown’s Main Street is packed with Middleton businesses, including a boutique bowling alley, a dueling piano bar and a hibachi restaurant. But the family chose to locate Peak Drift Brewery somewhere less flashy, in a previously abandoned building on North Main Street, more than 2 miles outside the city center in an area hungry for quality development. And they were able to do so thanks to a program that affords them a tax incentive for investing their capital earnings in a poor area of the city.

Peak Drift, currently under construction, sits in one of South Carolina’s 135 opportunity zones, economically distressed areas given the special federal status to entice economic development by using proceeds from capital gains.

“The opportunity zone makes it worthwhile for doing it in those zones,” said Greg Middleton, co-owner of the brewery. “But the project would have been economically viable in a historic building, just not on North Main. Instead of us just doing everything else on the 1600 block of Main Street, is there somewhere else that we can go?”

U.S. Sen. Tim Scott, a 2024 Republican presidential hopeful, included the idea of opportunity zones in the 2017 Tax Cuts and Jobs Act. Now opportunity zones are one of South Carolina junior senator’s signature initiatives, one he touts on the campaign trail.

However, measures of opportunity zones’ success so far are based mostly on anecdotal evidence.

Studies looking into the program say it has had mixed results in its effort to encourage investment in low-income areas nationally.

How effective the zones are and the amount of private investment that has taken place because of the program are questions that remain up for debate, as economic development is traditionally a long process and reporting requirements are usually between a developer, an accountant and the IRS.

After the idea became law, South Carolina chose 135 areas, or census tracts, to be opportunity zones. The zones were recommended by each county based on income information, said Kelly Coakley, spokeswoman for the state Department of Commerce.

To be one of the country’s 8,700 opportunity zones, a census tract has to be a low-income area or adjacent to a low-income community. Those that are adjacent to low-income areas could have a household median income up to 125% of the adjacent to the census tract.

For investors to receive a federal opportunity zone income tax incentive, a tax filer would have to use money from capital gains and invest in a designated opportunity zone. Incentives of the program include deferring income taxes owed on capital gains until 2026. Investors who keep their money in an opportunity zone investment for at least 10 years can take whatever money they earn from the sale of the investment tax free.

An analysis by The State of the 59 opportunity zones in South Carolina’s 10 largest counties showed positive movement in four economic indicators, according to American Community Survey data compiled between 2016 and 2021 by the U.S. Census Bureau.

Median household income increased in 48 of the zones, while decreasing in 11 of the zones. Median household income went up by at least $10,000 in 25 of the opportunity zones.

The poverty rate dropped in 47 of the 59 opportunity zones and went up in 12 zones.

Labor force participation increased in 29 of the 59 opportunity zones, but decreased in 30 zones.

The unemployment rate dropped in 50 of 59 opportunity zones, and increased in seven zones.

Specific projects credit start to opportunity zones

Scott touts opportunity zones while out on the campaign trail, as he wrote the domestic portion of the 2017 tax cut bill, which included the program.

During a town hall in Goose Creek in May, Scott said $200 billion had been invested into opportunity zones across the country since 2018 and that investment in the zones will help spur other jobs in the long term.

“Small business owners are given lots of chances to provide security and maintenance and landscaping, general contractors and tech services,” Scott said. “So the truth is, long term, you’re starting to see opportunities for small businesses, and that’s one of the ways that we make sure that small businesses are producing better opportunity zones.”

During interviews, Scott talks about pushing “opportunity zones 2.0” to encourage more private investment into low-income areas as part of an economic agenda.

Scott’s campaign called opportunity zones the most effective community initiative in the last 50 years, which has led to to tens of billions of dollars invested in 4,000 communities across the country.

“From improving the standard of living in the poorest areas in America to democratizing investment, and restoring hope, the results show how conservative principles can create opportunity for all Americans,” campaign spokeswoman Nicole Morales said in an email.

Scott, who has been in the Senate since 2013, says the concept of opportunity zones as a way to encourage investment in poor areas had been on his mind long before he got to Congress.

“Opportunity zones were hatched at the (South Carolina) State House,” said state Rep. Shannon Erickson, R-Beaufort, who is backing Scott’s presidential campaign.

Scott served on the S.C. Labor, Commerce and Industry Committee with Erickson during his one term as a state House representative.

“Tim Scott was (about) what can we do to empower people who don’t feel empowered and literally got embroiled in regulations, and (the Labor, Commerce and Industry Committee) and commerce and those things to look for ideas of how you could bring jobs and opportunities, (to) situations or areas that were in turmoil and give people the ability to work their own way out of problems instead of government handouts,” Erickson said.

Scott eventually brought the idea to Washington, and it was first introduced on the federal level by Scott in 2016 in the proposed Investing in Opportunity Act, along with U.S. Sen. Cory Booker, D-N.J., and then-U.S. Reps. Pat Tiberi, R-Ohio, and Ron Kind, D-Wisconsin.

Economic development now is taking place within the zones.

Anecdotally, developers say the opportunity zones program’s tax deferrals helped initiate projects.

Scott points to the Morrison Yard development in Charleston as a project that was made possible by the opportunity zones program. The $300 million residential, office and mixed-use project is part of a larger development. When completed, it will have over 138,000 square feet of office space in a 10-story building, 576 apartments, more than 37,000 square feet of retail and a 150-room hotel.

The development is projected to generate a cumulative economic impact of more than $1.4 billion by 2030.

“Our passion for opportunity zone investing has and always will be about making a positive difference in places that are too often overlooked and underestimated,” said Alex Bhathal, co-founder and managing partner of RevOZ Capital, a California-based company that invests in opportunity zone projects. “While we have much more to do, it’s gratifying to see Morrison Yard emerging as a model of what the Opportunity Zone program can achieve.”

In Columbia, the Peak Drift Brewing project, which is estimated to cost $40 million by its completion, would not have taken place on North Main Street without opportunity zone benefits, said at-large City Councilman Howard Duvall. The facility already is producing beer that’s being commercially sold, and the Middletons expect to open the consumption brewery and restaurant at some point in 2024, though that timing has been pushed back from previous estimates.

When it opens, Peak Drift could be the biggest commercial attraction on a corridor that’s slowly seen improvement over recent years, including significant streetscaping and upgrades to the nearby Hyatt Park, but still lacks many high-profile businesses.

In addition to the Middletons’ Peak Drift Brewing project in the area north of downtown, the family moved their health care business S.C. House Calls from a 15,000-square-foot-space in West Columbia into a 30,000-square-foot space previously owned by Benedict College, just off of Sunset Drive in the same opportunity zone as the brewery. The move allowed the company to have more employees at the location for training and meetings and hire more people.

“We could have just moved downtown. We could have just built a building there,” Greg Middleton said. “We could have moved anywhere, but we didn’t. We chose to move to an opportunity zone because of the fund.”

Other areas such as Columbia’s BullStreet District and areas along Interstate 20 also have been designated as opportunity zones.

“I wanted every incentive for people to build in the BullStreet District,” said Duvall, said who also chairs the city’s BullStreet Commission.

The BullStreet development, a 20-year project that got underway in 2013 before the creation of opportunity zones, has seen increased activity in recent years. Since the centerpiece, $37 million minor league baseball park opened there in 2016, a slew of development has followed, including an REI Co-op store, multiple apartment buildings, luxury townhomes, a senior living community, a couple of restaurants, a pair of office buildings, and a bevvy of ongoing construction.

Before development started at BullStreet, the 181-acre campus that once was home to the state mental hospital was filled with dilapidated, vacant buildings including the sprawling, historic Babcock building, which has since been converted into more than 200 apartments renting for anywhere from $1,300 to more than $2,000 per unit.

Although BullStreet’s master developer, Hughes Development Corp., isn’t sure how many projects within the district have taken advantage of the opportunity zone program since its creation, the designation brings additional interest to the area, officials say.

“People realize it’s another potential source for ways to do projects. It’s another arrow in the quiver to be able to use economic incentives, tax programs and other opportunities to create these projects,” said Chandler Cox, the director of commercial development for Hughes Development Corp.

Duvall, who is a Democrat, says Scott deserves to tout the opportunity zone initiative.

“It’s got a good message to it and name to it, but it takes someone who is in the economic development field, a financial person to understand all the intricacies of all that’s involved in these things,” Duvall said.

Studies differ on effectiveness of opportunity zones

Studies of the opportunity zone program have given mixed reviews.

Across the country, designated opportunity zones with the highest median household incomes received more investments through 2020 compared to the lowest-income areas in the program, according to a study by the Treasury Department’s Office of Tax Analysis released in June.

“At the national level, the highest median household income (opportunity zone) quintile received 34 percent of the total (qualified opportunity zone) property investment, a disproportionately large share,” the treasury study said.

But South Carolina and two other states bucked that trend.

Through 2020, 68% of opportunity zone investment in South Carolina went into areas with the lowest median household income, the treasury study said.

Still, across the country, the areas included in the program with higher median household, higher measures of educational attainment, higher house prices and lower unemployment were more likely to receive investment, the study said.

“Moreover, trends prior to O.Z. designation were an important indicator of which tracts received investment,” the study said. “Tracts that experienced growth in median household income, population and housing values and reduction in the poverty rate and unemployment rate were more likely to receive qualified investment.”

Treasury Department researchers say it’s too soon to say if opportunity zones have been effective. The Treasury Department points to research that shows little evidence of increased job postings in zip codes with opportunity zone designations than in zip codes without the designations, but there was a higher increase after the COVID-19 recession.

The designations themselves may not have had any effect on economic growth within opportunity zones.

The treasury study also found census tracts that were picked to be opportunity zones were already seeing increases in employment and decreases in poverty when compared to eligible areas but did not receive the designation.

“(Researchers) find that after they control for preexisting trends, there is little change in the employment rate of zone residents, a small increase in average annual earnings, and no positive impact on poverty rates,” the treasury study said.

Another recent study, however, offered a more glowing review of the program.

A study released in March by the Economic Innovation Group, a bipartisan Washington-based public policy organization that conducts research to encourage a dynamic economy, found $48 billion had been invested as of 2020 in nearly half of the opportunity zones in the country. The study considered research papers published on the subject that looked at building permits in opportunity zones and IRS data of opportunity zone investment.

Cash invested in opportunity zones was raised from roughly 21,000 individuals and 4,000 corporate investors who put money into 7,800 qualified opportunity funds, the EIG study said.

Money from the opportunity funds is being invested in communities that are more economically distressed than the rest of the country. The areas average in the 87th percentile for poverty, 81st for median household income and 80th for unemployment, according to the EIG study.

EIG determined having an opportunity zone designation led to a “large and immediate” increase in new commercial and residential development in 47 studied cities. The study found the designations also boosted economic activity in other areas. The EIG study found both housing supply and home values increased by 3.4% in opportunity zones from 2017 to 2020, while there were no observed increases in rent.

“We know that investment has been deployed across an unprecedented number of communities relative to previous place-based incentive programs,” the EIG study said in its discussion. “We know the high-need nature of those communities closely reflects the original intent of the policy despite occasional outliers. And we know that the OZ incentive appears to have significantly changed both the behavior of investors and the trajectories of designated census tracts in ways that could not have been predicted based on prior trends.”

Overall, are opportunity zones effective?

The final verdict on the effectiveness of opportunity zones is probably a long time away.

“It will be years before we know whether the economic effects observed to date prove durable. Likewise, we are perhaps a decade or more away from knowing the longer-term effects of OZs on local poverty rates, employment, housing, or business creation,” the EIG study said.

People who manage opportunity funds say improvements can still be made in the program.

“There are some things that are good, some things that were bad. I don’t know a perfect government program,” said Mark Elliott, the managing member of the South Carolina Opportunity Fund, which invests in opportunity zone projects. “This is not going to be a perfect government program. I think it has done more good for communities and helped a lot of folks. It got some rural places and places that are overlooked engaging in conversation with investors and other folks that they normally would not talk to.”

But information on specifically where developers used the incentives through the program isn’t completely available. Municipalities know where opportunity zones are located, but whether the program is used is between the developer and the IRS.

The advocacy group Opportunity Funds Association wants there to be further disclosure of investments that were made and how the money was used and results of the investment.

“Right now, it’s almost hyperbole when people come out and say the program did well or did not because no one, except the IRS, I assume, has (a) full data set of everything that went into the program, who benefited and where the money went,” Elliott said.

“Anything you hear is voluntary information someone was told, or it’s a guess. No one is reporting on the true data of the program,” Elliott said.

Cory Ouellette, a shareholder for Elliott Davis, a firm that provides tax, audit, compliance and consulting services for businesses, said final determination about whether opportunity zones are successful should wait until at least 2026, the last year someone can make an initial investment into an opportunity zone.

“Even then, Rome wasn’t built in a day, right?” Ouellette said. “These areas were designated as opportunity zones because they are distressed. You can’t just expect capital to flow in (on) day one and for positive results to be seen in two or three years. It’s going to take time. I think eight, nine, 10 years would be a good time frame to assess whether they achieved what they were hoping to achieve.”