February 9, 2018

Need Help Understanding the Opportunity Zones Eligibility? Start Here!

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Opportunity Zones Infographic

The growing awareness of the Opportunity Zones Program has left many with questions regarding geographic eligibility for designation as Opportunity Zones. This post seeks to clarify the census tract eligibility criteria and answer some of the most common questions we have been receiving on this topic. This information is based on our current understanding of the legislation as of the IRS guidance on February 8, 2018, and will be updated to reflect future guidance from the U.S. Department of the Treasury on these issues. 

In addition to this post, be sure to check out our Opportunity Zones landing page for the latest information about the program and be on the lookout for a new tool we have created to replace the Opportunity Zones classification map published previously on this blog to:

  • Reflect the more inclusive set of eligibility criteria discussed in this post.
  • Use the most current data to determine eligibility and allow users to download the data.
  • Provide additional functionality to overlay federal program data to assist with designation strategies.

Low-Income Communities

The most important geographic definition to consider is what constitutes a Low-Income Community. This is important for two reasons:

  1. It determines which areas are eligible for designation as Opportunity Zones. 
  2. The number of Low-Income Communities in a state determines how many Opportunity Zones can be designated – the total number of Opportunity Zones a state can designate is equal to 25 percent of the number of Low-Income Communities in that state (rounded up). 
    • A special exception allows states or territories with less than 100 Low-Income Communities to designate up to 25 Opportunity Zones.

For the purposes of Opportunity Zones, the term Low-Income Community is defined by Section 45D(e), which we will be exploring in this post. Of the five primary criteria outlined, there are two that we will not cover here, but that may be relevant to consider in some states – Targeted Populations and Areas Not Within Census Tracts.

Ignoring these two cases, a given census tract is a Low-Income Community if it meets at least one of the following requirements:

  • The tract has at least a 20% poverty rate.
  • The median family income in the tract is below a certain threshold. The relevant threshold is determined by whether the tract is located within a metropolitan area and whether it is located in a High Migration Rural County.
  • The tract’s population is less than 2000 people AND it is within an empowerment zone AND is contiguous with another Low-Income community. This one we can safely ignore at present, since there are currently no active empowerment zones and thus no tracts that qualify under this provision.

Due to the complexity of this definition, we thought a decision tree diagram might help to explain this. A census tract’s eligibility as a Low-Income Community can be determined by starting at the green START HERE box and answering a series of questions about the tract.

Opportunity Zones Eligibility Low Income Community Decision Tree.png

*MFI = Median Family Income

*Note that the initial data released by Treasury appears to exclude tracts that qualify under the High Migration Rural provision. We will update this post to reflect additional guidance on this matter when we receive it.

Tracts Contiguous with Low-Income Communities

In addition to Low-Income Communities, the Opportunity Zones program allows for designation of a small number of tracts that are not themselves Low-Income Communities but that are contiguous with Low-Income communities. These can account for up to 5 percent (rounded up) of the total number of tracts designated. Tracts must meet both of to be eligible for designation under this part of the program:

  • Be contiguous with at least one Low-Income Community that has been designated as an Opportunity Zone (note that this could be a designation by another state, meaning states will likely need to coordinate on designations to make this possible).
  • Have a median family income that does not exceed 125 percent of the median family income of at least one contiguous Low-Income Community. 
    • We have received questions on this regarding whether a tract has to meet the 125 percent threshold for all contiguous Low-Income Communities. Our understanding of the guidance provided by the IRS on February 8, 2018 is that it need only satisfy this requirement for at least one contiguous Low-Income Community.

The criteria for inclusion here are much simpler, as seen here in this decision tree.

Opportunity Zones Eligibility Contiguous Census Tract Decision Tree.png

*MFI = Median Family Income

In addition, our understanding of contiguity for this program is that tracts must have a shared border with a length greater than zero in order to be considered contiguous. Tracts that touch only at a single point would not qualify as contiguous. In formal terms (for those of creating their own models in GIS) this constitutes a rook’s case contiguity as opposed to queen’s case contiguity.

Putting it All Together: An Example

As an example of how these rules overlap, consider a state with 201 Low Income Communities.

This state would be able to designate up to 201 * 25% (rounded up) = 51 tracts as Opportunity Zones. 

Of those 51 designations, 5% (rounded up) or three tracts could be designated on the basis of contiguity with one of the other designated Low-Income Communities. The other 48 would need to be Low-Income Communities.
 

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