Opportunity Found: Treasury OZ Guidance Outpaces Early Days of NMTC

Published by Michael Novogradac on Friday, November 1, 2019
Journal cover thumb November 2019

A considerable amount of praise and respect–along with a fair amount of consternation and criticism–has been directed to the Department of the Treasury and the Internal Revenue Service (IRS) regarding the pace and content of opportunity zones (OZ) guidance.

Like much of life, perspective is everything. Many investors and fund managers point to a ticking clock, and the perishing nature of the OZ tax incentive, as a means to motivate Treasury and the IRS to issue guidance at a more rapid pace. However, a comparison to the rollout of the most recently enacted community development tax incentive shows that Treasury is working at a comparatively fast pace.

The new markets tax credit (NMTC) was added to the Internal Revenue Code (IRC) at the end of 2000 and the first investments weren’t made until 2003. That timeline, as more fully described below, illustrates the comparative speed of both initial OZ investments and published OZ guidance.

The OZ and NMTC are tax-incentive cousins, not siblings–there is some shared DNA, but significant differences. A comparison of the rollout of the NMTC in the early 2000s with the OZ helps us appreciate how fast we have gotten to where we are and insights into what lies ahead. As Mark Twain is often quoted as saying (absent evidence he actually did), history does not repeat itself, but it rhymes.

NMTC Early Guidance

The NMTC became law as part of the Community Renewal Tax Relief Act of 2000, signed Dec. 21, 2000, by President Bill Clinton. There was a volume cap of $15 billion over seven years–with annual caps–and the credit was for investments in certified development entities (CDEs). Any unused allocation could be carried forward to the next year, which meant there was no statutory urgency to award the calendar-year 2001 round by the end of 2001. The $1 billion 2001 allocation authority was ultimately combined with the $1.5 billion 2002 allocation authority for the first round.

The NMTC carryforward rule is a significant difference from the OZ incentive, which was ostensibly live the moment it became law, and investable once OZs were designated and how funds would be certified was determined.

With the enactment of the NMTC in 2000, Treasury faced two major tasks: issuing tax guidance to govern the operation of the NMTC and creating

Journal November 2019 Washington Wire NMTC/OZ Timeline

a process for awarding and administering the right of funds to issue investments eligible for the credit. The latter task included determining eligible census tracts, certifying funds, awarding credit issuance authority and monitoring compliance with award conditions. The legislation included a statutory deadline of April 20, 2001, for those tasks, with Treasury ultimately delegating that authority to the director of the Community Development Financial Institutions (CDFI) Fund.

Tax guidance wasn’t mission critical until awards were made and allocation agreements signed, so Treasury took the logical step of prioritizing administrative guidance.


NMTC Administrative Guidance

The initial administrative guidance from the IRS and Treasury was issued on April 20, 2001, the statutorily mandated deadline, and published May 1, 2001, in the Federal Register. The guidance provided general information on how an entity could apply to become certified as a qualified CDE, how a CDE could apply to receive an allocation of NMTCs, the competitive procedure through which such allocations would be made and actions that would be taken to ensure that proper allocations are made to appropriate entities. 

Soon after, eligible areas were formally identified. Entities could apply for certification as of Dec. 20, 2001, the first notice of allocation availability was released June 10, 2002 (with an application due date of Aug. 29, 2002) and the first allocations were awarded in March 2003. Allocation agreements were entered into in the subsequent few months.

The timeline (legislation in December 2000, allocation agreements in summer 2003) meant that taxpayers generally couldn’t invest in and generate NMTCs until two-and-a-half years after the incentive was enacted. 

NMTC Tax Guidance

At the same time the April 20, 2001, administrative guidance was issued, the IRS and Treasury issued a notice of proposed rulemaking. In the notice, the IRS and Treasury requested comments from the public in eight specific areas and asked, as well, for comments on any other issues for which taxpayers believed guidance was needed.

The first temporary tax regulations were published by the IRS and Treasury Department Dec. 26, 2001–more than a full year after the creation of the incentive. Additional guidance was released Sept. 20, 2002, Jan. 9, 2003 and Jan. 23, 2003–all before the first round of allocations.

Treasury NMTC guidance wasn’t exhaustive and still isn’t. In many areas, the tax bar has gotten comfortable with widely accepted understandings of the statute and other guidance, taking comfort that they are traveling within the tax interpretation herd. In other areas, lacking published tax guidance, such as partnership allocations among partners in an investment fund, possible structures generally aren’t used. Arguably, that nominally harms the productive capacity of the credit.

In short, release of NMTC guidance was deliberate, collaborative and convergent.

“You could see how it went along at a reasonable pace, at least as we look back on it now,” said Bob Rapoza, spokesman for the New Markets Tax Credit Coalition, who held the same position then. “There was always a sense of forward progress.”

Early Days of OZ

Fast-forward 17 years to tax-reform legislation that created the OZ incentive, signed Dec. 22, 2017, by President Donald Trump.

The OZ is an as-of-right incentive with no volume cap, which meant Treasury played no role in allocating fund raising authority. Treasury was tasked with working with states to designate OZs, determining rules for certifying funds and issuing tax guidance interpreting the statute.

With no application and no awards, OZ tax incentives are different from NMTCs.

States nominated OZs and Treasury confirmed and designated them; Treasury also determines how entities are certified as qualified opportunity funds (QOFs). That was done by June 2018, just six months after passage.

Under the OZ incentive, capital gains can only be deferred until Dec. 31, 2026, which meant delay in the rollout came at a cost. Treasury was placed on a comparatively aggressive schedule and progress was comparatively fast.

The first tranche of proposed regulations was issued Oct. 19, 2018, along with a revenue ruling–a process that somewhat remarkably took less than 11 months, including the 30-plus days of review by the Office of Intergovernmental and Regulatory Affairs. (A review was not required for NMTC regulations.) More guidance–in a second tranche of proposed regulations–came in April 2019, just 16 months after the legislation passed. Each time a tranche of regulations was released, more potential investors moved off the sidelines and began investing.

Similarities, Differences

The NMTC and OZ incentives share DNA. Both target investment in low-income communities. Both require investment flow through funds. Both require Treasury guidance to clarify and build out the statute. Both require ongoing compliance with tax rules.

However, the “cousin incentives” are different in key ways that informed the reaction to Treasury’s pace:

The NMTC has a guaranteed annual allocation and the right to receive investments is a competitive process, while the OZ is a by-right incentive with no cap and no competition for allocations.

The OZ incentive is perishable, with a Dec. 31, 2026, deadline looming, while the NMTC was introduced with seven years of allocation authority and has been extended multiple times.

The amount of investment is also different. The initial round of the NMTC was $2.5 billion, whereas OZ investment has been much greater. The Novogradac Opportunity Funds Listing in mid-October showed more than $3 billion raised for OZ investment. Treasury and Joint Committee on Taxation both forecast that the impact of OZs will be about $8 billion to $10 billion annually–far greater than the NMTC allocations. While OZ equity dollars raised are greater than the NMTC, the depth of subsidy provided by QOFs to each business is substantially less than that provided by CDEs. The difference in subsidy levels is a key reason why the NMTC and OZ are widely viewed as complementary community development tools. 

Another difference is the number of players. In the first round of allocations of the NMTC, 66 CDEs were selected. Compare that to the 280-plus QOFs on the Novogradac list, which is not exhaustive. 

The path from being added to the IRC to investments being made was longer and slower for the NMTC. The OZ path–with administrative moves and Treasury guidance–has been faster, but it’s been done with a running clock, making delays more costly.

Coming in Late 2019

Before the end of 2019, the OZ community hopes for at least two major milestones.

The first is for Treasury to issue updated regulations for OZs, clarifying and making final much of the guidance addressed in the first two tranches of OZ regulations, and hopefully changing some aspects as well. 

The second milestone is legislation to extend the date by which a taxpayer must realize their gain to obtain the maximum deferral under the OZ incentive. The original OZ legislation said gain must be realized no later than Dec. 31, 2026–meaning that in order to receive the seven-year benefit of a 15 percent reduction in capital gain, investments must be made by the end of this year.

There is expectation for legislation to extend that deadline, although passage is no slam-dunk.


The OZ incentive was heralded as an unprecedented chance to revitalize America’s low-income communities, echoing the expectation for the NMTC incentive–expectations that have largely been met. Updated regulations and guidance would be another major step forward for the OZ incentive, but having to wait on guidance is nothing new.

“I think the people at the IRS and Treasury were very thoughtful [about the NMTC],” Rapoza said. “They had to come up with regulations, certification for CDEs and the NMTC application, which are three big things. As I look back on it now, much of what we still have was built on the work from 2000, 2001 and 2002.”

Novogradac and other stakeholders and organizations helped during the early days of the NMTC to educate key stakeholders and generate momentum for the incentive. The same is happening now during the early days of OZs, although more early investment is being made and more is coming.

The differences between the NMTC and OZ incentives–particularly the uncapped amount of capital involved in OZs and the perishability of the incentive–provide urgency for guidance that wasn’t there for the NMTCs.

Treasury has been relatively fast to provide guidance. For the OZ incentive to maximize investment in low-income communities, that pace needs to continue–the faster the better.