How Wide is the Opportunity Zone Potential?
By: Maria Oldenburg and Baiju Shah
Since the introduction and passing of the Tax Cuts and Jobs Act of 2017 legislation, the promise of Opportunity Zones—designated areas in each state where preferential tax incentives are set up to stimulate investments—has intrigued investors and entrepreneurs across a broad range of fields. Although only preliminary regulations have been established for the zones as of December 2018, Opportunity Zones could provide investment opportunities for accelerated drug development in the biotech industry.
The strongest advantage of the Opportunity Zone legislation centers around the reduction and potential elimination of capital gains taxes for investments made within Opportunity Funds, designated funds primarily located and operated within Opportunity Zones. Investors can save tax costs if they maintain their investments within the Fund for long periods of time, with the most benefit accruing after ten years. Not surprisingly, real estate investors have been attracted to and queuing up to create Opportunity Zones. Real estate investors have significant experience in working with investment incentive programs at all governmental levels.
However, the broad nature of the legislation allows for many other types of businesses and investment funds to operate within Opportunity Zones and access the benefits of the legislation. The potential is vast and can be influential for almost any industry located within an opportunity zone who is willing to accept a long-term investment horizon. Ultimately, this allows the legislation to lead to the formation and support of businesses that can help transform communities, accelerating investment and job creation across a variety of industries including biotech in targeted communities. These funds should then be inherently attractive to impact investors, individuals, and organizations who prioritize both profit and social returns when they invest.
The fact that many of the Opportunity Zones encompass or are located near major healthcare research institutions leads to the question of whether this could provide an opportunity for biotech investors. For companies whose business models include asset investments and acquisitions like pharma, this tax incentive could prove to be significant. Pioneers and first-movers have already begun to crop up, such as the Central New York Biotech Accelerator, showing the potential for biotech applications supporting both social enterprise and impact investment.