How the proposed IMPACT Act can help with the success of Opportunity Zones

While the country eventually emerged from the Great Recession, many communities were left with massive economic disparities [1]. 

The Opportunity Zones initiative, launched in 2018, is targeted at resolving this issue by encouraging private sector investment into the most distressed communities. Early results are very encouraging: in August 2020, the White House released a study from the Council of Economic Advisors (CEA) that reported $75 Billion of private investment was made into Opportunity Zones in the first two years of the initiative [2].

The report went on to say that over 500,000 jobs had already been created as a result of these investments and that the initiative was on track to lift over 1 million people out of poverty. Considering the regulations for Opportunity Zones weren’t complete until near the end of the 2-year period, these results are impressive when compared to other tax incentives like the low-income housing tax credits or New Market Tax credits programs [3].

Despite the good intentions of the initiative and the positive results shared in the CEA report, general perception of the initiative has been mixed. Initial media reports focused on some of the early announcements of high-profile projects in gentrifying areas. [4] Other news outlets disputed the CEA report as not providing enough proof [5]. However, more recent media reports have been more balanced for two reasons: first, there have been credible reports from industry stakeholders showing trends towards an increase in funds focused on specific place-based initiatives and operating business investments [6], and second, because of recognition that it just takes time to put projects together that weren’t already in planning before the OZ initiative became law [7].

What would the IMPACT Act mean for the Opportunity Zone industry?

So, while it seems the public perception is trending in the right direction at the moment, the reality is that without consistent, detailed and objective reporting, the success of the OZ initiative will remain up to debate. Legislation that would improve impact reporting and measurement has long been on the docket, most notably in 2019, when there was a bipartisan effort that called for increased reporting. The recently introduced IMPACT Act [8] (or Improving and Reinstating the Monitoring, Prevention, Accountability, Certification, and Transparency Provisions of Opportunity Zones Act) includes impact reporting requirements that will provide the necessary data to measure the effects of the Opportunity Zones initiative.

The first set of requirements will apply to funds and fund managers. Information such as the total assets held in the fund, the location, the value of Opportunity Zone property held by the fund, whether the property is owned or leased, the location and industry classification of operating businesses, equity investment, and the number of persons the fund expects to be employed through the various investments they’re making will be included. 

The second set of requirements will be for the Treasury Department, enabling them to do an economic impact analysis that will measure several domestic and economic factors to determine the impact of the Opportunity Zones provision. 

Over time, this will ensure investments in the Opportunity Zones initiative are evaluated more effectively. From there, informed decisions can be made on adjustments or enhancements to ultimately achieve the intended results.

Reporting criteria welcomed by OZ community 

Compared to other impact investing initiatives where the private sector has been reluctant to implement this type of reporting, the Opportunity Zone industry has been very supportive. In many cases, fund managers have already gone ahead and implemented technology-based solutions that efficiently track, measure and report on impact, despite the fact that there was no regulatory requirement to do so. Many recognize that the Opportunity Zones initiative was created to address one of the most serious challenges our country faces, and that tracking and measuring impact is fundamental to the long-term success of the initiative. This approach could also serve as a guide for many other initiatives.

For example, most fund managers have implemented ESG/Impact specific investing strategies in response to strong demand from investors, and the ESG market in the US has more than doubled in the last year [9]. Despite the enthusiasm, however, reporting standards are not in place and this has led to concerns of abuse. In fact, the SEC recently put out a Risk Alert because of concerns that Impact and ESG disclosures are not accurate [10].

The challenges in those cases stem from the same root cause that exists in Opportunity Zones. No official reporting standard has been legislated and the market itself hasn’t agreed on one. The key to ESG/Impact tracking more generally is to get started with baseline standard set of data. From there, stakeholders can implement technology to minimize the reporting burden. As the industry grows, and technologies such as artificial intelligence, machine learning algorithms, big data analysis, and natural language processing continue to mature, the reporting can be enhanced.

The efforts of the regulators in OZ sets a common sense baseline for the type of information that is to be collected and tracked. With that approach, the industry can move forward quickly to get good done. Adding more requirements over time is always possible, but the key is to get started now. Distressed communities need these initiatives to get going and to be successful. 

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