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Opportunity Zone development helps Purdue attract industry partners

By David Schwartz
Published: June 11th, 2019

Universities looking to draw companies and start-ups to their regions may be overlooking a government tax incentive program that, coupled with the perks and talent pipeline available on campus, can become a strong economic development and industry engagement magnet.

You may have heard of Opportunity Zones, which are typically associated with revitalization efforts in poor neighborhoods, but most universities don’t recognize their potential for campus economic development. Purdue University and few other schools have, and Purdue’s efforts are now paying off.

David A. Broecker, chief innovation and collaboration officer for the Purdue Research Foundation, is hoping the new 200-acre-plus “Opportunity Zone” on Purdue’s campus will be a major draw for industry. It will feature Discovery Park District, a new ‘city’ that includes not only office and research space, but retail and residential projects as well. This unique environment, he says, can lead to new innovation centers sponsored by major corporations, an increase in the number of start-ups based on university IP, and increased engagement on a number of levels among current industry partners.

Opportunity Zones were created by the Tax Cut and Jobs Act of 2017 and are meant to encourage private investment in underdeveloped communities through tax incentives. Under the law, investors can defer tax on any prior gains invested in a Qualified Opportunity Fund (QOF), which is set up specifically to invest in Opportunity Zone projects. Depending on how long the investment is held, capital gains can be reduced by 10%-15%.

Broecker points out that an “OZ” on a university campus is fairly unique. “Of the more than 8,700 OZs in the U.S., only about three dozen are on university campuses,” he says. Other university-based Opportunity Zones include Indiana University of Pennsylvania, Illinois State University, Liberty University, and California State University, Northridge.

Broecker has been heading up a “road show” to major investment houses and banks, highlighting the advantages of the Opportunity Zone investments. The incentives could make a significant difference for start-ups. “Let’s say you have a million-dollar pre-money valuation, and someone puts in half a million dollars,” Broecker posits. “If you exit at $10 million, capital gains would be $9 million. My understanding is under this model the gains would be tax free.”

A few details are missing from this explanation — here are the capital gains rules for OZ investments:

  • Investors get a temporary deferral of taxable income for capital gains reinvested in an Opportunity Fund. The deferred gain must be recognized on the earlier of the date on which the opportunity zone investment is disposed of or December 31, 2026.
  • Investors can recognize a step-up in basis for capital gains reinvested in an Opportunity Fund, and the benefit is bigger the longer the investment is held. The basis is increased by 10% if it’s held for at least five years, and by an additional 5% if held for at least seven years, thereby excluding up to 15% of the original gain from taxation.
  • A permanent exclusion from capital gains tax capital gains from the sale of the OZ investments applies only if the investment is held for 10 years.

A detailed article on Purdue’s use of the Opportunity Zone legislation to build out its Discovery Park District appears in the May issue of University-Industry Engagement Advisor. For subscription information, CLICK HERE.

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Posted under: University-Industry Engagement Week

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