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Opportunity zone program offers social determinants of health opportunities

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The Tax Cuts and Jobs Act of 2017 offers tax benefits to taxpayers reinvesting capital gains in special funds aimed at lifting low-income communities. The program has significant implications for groups addressing the social determinants of health, offering a massive new source of private funding.

Pushed to reduce healthcare spending and shoulder financial risk for the health of their patients, the $3.6 trillion US healthcare industry is starting to focus on factors that affect health but aren’t usually addressed by the nation’s sprawling healthcare system. These social determinants of health – such as jobs, transportation, safe housing and access to nutritious foods – can have immense influences on health. And yet, hospitals, insurers and other organizations have found that addressing them is challenging and complex, and crucially, funding for larger-scale projects is hard to come by.

This could change in coming years as billions of dollars in capital investments – Treasury Secretary Steven T. Mnuchin projected as much as $100 billion – are expected to flow into what are known as tax-advantaged qualified opportunity funds (QOFs) earmarked for investment in 8,700 low-income census tracts designated as qualified opportunity zones (QOZs).

This sets up an unusual chance to bring together unlikely bedfellows for mutual benefit – financial investors, asset managers and corporations with capital gains tax exposure; business-to-consumer companies looking for growth in low-income markets; and healthcare providers, insurers, community funds and philanthropic foundations seeking funding to increase the scale and effectiveness of social impact interventions.

Working together through a QOF, corporate and individual taxpayers can seek a return and satisfy increasing shareholder desires for social good, consumer companies can gain access to low-income markets, and healthcare organizations and foundations can gain access to private capital to fund social determinants of health projects.

Established by the Tax Cuts and Jobs Act of 2017, the QOZ program offers taxpayers three types of tax benefits in exchange for reinvesting capital gains in a QOF. A taxpayer – for example, a private equity firm – can defer payment of capital gains taxes through 2026 as long as the gains are held in the QOF. If the firm holds the gains in the QOF for more than five years, the basis on the deferred gain is increased by 10 percent. After leaving the gains in the QOF for more than seven years, the firm can increase the basis by another 5 percent. Finally, appreciation on the original investment grows tax-free as long as it is held in the QOF for at least 10 years.

QOFs are required to invest 90 percent of their assets in tangible property, such as real estate, businesses, or both, in one or more QOZs. QOZ businesses are to be solidly anchored in the opportunity zone. They must maintain 90 percent of their assets in tangible property in the zone and generate 50 percent of their gross income within the zone, according to proposed guidance released by the US Treasury in April (for more on the proposed guidance, please see PwC’s brief). Unlike other federal economic development incentive programs, there is no federal cap on the amount of money that can be invested in QOFs.

And so, for example, a tax-exempt urban hospital interested in addressing homelessness to reduce emergency department admissions could partner with a coalition of private equity firms, pharmaceutical companies, individual investors, public and private companies and family offices to buy and renovate vacant buildings in nearby QOZs to operate as affordable housing through the coalition’s QOF.

Homeless residents could gain safe, secure housing. The hospital could reduce admissions to its emergency department. Over 10 years, the investors could enjoy the program’s tax benefits – deferred capital gains taxes, reductions in those taxes and, finally, elimination of tax on appreciation of the assets after 10 years.


Get the ball rolling. Find partners. Settle on a role.

QOFs likely will bring together coalitions of unlikely bedfellows – investors, social service organizations, community leaders, hospitals and insurers. All of the stakeholders should agree on the group’s mission and goals from the beginning.

Investors should be clear about their priorities. Which is a higher priority – the tax incentive or the social good? What kind of return do they expect? What is their broader purpose? Who do they want to partner with? A university? An AMC? A community hospital? Other entities looking to attract new capital? The motivation for a company should not just be, “I want to have this gain.” It also should answer, “Why do I want to reinvest in this way?”

Non-profits should ask themselves a similar set of questions. What does the organization want to get out of the arrangement? How does the project align with the organization’s mission, and their plans to transition to more value-based reimbursement and financial risk? Is acting as a health manager part of the organization’s strategic mission? Will the organization lead the project, manage it, fund it, or convene the stakeholders? Is there a risk to reputation, and possibly non-profit standing, of being involved in a QOF if the project is purely a commercial venture and not a socially-minded enterprise? Correspondingly, could there be other tax risks as well? How well does the organization understand the community in the targeted QOZs?

All parties should ask themselves whether the mechanisms for governance and value sharing can be addressed within the QOF vehicle, or whether some form of contractual or co-ownership relationship needs to be established by the stakeholders. What other mechanisms can be used, if one is needed besides the QOF?

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Find a disinterested party to build trust.

Even if all stakeholders agree on the QOF’s mission and goals, the coalition will benefit from a disinterested party (a “trusted referee” or “broker”) to resolve disputes around value and risk, and to safeguard the interests of the community, QOF partners and shareholders. The disinterested party also can help develop the social impact metrics and data capture method, and then measure and report on impact. This party could be an organization or person the stakeholders trust not to act in a proprietary, self-interested way. This broker ideally should be an entity that will not directly benefit from the project, explains Len Nichols, director of the Center for Health Policy Research and Ethics at George Mason University.

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Consider starting with transportation, food and housing.

Tax-exempt hospitals, which are required under the Affordable Care Act to produce Community Health Needs Assessments, could be valuable sources of information involving community health priorities.

Early wins can lead to other activities, and build trust among stakeholders and within the community. Some QOF managers may become interested in adapting an intervention that has shown promise in a different part of the country, but those efforts may not translate directly. For example, efforts to address food deserts in Ohio may not work in Chicago when Chicago needs childhood development interventions. Critically, in the planning stages, don’t ignore the need for data and metrics. For example, a project addressing childhood asthma may want to measure more than ER visits and admissions; it also may want to monitor missed days of school. These data elements will help stakeholders show impact, allowing them to adjust and expand with time.

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Lift the community, not just the neighborhood.

One common shortcoming in economic development efforts is to focus on improving the bricks-and-mortar neighborhood at the expense of the people living there, said Brian Castrucci, president and CEO of the de Beaumont Foundation, a non-profit focused on social determinants of health. “A hammer can build a house and it can also bludgeon something,” Castrucci said.

QOFs focused solely on renovating buildings in a QOZ may result in a flurry of activity – openings of new coffee shops, restaurants, big box retailers, grocery stores, retail pharmacy chains. But these developments also could come with spiking rents and property taxes for residents and their businesses, triggering an exodus of the original population and an influx of wealthier people.

To avoid that, QOFs and their partners should work with local government to support policies that protect the residents – freezing their property taxes for a period of time, for example. QOFs and their partners also should work closely with community groups and leaders in the QOZ to find ways to ensure residents benefit and are not merely pushed out.

Len Nichols of George Mason University suggested finding groups or coalitions that are already in place and building on them. Does it meet regularly? Who is in it? Are there people not at the table yet? Is the table complete? Has the coalition already put money into a project together? Are there outcomes from that project? Coalitions that check all of those boxes are good bets. “Build on what’s there and put twice the money in those places,” he said.

A good example of such a coalition is the California Accountable Communities for Health Initiative, which brings together private and public funding to work on social determinants activities in 13 California counties. The initiative is working on, for example, preventing heart attacks and strokes in San Diego County by enlisting a broad coalition of local partner organizations. This includes faith-based organizations helping to promote nutrition, physical activity and appropriate treatment for high risk individuals, as well as neighborhood community centers that can increase access to treatment, education and health coaching.

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Develop a post-10-year endgame.

The opportunity zone program’s tax benefits run over a period of 10 years, leaving stakeholders with a key question. What happens after 10 years if some investors want to cash out? If, for example, the QOF has funded a university research center in a QOZ, after 10 years, what happens if the university wants to continue running it? Some stakeholders – especially tax-exempt players – may be reluctant to join in efforts that could end abruptly with the sale of property at the end of 10 years. A clear game plan, bought into by all stakeholders, is crucial to building trust and ensuring a clean transition after the 10 years pass. Stakeholders also should develop a clear plan for taxpayers that want to sell before the 10-year mark is reached. Establishing mission and goals at the beginning will build the foundation for plans around timing.

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Rob Friz

Health Services Tax Leader, PwC US

Matamba Austin

Principal, PwC US

Hallie Caywood

Partner, PwC US

Travis Patton

Partner, Exempt Organization Tax Services, PwC US

Ginger L Pilgrim

Principal, PwC US

Benjamin Proce

Partner, PwC US

James Prutow

Principal, PwC US

Gwen Spencer

Partner, Exempt Organization Tax Services, PwC US

Steven Kennedy

Director, PwC US

Benjamin Isgur

Health Research Institute Leader, PwC US

Trine K. Tsouderos

HRI Regulatory Center Leader, PwC US

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