The Opportunity Zones Transparency, Extension and Improvement Act, H.R. 7467/S. 4065, introduced April 7 responds to widespread agreement across the industry and in Congress on the need for reporting on the targeted impact of investments in opportunity zones (OZs) and implementing change to better incentivize investment in underserved communities.

The bipartisan, bicameral legislation not only addresses the need for increased reporting requirements, it also seeks to build upon the good already realized to date by extending the OZ incentive through the end of 2028 to facilitate continued investment in underserved, low-income communities, encouraging small dollar impact investments and providing operating support and technical assistance to high-poverty and underserved communities. Since its inception, one criticism that has dogged the incentive is the attention given to a small number of OZs that were not considered needy. The bill would address these OZs by decertifying zones that are not impoverished.

At the time of this writing, the bill is sponsored by Sens. Cory Booker, D-New Jersey; Tim Scott, R-South Carolina; Mark Warner D-Virginia; Chris Van Hollen, D-Maryland; and Todd Young, R-Indiana, as well as Reps. Ron Kind, D-Wisconsin; Mike Kelly, R-Pennsylvania; Terri Sewell, D-Alabama; Dan Kildee, D-Michigan; and Jackie Walorski, R-Indiana. The inclusion of Scott, Booker and Kind, the original co-sponsors of the Investing in Opportunities Act of 2016, which was ultimately included in the Tax Cuts and Jobs Act (TCJA) of 2017, as leading sponsors of the bill demonstrates that it would preserve the intended scope of the legislation while enhancing the OZ incentive.

The Impact of OZs  

The OZ incentive has been a driving force behind a significant influx of investment capital into low-income communities throughout the United States since its inception. Adapting and expanding the OZ incentive under the Opportunity Zones Transparency, Extension and Improvement Act would allow it to continue to provide investment in underserved communities across the country. Novogradac conducts a rolling survey of a select subgroup of qualified opportunity funds (QOFs) that tracks actual investments made into QOFs and businesses in these communities. As of Dec. 2021, the total reported equity investment received by QOFs exceeded $24 billion. While official statistics are not yet available, governmental estimates of cumulative investments into OZs are as high as $75 billion, with significant additional investment expected to continue through the remaining life of the OZ incentive.

Reporting Requirements, Decertification have Long Been Called for

H.R. 7467/S. 4065 has five main provisions that would enhance and target the power of the OZ incentive:

• Extending the deferral period of the OZ incentive through the end of 2028,
• Reinstating the reporting requirements that were included in 2017 in the Investing in Opportunities Act, but were stripped out due to procedural rules,
• Sunsetting the OZ designation for census tracts with a median family income at or above 130% of the national median family income (MFI),
• Allowing QOFs to be organized as “funds of funds” to invest in other QOFs, which would provide smaller communities and projects with the financing they need, and
• Creating a State and Community Dynamism Fund to provide grants to enable states to drive private and public capital to underserved businesses and communities.

The OZ incentive deferral period is currently set to expire after Dec. 31, 2026, and under this proposal (Sec. 301) investors will have until the end of 2028 to consider investments in OZ. This extension would also make Dec. 31, 2028, the date upon which tax would be due on all deferred capital gains invested in a QOF since inception–a deferral extension of two years. The OZ bill will also allow for an additional 5% reduction on capital gains invested if the investment in the QOF is held for six years versus the seven-year holding period required under current law, thus allowing more investors to realize this benefit.    

As originally envisioned in the Investing in Opportunities Act, reporting was an integral part of the OZ incentive. Due to Senate budget reconciliation rules, reporting was removed from the final bill language included in the TCJA. Since that time, Scott, Booker and others have been looking to restore the reporting requirements so that there is a clear methodology to assess investments into OZs, including the types of businesses and projects receiving investments and the impacts these investments are having in the communities they are located. Section 201 of the OZ legislation includes provisions originally introduced in  S. 2994, Improving and Reinstating the Monitoring, Prevention, Accountability, Certification and Transparency of Opportunity Zones Act introduced by Scott and seven co-sponsors in the 116th Congress. The new legislation would: expand the information required to be reported on IRS Form 8996; require investors to provide additional information on their OZs investments; require certain qualified opportunity zone businesses to provide QOFs so that the funds may meet their reporting requirements; details penalties for failing to comply with the reporting requirements outlined; and public reporting requirements and required reporting from the U.S. Department of the Treasury.   

Another major provision of H.R. 7467/S. 4065 is the decertification of a small number of certain higher-income census tracts. The designation of these tracts, which have drawn criticism as they do not appear to conform to the intended goals of the OZ incentive, was permitted, as they either fit the definition of a low-income community or they were allowable contiguous tracts, as long as the incomes of such tracts were no more than 125% of the adjacent qualified low-income tract. Still, to further ensure the original intent of the incentive remains intact, which is to attract investment to underserved, low-income areas, OZ census tracts with an MFI that exceeds 130% of the national MFI would be decertified. The bill provides that Governors may nominate replacement census tracts as qualified OZs. Provisions of the recently introduced Rust to Revitalization Act, H.R. 7183, have been included and would allow certain zero-population brownfield industrial census tracts to be designated as OZs. 

The early sunsetting of high-income tracks and contiguous tracks proposed in the new legislation could have implications for current investors and the bill details the process by which OZs would be decertified and the timeline for this process. Thankfully, preexisting trades or businesses operated by a QOF or a qualified OZ business in a disqualified tract can retain the tax benefits so long as there was (1) a SEC registered or similar offering disclosing the intent to invest, or (2) the QOF or qualified OZ business has entered into certain written binding commitments to make an investment of at least $250,000 or more,  or (3) the IRS has determined that the entity has relied upon the designation of the disqualified census tract as a qualified OZ and has suffered a loss as a result of its removal.  

The remaining two proposals are designed to drive investments. By allowing for a “fund of funds” model, QOFs would be able to invest in other funds, which would create opportunities for smaller communities and projects to receive needed financing. There are requirements that must be met, such as the “Qualified Feeder Fund” being formed as a partnership and investing at least 95% of its assets into another QOF.

The formation of the State and Community Dynamism Fund, would provide $1 billion to states, territories and the District of Columbia that can be used to fund “technical assistance, capacity building, and financing support to drive capital to projects and businesses in underserved communities.” Underserved communities include high-poverty, high-need, rural and underbanked communities. The targeted businesses would be minority-, women- and veteran-owned businesses. States must provide an annual report to Congress and undergo an audit on their use of the funds.    

Novogradac’s OZ Working Group Continues to Encourage Improvements, More Varied Investments  

Since its inception, the mission of the Opportunity Zones Working Group (OZ Working Group) has been to ensure the OZ incentive attains its stated goals of driving investment to underserved communities. In addition to its continued analysis of technical and administrative issues, the OZ Working Group continues to examine how any potential modifications to the OZ incentive and to tax law could affect OZs and analysis of H.R. 7467/S. 4065 is on the working group’s immediate agenda. In March, the OZ Working Group sent a letter with regulatory recommendations to Lily Batchelder, Assistant Secretary for Tax Policy at the U.S. Department of the Treasury.

Recommendations made by the working group in the letter to Batchelder included regulatory actions that could be taken to stimulate investment in both affordable housing and operating businesses. Other recommendations were made to ensure changes around QOF certification and decertification do not harm existing investments or limit future investment. Enacting data collection and monitoring requirements that do not unduly burden the government and QOFs was also included among the group’s recommendations. The letter also noted where regulatory actions could be taken to provide clarity and facilitate compliance for start-up businesses. In this letter, the OZ Working Group asked Treasury to exercise caution when considering modifications to the OZ incentive to ensure they do not suppress the flow of capital that is so desperately needed in OZs.

There is widespread agreement among working group members on the need for transparency and reporting on the targeted impact of investments in OZs.  The OZ Working Group intends to be part of this conversation, suggesting reasonable measures that protect taxpayers and preserve the efficiency and flexibility of the incentive without overburdening entrepreneurs and the government.

Learn More About What’s Next for OZs

Novogradac, through the OZ Working Group and the firm’s OZ services, will continue to maintain a leadership role within the OZ industry by monitoring emerging issues and providing recommendations for guidance around such issues. Those wanting to have a voice in shaping how the OZ incentive progresses from this point forward should visit the OZ Working Group homepage for details about the group and information on how to join. Novogradac partner Brent Parker joined Michael Novogradac on last week’s Tax Credit Tuesday Podcast where they not only discussed the new legislation, but also discussed what’s next for the OZ incentive. This conversation is a precursor to the Novogradac 2022 Spring Opportunity Zones Conference, which will be taking place April 21-22 in Long Beach, California, and online. It is not too late to register for the conference and join OZ experts and professionals as they discuss the future of the incentive, learn about best practices and expand their network. The Novogradac Opportunity Zones Investment Report is another available resource to learn more about the types of investments being made in OZs.