Sports sector a great fit for ‘Opportunity Zones’
When Nationals Park opened in Southeast Washington, D.C., in 2008, it was the centerpiece of a plan to revive a long-blighted section of the nation’s capital. Eleven years (and $670 million of public financing) later, the Anacostia neighborhood is widely seen as a triumph of urban development, with the ballpark just part of a revitalized area that includes a wide array of residential and commercial development.
It was this type of success story that was envisioned by policymakers and politicians when they included a provision in the new tax law called the “Investing in Opportunity Act” designed to attract private investment capital into economically distressed areas. The law allowed for the creation of more than 8,000 “Opportunity Zones” around the country — low-income census tracts designated by the governors of all 50 states.
Opportunity Zones were the brainchild of tech entrepreneur Sean Parker, whose think tank Economic Innovation Group helped write the policy. Parker recruited a rare bipartisan group of leaders in Washington, led by Sen. Cory Booker (D-N.J.) and Sen. Tim Scott (R-S.C.) to turn it into law. Here’s how it works:
■ A company or individual who sells any investment at a profit would normally be subject to a capital gains tax of either 15% or 20% of that profit.
■ Under the Opportunity Zone program, if that same investor reinvests the cash proceeds of that sale into a Qualified Opportunity Fund — a fund that invests in projects or businesses located within an Opportunity Zone — they get to both reduce that tax bill and defer it to years into the future.
■ Perhaps most significantly, any additional profits that an investor realizes from their subsequent Opportunity Zone investment may be completely tax free.
What does all this have to do with sports? Sports is among the industries best positioned to take advantage of this tax incentive. While the program is still in its infancy, we foresee at least four potential pathways for sports and Opportunity Zones to intersect:
1. Stadium and arena construction and renovation. Fourteen of 28 NFL stadiums (counting the new stadiums in Los Angeles and Las Vegas) sit within Opportunity Zones, with another five adjacent to zones (see chart). MLB, the NBA and NHL have 13, 12 and seven buildings in zones, respectively. Clubs looking to upgrade or replace their facilities could invest or raise capital using the benefits of the program. The private capital unlocked by this incentive could give clubs an alternative to public financing, which faces growing skepticism from elected leaders and taxpayers.
2. Ancillary mixed-use districts. The strategy of building retail, housing, office and hospitality destinations to complement arena and stadium projects is increasingly becoming core to the business models of sports teams, particularly when community expectations are high for venue projects to generate broader economic and community benefits on game and non-game days alike.
3. Youth sports complexes. These are another potential beneficiary. The last decade has witnessed a building boom of multisport youth facilities nationally, but there remains an acute shortage of places for kids to play in lower-income areas. Directing Opportunity Zone dollars to the creation of new youth sports facilities is consistent with the pro-social policy goals of the program, and could help stem the steady decline in youth sports participation that we have seen in these communities.
4. Sports-related operating businesses. While early Opportunity Zone investment has favored real estate, the program is primarily intended to provide patient and discounted capital to support businesses with the potential to create jobs in areas that need it most. If sports entrepreneurs are able to position ventures authentically in Opportunity Zone communities, emerging areas like esports, drone racing, sports media and tech, incubators and other models could show promise as well. (Sportsbooks and golf courses, it should be noted, are excluded from the program.)
Investors and those seeking to raise investment capital need to know that the clock is ticking on this program. Investments in Qualified Opportunity Funds must be made by the end of 2019 to qualify for a 15% reduction of capital gains taxes for investments held at least seven years. The biggest economic benefit to investors, however, is the ability to achieve tax-free profits on Opportunity Zone investments that are held at least 10 years.
There is an estimated $6 trillion in unrealized capital gains currently sitting on paper in the U.S. Those dollars have the potential to transform struggling communities and create countless jobs. The sports industry has a chance to play a major role in this process while also realizing significant economic benefits. The opportunity of a lifetime beckons.
Rob Simmelkjaer is an attorney, entrepreneur and a former executive at NBC Sports and ESPN. In April he joined CapZone Impact Investments as a senior adviser. Kunal Merchant is managing director of Lotus Advisory, a sports consultancy, and co-founder of CalOZ, a nonprofit trade organization focused on Opportunity Zones.