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Infrastructure: A Catalyst for Land and Zone of Opportunity?

The views expressed are those of the author and do not necessarily reflect the views of ASPA as an organization. 

By Daniel G. Bauer
February 27, 2019

One of the fundamental underpinnings of successful collaborative governance is an appeal for mutually beneficial undertakings from both the public sector and the private sector. Sustaining mutual benefit for the long-term requires discipline, steadfastness and endurance. In other words, it requires a real commitment to long-term value.

Financial constraints impose burdens upon public policy choices. Such constraints are the resultant outcome emanating from debt issuance. What if through collective governance, instead of issuing 100 percent debt financing, an equity component incentivizing the private sector was possible? The equity component in public works is not a brand new financing technique, but has been used in large infrastructure public-private partnerships. Now, private sector investment can be funneled to qualified opportunity zones across the United States. Born out of the 2017 Tax Cuts and Jobs Act, the Opportunity Zone Program was originally created to incentivize private sector investment in distressed communities. In return for such investment, a tax break on capital gains is provided.

Writing in January 2019’s National Law Review, Albert Dotson Jr., and Andrej Micovic outline the structure for longer-term benefits which may be captured through investment participation in qualified opportunity zones. In their article, “Opportunity Zones Create Funding Alternatives for Social Infrastructure Projects,” the prospect exists for potential zero capital gains tax if an investment is held for at least 10 years. The main driver for the ultimate success or failure will be the status of infrastructure.

Infrastructure projects (and the resultant businesses and other projects) can be invested in through the capital gains from taxpayers, who, first, must invest the capital gains into qualified opportunity zone funds. In turn, the qualified opportunity zone funds must invest 90 percent of their fund assets into opportunity zone projects, businesses and social infrastructure. Social infrastructure possesses the greatest possibility for success in the qualified zone underserved community. Specifically, three types of social infrastructure consisting of schools, hospitals and housing may be impacted, altogether constituting the bulk of opportunity zone social infrastructure development. The crux of the situation is that not all qualified opportunity zones are created equal. Within that context, state and local governments (who originally selected the areas for opportunity zone qualification, in conjunction with the U.S. Department of Treasury) possess the freedom of choice regarding incentive provisioning for investment attraction.  

A positive factor for qualified opportunity zones is the availability of capital gains for potential equity investment on the part of the private sector. On the surplus side, according to the Economic Innovation Group, year-end 2018 saw over $6 trillion in capital gains sitting in institutional investment vehicles in the form of mutual funds, stocks and corporations that investors had not cashed in. The need for social infrastructure investment alone is substantial. On the deficit demand side, according to the National Center for Education Statistics, $550 billion will be required in infrastructure investment to elevate American schools to normalized standards. It is worth noting that the average age of an American school building is at least 45 years old. Moreover, the National School Boards Association reports that if buildings depreciate at a rate of 2 percent per annum, the the vast majority of schools are at or approaching end of their lifecycle. Depending upon the status of systems upgrades from mechanical to automatic, the cost for replacement weighs decisively upon whether operations and maintenance are deferred to a later date.

In January 2018, The American Society for Healthcare Engineering of the American Hospital Association and the American Institute of Architects’ Academy of Architecture for Health published a monograph titled, “State of U.S. Health Care Facility Infrastructure,” illustrating the accelerated aging status of American healthcare facilities around the country. According to the monograph, for example, the, “Median average age of plant for U.S. hospitals in 2015 ranged from 10.78 to 11.48 years (depending on publishing source), compared with 9.8 to 9.96 years in 2004, and 8.6 in 1994. This increase in median average age of plant of nearly three years over the past two decades indicates that hospitals, in general, have struggled to raise the capital needed to keep their facilities up-to-date.” With over 8,000 health care delivery facilities consisting of registered hospitals and retail health clinics, the budgetary impact for hospital infrastructure approximates $1 trillion.

In order to attract the estimated $6 trillion investment capital (in the form of capital gains) into qualified opportunity zones, basic underlying infrastructure projects will need to be undertaken, serving as a positive externality. The three main drivers of social infrastructure–schools, hospitals and housing–will require investment proceeds ranging from $1.5 to $2 trillion. The potential for positive externality may, ultimately, enable qualified opportunity zones to derive a net social benefit all while serving as a preferred mechanism for equity investment, even on the part of public pension funds. Infrastructure may serve as the catalyst for maximizing local public goods. Once again, infrastructure is paving the way.

Author: Daniel G. Bauer is finishing his Doctorate at the School of Public Administration at Florida Atlantic University. Mr. Bauer has an Executive MBA from the College of Business at Florida Atlantic University and a BBA in Finance from University of Toledo College of Business. Daniel has 20+ years of professional experience both domestically and abroad. His research areas focus on finding solutions at the confluence of financing, procurement/supply chain, organizational behavior, sustainability, and social responsibility. Please reach out to him at [email protected]

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