Set-Aside Alert news analysis:

New rule allows Opp Zones to be designated as HUBZones too

Final rule could negatively impact existing HUBZones; Opp Zone design said to allow wealthy areas to benefit

      A new Small Business Administration final rule would allow governor-designated areas--including recently- created Opportunity Zones--to be dual designated as HUBZones.

      Congress created Opportunity Zones in the 2017 tax bill in areas selected by governors. The goal was to provide tax breaks for investments in lower-income areas.

     The SBA final rule, set to go into effect Jan. 1, 2020, allows SBA to recognize governor-chosen “covered areas,” including Opportunity Zones, as HUBZones. The covered areas are primarily rural and suburban.

      The final rule allows Opportunity Zones that previously didn’t qualify as HUBZones to be HUBZones.

      “SBA anticipates that included within the covered areas that a Governor may seek to be designated as a qualified HUBZone area are Opportunity Zones, authorized by Section 13823 of the Tax Cuts and Jobs Act of 2017 Public Law 115-97, that do not otherwise qualify as HUBZones,” the final rule states.

      While the SBA expects the final rule to be uncontroversial, that could change for two reasons.

      For one, the proposal could be detrimental to many existing HUBZones, since the proposed dual Opp-HUB Zones likely would compete for investments against nearby HUBZones that lack the dual designation.

      Secondly, there have been a growing number of reports that many of the benefits of Opportunity Zones are flowing to wealthy investors building luxury properties in areas that were already booming. Critics say the Opportunity Zone program was poorly defined and is being misused.

HUBZones and Opp Zones

      The HUBZone (Historically-Underutilized Business Zone) program offering set-asides for federal contracts in low-income areas was created by Congress in 1997. To date about 16,500 census tracts, former military bases and other areas have been designated as HUBZones. The program has had modest success, with 2% of federal contracts going to HUBZone-located firms in fiscal 2018.

      The Opportunity Zones program, which was part of the 2017 tax bill, has resulted in 8,762 Opportunity Zones created to date.

      There has been very little attention to how the Opportunity Zone program may interact with the HUBZone program. Both programs have stated goals of helping lower-income geographic areas.

      Based on a visual inspection of HUBZone and Opportunity Zone national maps, it appears that about half of the land area of HUBZones may overlap with Opportunity Zones. However, there has been no official analysis of how the geographic areas interact.

      Since HUBZones offer only set-aside incentives, and Opportunity Zones offer only tax incentives, a dual-designated Opp-HUB Zone likely would have a significant advantage in attracting investments against zones with only one designation.

      Under the SBA final rule, dual-designated Opp-HUB Zones would be created. It is not immediately clear how many of these would, or could, be created.

      Nonetheless, initial analysis suggests that little benefit would go to existing HUBZones from the final rule, and the new Opp-HUBZones may be detrimental to existing HUBZones due to the increased competition.

Opportunity Zone controversy

      Recent news reports suggest that Congress and the Trump Administration have defined Opportunity Zones so broadly that the program has diverged from its goals.

      “A federal tax break intended to draw investment to lower-income areas has become one more way for the rich to avoid paying taxes,” wrote the editorial board of the New York Times on Nov. 16. “In reality, the tax break is being used to juice the profit margins on projects like a proposed luxury condominium development at a ‘superyacht marina’ in ritzy West Palm Beach, Florida.”

      In another example, the governor of Indiana named a large portion of downtown Indianapolis as an Opportunity Zone, even though the area already is booming with investment, the New York Times editorial said.

SBA final rule

      The SBA final rule outlines how governors can petition the SBA to designate “covered areas” as HUBZones. Each year, a governor may submit one petition covering multiple areas.

      The covered areas must be:

• Located outside of an urbanized area;
• With 50,000 population or less; and
• The average unemployment rate may not be less than 120% of the average unemployment rate of the U.S. or of the state, whichever is less.

More information:
Final rule: https://bit.ly/2QEJNlP
NYT editorial: https://nyti.ms/349v7PD
NJ Press release: https://bit.ly/2KIDZnL

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