Impact Reporting is Key Ingredient to Ensuring Successful Implementation of Opportunity Zone Incentive

Published by Bob Ibanez on Wednesday, October 10, 2018 - 12:00am

Now that the opportunity zone (OZ) nomination and designation process has been completed and the Internal Revenue Service (IRS) has published an initial list of 15 frequently asked questions, community and economic development practitioners and policy makers are now focusing on soon to be released proposed regulations from the IRS.

It would be unrealistic to expect the forthcoming regulatory guidance to address every issue and concern that has been raised thus far but hopefully it will provide enough clarity to jump-start opportunity fund investments into qualified OZ property. Once proposed regulations are in place, there will continue to be emphasis placed on seeking additional guidance from the IRS on how the OZ benefit under IRC 1400Z-2 will be administered.

One area that may not receive as much attention at this early stage of rolling out the OZ incentive is the reporting of impacts. This is due, in part, to the enabling legislation not including any impact reporting requirements. (The original legislation [H.R. 828 and S. 293] did include reporting requirements but they were stripped out because of the budget reconciliation rules under which the final bill was passed.) Consequently, it will be incumbent upon Treasury to institute impact reporting requirements that enable federal legislators and other OZ stakeholders to assess the degree to which investments truly benefit residents of low-income communities including low-income persons.

While at first blush this may not seem like a particularly painstaking exercise, it is vitally important that Treasury establish comprehensive metrics including the ones outlined in the congressional conference report related to job creation, poverty reduction and new business starts. Furthermore, it is imperative that the reporting requirements be implemented as quickly as possible instead of allowing years to elapse as would be allowed by the conference report language stipulating that the Secretary or the Secretary’s delegate be required to report annually to Congress on the OZ incentive beginning five years after the date of enactment.

Why is it so important? Unlike other taxpayer incentives including the new markets tax credit, the OZ incentive has no public benefit requirements. Consequently, in theory, OZ investments could gravitate to those investments or businesses with the greatest potential for capital appreciation without regard to their impact on residents of low-income communities including low-income persons.

Furthermore, it will be easier for Treasury and opportunity fund managers to collect data at the beginning, rather than to impose reporting requirements after many funds have been operating, and data collection will crucial in getting Congress to make legislative adjustments and extend the incentive.

While the IRS may not be the logical resource to tap to identify such metrics, there is a bureau within Treasury that has the requisite experience and expertise:  the Community Development Financial Institutions (CDFI) Fund. The CDFI Fund collects impact data from CDFIs and community development entities on an annual basis. The breadth and depth of data points is well beyond what is likely to be established for OZ fund reporting to Treasury but is a good place to start.

In determining meaningful impact measures, particular attention should be paid to including data points that quantify the extent to which investments in OZs directly benefit residents of low-income communities including low-income persons. For example, affordable housing, creation or retention of living wage jobs; development or expansion of much needed commercial or community goods and services; and financing of minority-owned or controlled operating businesses.

A necessary process to ensure successful implementation of OZ impact measures must also include stakeholders at the state and local level. To the degree the Treasury mandated impact reporting requirements fall short of some observer’s expectations for transparency and accountability, it will be incumbent upon state and local jurisdictions to provide insights into the impacts attributable to opportunity fund investments on residents of low-income communities including low-income persons.

Recently, the Novogradac Opportunity Zone Working Group added an IRS compliance and impact reporting subgroup in recognition of the importance of establishing impact measures for the OZ incentive. If as much attention is paid to this aspect of implementing the OZ incentive as efforts by the legal and accounting professions to obtain IRS guidance, meaningful data and analysis will result that will, in turn, enable Treasury, Congress, policymakers and other OZ stakeholders to effectively evaluate the impact the OZ incentive has had on low-income communities including low-income persons.