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Impact Reporting and the Opportunity Zones Incentive

Published by Mark O’Meara on Friday, May 3, 2019

Journal cover May 2019   Download PDF

The opportunity zones (OZ) incentive is expected to drive substantial capital into low-income communities across the country, but in order for that to continue long-term, data is needed to highlight the incentive’s impact.
Community development practitioners are looking for ways to monitor that impact. 

“Impact reporting is a hot topic because people are looking for transparency,” said Bob Ibanez, senior public policy manager at Novogradac. “The issue is proponents’ need for transparency. They want these investments to have real impact in low-income communities.”

John Sciarretti, partner in the Dover, Ohio, office of Novogradac and head of the Novogradac OZ Working Group, said impact reporting will also help the incentive long-term.

“For the long-term viability of the incentive, socially responsible interests are important and data is needed for Congress to pass extensions,” said Sciarretti. “If there is no data, then no informed decisions can be made. That’s the importance of data. …  Aggregate gross data might be easy to find out, but knowing what the money did for the census tract is a different question. Did it provide more opportunities for low-income residents or did it create gentrification?”

The Opportunity Zones Reporting Framework is one approach for OZ impact reporting. 

The Opportunity Zones Reporting Framework is designed to define best practices for investors and fund managers looking to invest in OZs. The framework was established by the U.S. Impact Investing Alliance and the Beeck Center for Social Impact + Innovation at Georgetown University. They took input from a range of contributors, including the Federal Reserve Bank of New York, prospective investors, private wealth platforms and prospective fund managers.

“The framework is a group effort,” said Fran Seegull, executive director of the U.S. Impact Investing Alliance, which works on federal policy and engages with institutional investors to increase the flow of capital to impact investing. “We had many rounds of stakeholder engagement with policy makers, community development finance experts, foundations, fund managers, wealth advisors and others. So, the framework is the collective work of many.” 

The framework asks fund managers to identify key data for each OZ investment, including data points that identify transaction data (size of investment, location, type of property, etc.), core community impact (number and types of jobs created, entrepreneurship, real estate type, infrastructure improvement, etc.), lasting community impact with responsible exits, as well as transparent outcomes reporting. 

“The goal of the framework is to make our contribution to define measurable best practices,” said John Cochrane, manager at the U.S. Impact Investing Alliance.

“The framework is a set of voluntary guidelines for fund managers,” said Ibanez. “It is trying to get people to conceptually align around a set of core criteria, while maintaining the flexibility to be effectively deployed by diverse stakeholder groups across a wide range of asset classes.”
“We see that a market-facing structure was needed to guide capital to the most impactful projects. We want to bring focus to everyone in the space. Everyone should be thinking about the impact,” said Cochrane. “That was the original purpose of the incentive. Doing this successfully requires you to engage with the community you are going into. We want to help investors understand the unique contexts of these zones.” 

For funds participating in the framework, it creates a set of guardrails to ensure positive community effects, which was left out of the guidance. 

Those guardrails are not yet mandated at the federal level. 

“OZ impact reporting is not in the final statutory language. It was stripped out of the bill for parliamentary reasons, but leaders on the Hill continue to press for transparency from Treasury,” said Seegull. “Without that, there is a lack of guardrails. Our concern from the beginning has been about the lack of data [mandated] at the federal level. … We feel that it’s important to collaborate on the framework to encourage the market toward community engagement, accountability and outcomes.” 

While the goal of the framework is admirable, it may have trouble gaining traction. 

“Their effort is commendable. They just started the movement, and it already seems to be gaining some traction, which is good. They are the first out of the gate,” said Sciarretti. “[However,] there are a lot of folks in the OZ market who are not necessarily community-development oriented, so it will be difficult to get them to collect the data without some sort of mandate. It is critical that folks understand that we will need the data if we want lawmakers to consider some form of extension or even permanency for the incentive.”
Sciarretti said the framework could be beneficial to community development-minded investors. “If you put the OZ Reporting Framework seal of approval on a fund, it may attract investors.” 

Sciarretti said voluntary reporting for the OZ incentive reminds him of the early days of the New Markets Tax Credit (NMTC) program, which also started out asking for voluntary data about investments. Sciarretti recalled it being difficult to collect transaction-level data for NMTC investments when certain data collection was voluntary. 

Mandatory Guidance in the Future? 

At the time of this publication, industry practitioners didn’t expect the Treasury Department’s second tranche of OZ guidance to include impact reporting guidelines. 

“Data reporting may be a separate project. It may be part of tranche three. Or, it might not come in the regulations, but in some other fashion,” said Sciarretti. 

However, the industry is expecting OZ reporting guidelines in the future. 

“It’s fair to say that the IRS will come out with guidance,” said Ibanez. “But the IRS may come out with something far less than what certain stakeholders will think is optimal.” 

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