When Qualified Opportunity Zones (QOZ) were established by the Tax Cuts and Jobs Act of 2017, real estate developers and speculators rushed to the urban areas buying up properties, and in many cases, driving up land prices. Commercial real estate has since become the primary focus for nearly all Opportunity Zone Funds. An often-cited potential issue is a Qualified Opportunity Funds’ focus on real estate development in urban locations may simply be a catalyst for gentrifying these urban areas and may not actually benefit the existing disadvantaged residents of the zones. Another reality is that even though billions of dollars of capital gains have begun to flow into these funds, very little of that activity has been directed into rural areas, despite a large number of the designated zones being outside urban centers.  

DIVIDED COMMUNITIES

Today, nearly 80% of the U.S. population lives in metropolitan areas, while only about 15% lives in rural areas. The long-lasting divide between rural and urban America has continued to grow since the last recession. “The Great Recession hit harder and lasted longer in rural communities, and many predominantly rural states still have yet to recover from the depths of the recession,” wrote Martin Heinrich in a May 2017 minority staff report to the congressional Joint Economic Committee.

Since 2007, the median income of rural America has averaged 25% below U.S. metropolitan areas. In the south, nearly a quarter of rural populations live below the poverty line. Rural populations are shrinking as people move near cities for better opportunities in education and employment. In 2000, 27% of metro-area residents held a bachelor’s degree or higher, compared to 16% for those living in rural communities; by 2016, that 11-percentage point gap had grown to 15 percentage points. Nearly 80% of those living outside of metropolitan areas hold only a high school diploma, or less.

Opportunity Zones represent around 11% of all census tracts, and account for 24% of the nation’s food deserts. The USDA defines “food deserts” as low income census tracts without a full service grocery store within a 1 mile radius in urban areas or within a 10 mile radius in rural areas. In total, 2, 225 OZs, or 28% of all zones, qualify as food deserts.[1]

Rural communities are in need of a change to help promote local economic and social development, and rural areas make up 40% of the designated zones.[2]

The OZ legislation could play an important role in reversing the outflow of human talent and capital from rural areas.

Daniel Kowalski of the U.S. Department of Treasury recently held a presentation where he focused on the social impacts from OZ. “Opportunity Zones will make sure that more American families will benefit from the growth in the U.S. economy," Kowalski said. He didn’t make a distinction between rural and urban opportunity zones, because the legislation makes no such distinction.

At a recent meeting of the White House Opportunity and Revitalization Council, President Trump and Agriculture Secretary Sonny Perdue exchanged words about the potential benefit of this legislation for America’s farmers. The secretary commented that “Forty percent of these economic zones are in rural areas, Mr. President. And USDA has a prime objective in helping to raise them as well. I would submit to you that this may be the sleeper provision of your tax cuts. We’ve already seen the growth of GDP and jobs and employment and economic prosperity… So I look forward to working here with this group to make sure that happens — not just for today, not just for your administration, but in the future, raising these communities.” [3]

What is the best way for OZ to bring jobs and boost the livelihoods of those living in smaller communities across America?

THE PROMISE OF AGRICULTURE

Agriculture holds the potential to be one of the most impactful means to attract capital into rural OZs and to benefit people living in disadvantaged, small town communities, which meets the original intent of that legislation. Understanding recent developments in agriculture will help explain the potential of the OZ legislation to transform our country’s rural areas.

First off, a globalized food system means that American farms are getting larger to achieve economies of scale and compete with growers, not just in the next county, but with those in countries like Brazil and Australia. Farms are also incorporating more technology to increase yields and productivity. Drones help today’s farmers observe and understand what is happening in the fields and in-ground sensors monitor soil moisture content. All this data is increasingly stored in the cloud and analyzed via web-based applications. Hardware, such as robotic harvesters, are making up for labor shortages in agriculture in many areas and fully automated tractors are not far off. The problem is that all of this technology is capital intensive. American growers face severe hurdles in securing capital to expand and innovate their farms so that they can be competitive with overseas farmers who have access to cheap land and labor.

OZ investments are maximized when the capital is held for ten or more years. Agribusiness pairs well with the eligibility requirement for a QOZ, because many farms and ranches require longer time periods to establish sustainable cash flow, than say an industrial business. Many operations will be purchasing or leasing land as expansion projects. For those that are on land that is pre-owned, then they must abide by the 80/20 rule as far as ownership of the business entity. Farms and ranches are quite static in nature, and mostof the business will operate within the QOZ. All QOZ eligibility issues for the assets will have to be addressed by the fund manager to ensure the investors funds are eligible for the tax benefits.

Healthy agribusinesses can provide both direct and indirect benefits to rural America. A problem facing many small towns throughout the country is a shrinking tax base, which is unable to pay for the municipal services that urban dwellers take for granted, like public schools, fire, and police services. Moreover, OZ investments in farming will enhance the quality of life for the current residents of the QOZ and help to repopulate small towns due to newly available jobs.

In rural areas, the infrastructure is already in place to produce and move products, and OZ investments can help grow the local economy. American farms and ranches are able to expand and bring jobs to communities that did not previously have many employment opportunities, while keeping up with the demand to feed and clothe nearly 10 billion people globally by 2050. Not only must farmers and ranchers grow more with a decreasing amount of arable land, they must also innovate to ensure their products meet consumer demand in quality and specialized foods, such as organic, non-GMO, grass-fed and antibiotic free livestock.

Returns are always an important aspect of any investment, but there are other benefits that are available from investing in agriculture projects. For those who prefer socially-responsible offerings, sustainable methods of production and land management practices of many of today’s agriculture businesses can make rural OZ funds an attractive investment.

Sources:

[1] https://eig.org/opportunityzones/facts-and-figures

[2[ https://www.governing.com/week-in-finance/gov-opportunity-zones-rural-communities.html

[3] https://www.whitehouse.gov/briefings-statements/remarks-president-trump-white-houseopportunity- revitalization-council-meeting/