How OZ Investments Qualify Under Current Public Welfare Investment Authority and CRA Guidance

Published by Peter Lawrence, Teresa Garcia on Tuesday, December 3, 2019
Journal cover thumb December 2019

As banks eye the upcoming Dec. 31, 2019, deadline to invest in a qualified opportunity fund to get the maximum tax benefit, the Novogradac Journal of Tax Credits spoke with Barry Wides, deputy comptroller for community affairs at the Office of the Comptroller of the Currency (OCC).

The discussion focused on how opportunity zones (OZs) qualify under existing public welfare investment authority and Community Reinvestment Act (CRA) guidance, as well as a forthcoming OCC publication focused on OZs that is expected to be published in 2020.

Q: U.S. banking laws allow national banks and federal savings associations to make equity investments in real estate and operating business under certain circumstances. The legal authority which banks use to make OZ investments is the public welfare investment authority. How do OZ investments qualify under the existing public welfare investment authority?

A: The public welfare investment (PWI) authority for national banks is codified in Title 12 of the Code of Federal Regulations Part 24. Specifically, 12 CFR 24.3 outlines the criteria used to qualify an investment under this authority. This regulation requires qualifying investments to primarily benefit low- and moderate-income individuals (LMI), LMI areas or other areas targeted by a governmental entity for redevelopment, or be eligible to receive consideration as a “qualified investment” under the Community Reinvestment Act.

Barry Wides Image

Image: Courtesy of Office of the Comptroller of the Currency Barry Wides, Office of the Comptroller of the Currency’s deputy comptroller for community affairs.


One of the questions I get asked frequently by banks is, if a state has identified a census tract as being a qualifying OZ tract, does that mean that any deal in any opportunity zones-qualifying tract would be considered a government-targeted area for redevelopment under public welfare investment authority? We have concluded that the process of a state government making such an OZ designation, would not, in and of itself, be sufficient to meet the PWI government-targeted area for redevelopment criteria.

If a bank is uncertain if an investment would qualify for PWI, they can contact the OCC’s Community Affairs office in Washington, D.C., or one of our district community affairs officers. We can review the PWI criteria and provide guidance as to how to submit a proposed transaction for review through the OCC’s public welfare investment review process.

Q: How do OZ investments in new markets tax credit (NMTC)-eligible census tracts qualify for positive consideration under the existing CRA regulations and guidance?

A: [OZ investments] are not the same as new markets tax credit investments and they’re not governed by the same targeting criteria. We have within our CRA regulation and in the Interagency Q&As on Community Reinvestment, a set of criteria as to what qualifies as a community development investment–whether it’s affordable housing for LMI individuals, a project providing community services targeted to LMI individuals, a deal that involves economic development by providing financing for small business or small farms, or one that involves the revitalization or stabilization of underserved or distressed nonmetropolitan middle-income areas, LMI areas or designated disaster areas. Adherence to community development criteria is going to determine whether the OZ project going to be a CRA eligible activity.

Q: About 2 percent of all OZs are located adjacent to but outside of NMTC-eligible census tracts. How are OZ investments in those adjacent census tracts treated under existing CRA regulations and guidance?

A: We apply the same rules. For example, affordable housing for LMI individuals doesn’t need to be in a LMI area as long as the affordability requirements comply with CRA. You can have community services targeted to qualifying individuals as described in our CRA guidance and it doesn’t necessarily have to be in a LMI area. At the end of the day, the banker that’s thinking about CRA consideration for opportunity zones investment is going to be applying these criteria the same way, whether it’s in a new markets tax credit-eligible tract or an adjacent, non-new markets tax credit-eligible tract. It’s looking at the purpose of the investment and what it’s going to do and who it is going to benefit.

Q: Is there a difference in approval time for OZ investments vs. other incentives, such as the low-income housing tax credit and new markets tax credit?

A: The low-income housing tax credit and new markets tax credit are specifically identified in our regulations, so these investments typically can be made through an “after-the-fact” notice process (provided the bank meets certain supervisory criteria in 12 CFR 24). This “after-the-fact” notice process allows the bank to make the investment, then notify us within 10 business days of the date on which the investment was made. Opportunity zones are not specifically identified in our PWI regulation. A bank could still potentially submit an after-the-fact notice for opportunity zones, but they’re usually the transactions that clearly fall within our guidelines, such as affordable rental housing primarily serving LMI individuals. Some deals are in blind funds that invest in deals as they become opportunistically available. They may not know where deals are going to be, whether they’re in a new markets tax credit-qualifying census tract or part of adjacent tracts. Those are deals for which we strongly encourage banks to go through the PWI prior-approval process.

Our regulations say we should try to make these prior-approval decisions within 30 days. That’s our goal. Sometimes we need to get additional information and we can’t meet the 30-days target for approval decisions. Under these circumstances we formally extend the timeline for our review. However, we endeavor to respond to all prior approval requests as expeditiously as possible.

Q: What kind of OCC guidance can we anticipate on the prior-approval process for those straightforward OZ transactions?

A: We do periodically make our PWI prior approval letters available on our website if the investment involves novel or new types of investments. We’re planning on posting one or more opportunity zones prior-approval letters on the OCC’s website. This will help the public better understand our evaluation criteria for opportunity zone investments that are not as clear-cut as the affordable housing example I described previously. We’re also working on a Community Development Investments newsletter on opportunity zones. We’ll provide more information for interested parties on the kinds of considerations that go into our thinking about opportunity zones and public welfare investment authority. It’s possible we could make an amendment to or republish the public welfare investment authority rule to mention opportunity zones, but it isn’t something that will happen within a particular period, and very likely not before a notice of proposed rulemaking on CRA regulations is released.

Q: What can we expect from the forthcoming OCC publication on OZ? Will it be similar to the OCC’s Community Developments publications?

A: It’s an edition of our community development newsletter. It will touch on regulatory considerations, public welfare investment authority, CRA consideration and will look at deals by banks. We’re seeing banks that are getting approached by funds for information so we’re trying to give a snapshot of what we’ve seen in terms of deals and the regulatory process.

Q: Do you think banks can anticipate OCC guidance on opportunity zones before Dec. 31?

A: No, I don’t think so. [Banks] should contact our office directly and we’ll process [the prior-approval requests] expeditiously.

Q: While we understand that OCC has not yet released a proposed rule on rewriting CRA regulations and you cannot comment on the specifics of the proposed rule, could you comment on the contours of the debate on how OZ equity investments and loans in OZs should be treated under the rewritten regulations?

A: You can review the comments on OCC’s advance notice of proposed rulemaking on CRA modernization and see that we received a number of comments on treatment of OZ–including a letter from the Opportunity Zones Working Group.

In our CRA notice of proposed rulemaking we plan to provide greater clarity around the definition of community development, which we hope will make it easier for banks to determine if an activity meets our community development criteria.

Editor’s notes: The Opportunity Zones Working Group submitted an Oct. 15 comment letter to the OCC regarding OZ investments under existing PWI and CRA guidance. Also, Comptroller of the Currency Joseph Otting told attendees of an American Banker conference Nov. 12 that his agency plans to release a CRA notice of proposed rulemaking by the end of 2019.