Doell & Sen: Are opportunity zones really creating opportunities?

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By Melissa Doell and Sunrita Sen

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The federal “Opportunity Zones” incentive began as a bipartisan congressional initiative enacted as part of the Tax Cuts and Jobs Act of 2017 to spur economic development by encouraging long-term private capital investment in low-income urban and rural communities nationwide. The program allows qualifying investors to defer and potentially avoid taxation of certain capital gains by making equity investments in qualified Opportunity Funds that invest in qualifying property and/or businesses in designated Opportunity Zones. Indiana has 156 census tracts designated as Opportunity Zones covering all or portions of 83 cities and towns in 58 counties throughout the state. There are 36 Opportunity Zone tracts located in Marion County alone.

Since the Opportunity Zones program became law more than one year ago, curiosity has grown among investors. Yet, a press release from Preqin, a company providing data, solutions and insights for alternative asset professionals, suggests that curiosity concerning Opportunity Zones isn’t necessarily translating into sizeable dollar figures. According to the press release, there are approximately 62 Opportunity Funds nationwide seeking a total of $16 billion from clients, compared to 300 private real estate funds raising over $124 billion in 2018 alone. Thus, money raised by Opportunity Funds is still small potatoes when compared to overall investment in real estate funds in general and in light of the Economic Innovation Group’s (EIG) estimate of $6 trillion of unrealized capital gains that could be poured into Opportunity Zones. The slow start to the program may be attributable, in part, to uncertainty surrounding certain provisions of the legislation and limited guidance provided by the IRS. Proposed regulations promulgated in October 2018 provided some clarity, but businesses and investors continue to wait for further temporary regulations to be released. A second set of temporary regulations that is expected to provide further guidance is currently being reviewed by the White House Office of Information and Regulatory Affairs and should be released within the coming weeks.

Despite the uncertainty of regulations or other administrative guidance surrounding the program, there is growing optimism among investors and community stakeholders alike regarding the opportunities stemming from this program. An IRS public hearing on the notice of proposed rulemaking for investing in Opportunity Funds held on Feb. 14 was a testament to the interest in the incentive. According to EIG, the public hearing had 90-minute-long lines to get into the building, an auditorium filled to capacity and testimony from 23 scheduled speakers lasting nearly five hours. EIG further noted that the testimonies and comment letters submitted to the IRS on the regulations converged upon several key issues, the most noteworthy of which has been the constant refrain around the need for regulations to support investments in operating businesses. Such investments are arguably more complicated under the existing guidance than direct investments in real estate but are potentially a powerful force for sustainable and inclusive growth that could carry potential for positive economic growth in distressed communities. Critics of the program fear that the IRS’s failure to address these critical issues, which would open the door for business investments, will result in the Opportunity Zones program falling short of its full potential.

While federal regulations are still being debated in Washington and serious investment in the program has yet to pick up, Indiana is taking concrete steps to streamline its efforts and intentionally champion the transformation of Opportunity Zone neighborhoods into vibrant places for residents and businesses. According to the Indiana Economic Development Corporation, Indiana is well-positioned for investment through the Opportunity Zone program because of the state’s pro-growth business environment, competitive tax climate, efficient regulatory system, AAA credit rating and consistently balanced state budget. In November 2018, the Opportunity Investment Consortium of Indiana was officially launched to aid in matching projects in need of funding in the 156 designated tracts to potential investors. The consortium has the support of a diverse group of investors and community partners, such as Cinnaire, Community Investment Fund of Indiana, Indy Chamber, Indiana Economic Development Corp. and Indiana Housing & Community Development Authority, as well as an online deal portal to identify a pipeline of projects that can garner both local and national investments in Opportunity Funds. The consortium is primarily aimed at accomplishing two things: providing a portal to projects — affordable, commercial, industrial or small business —where investors can review preliminary information and have conversations with project sponsors, and; serving as a conduit for education, technical assistance, and discussion to leverage new funds.

While Indiana’s foray into Opportunity Zone fundraising has seen some success, the absence of built-in reporting requirements to make clear which projects received investments from Opportunity Funds is a concern. The program also does not require community leaders to track or measure the impact of such investments on their communities, making it extremely difficult to measure the actual success of the Opportunity Zone program in Indiana and across the nation. To alleviate these crucial concerns, U.S. Impact Investing Alliance and the Beeck Center for Social Impact and Innovation at Georgetown University have released an Opportunity Zones framework that aims to ensure Opportunity Zone returns accrue equally to communities and to investors. This framework of principles is likely the first of many that will call for federal legislation to be amended to include requirements for transparency measurement and impact reporting.

With the next round of federal regulatory guidance around the corner, this is a critical moment for the Opportunity Zones program to be able to fully realize its potential. If policymakers and community leaders can incorporate guidelines to ensure transparency, measurable community benefit and broad geographic impact, the Opportunity Zones program may be able to serve its true purpose, i.e., to jump start depressed economies across the nation. Presently, Indiana’s lawmakers have not proposed legislation relating to Opportunity Zones or Opportunity Funds, but interest from within the state and from external investors and developers may well serve to bring this program to the forefront of the state’s agenda.•


Melissa Doell[email protected] — and Sunrita Sen[email protected] — are attorneys with Frost Brown Todd LLC and members of the firm’s real estate practice group. Opinions expressed are those of the authors.

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