Need Help Understanding the Opportunity Zones Eligibility? (Updated)
Update: On February 27, 2018, the CDFI Fund posted an update to their “safe harbor” eligibility data on their Opportunity Zones Information Resource. It results in an additional 168 Low-Income Communities, an additional 1,007 additional eligible contiguous tracts, and 72 formerly eligible contiguous tracts that are no longer deemed eligible. This blog post, along with our own Opportunity Zone Eligibility Tool and underlying data have been updated to reflect these changes. The changes include:
- Adding high migration rural tracts and low population tracts to the “safe harbor” list of low-income communities and determining relevant eligible contiguous tracts for these;
- Allowing queen’s case contiguity (in addition to rook’s case contiguity) to be considered eligible;
- Correcting some issues in their original analysis that had identified some contiguous tracts that were not in the end eligible
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 27, 2018 and will be updated to reflect future guidance from the US Treasury Department.
In addition to this post, be sure to check out our Opportunity Zones landing page for the latest information about the program and our Opportunity Zone Eligibility Tool. This tool allows users to:
- Determine eligibility using both 2015 and 2016 ACS data and download the data;
- Overlay federal program data to assist with designation strategies;
- As of our February 28 update, the tool also includes Puerto Rico.
The most important geographic definition to consider is what constitutes a Low-Income Community. This is important for two reasons:
- It determines which areas are eligible for designation as Opportunity Zones.
- 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 2,000 people AND it is within an empowerment zone AND is contiguous with another Low-Income community (this only became relevant with the passage of the Bipartisan Budget Act of 2018 on 2/9/2018).
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.
*MFI = Median Family Income
*Note that although the initial data released by Treasury did not include tracts that qualify under the High Migration Rural and Low-Income Community provisions, this has been remedied as of February 27, 2018.
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 in this decision tree diagram.
*MFI = Median Family Income
In addition, as of the CDFI Fund's February 27 update, it is our understanding that tracts must only touch at a single point to be considered contiguous – in formal terms (for those of creating their own models in GIS) this constitutes a “queen’s case” contiguity as opposed to merely a “rook’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 51 tracts (25%, rounded up) as Opportunity Zones.
Of those 51 designations, up to three tracts (5%, rounded up) could be designated on the basis of contiguity with ad Low-Income Communities. The other 48 would need to be Low-Income Communities.