With the new administration, the OZ marketplace is focused on potential regulatory changes to the OZ rules. The OZ industry is concerned about what legislation a new congress may impose: specifically, whether Senator Tim Scott’s IMPACT Act will pass after reintroduction, which would add significant reporting requirements for Qualified Opportunity Funds and their investors. Regardless of the potential changes, however, the future of the OZ tax incentive appears certain, given its clearly demonstrated success in attracting capital and jobs to OZs.
THE OZ SUCCESSES TO DATE
Documenting the success of OZs to date, in the “Impact of Opportunity Zones: An Initial Assessment,” [1] the Council on Economic Advisors reported the OZ incentives have attracted about $75 billion in equity into low-income communities. Moreover, the CEA report estimates that, as a result of the capital invested to date, over one million people have been lifted out of poverty and into self-sufficiency. [2] While these are estimates, many in the OZ industry think the investment amount is a fairly accurate measurement of activity in the marketplace.
Although much of the attention and most of the investment thus far has been in real estate projects, the positive CEA news and reporting on deals completed in the marketplace indicate the OZ incentives have been successful [3] in stimulating job creation and investment. The following examples offer some sense of the breadth of the investment decisions to date. As changes to the tax incentive are considered by congress, it is critical to preserve those aspects of the OZ initiative that encourage investors to invest and build in those communities that need help the most.
1,500 Agriculture Technology Jobs in Rural South Carolina
Agriculture Technology Campus is one of the largest rural OZ projects in the country and one of the largest agriculture investments in South Carolina history. The GEM Opportunity Zone Fund project is a joint venture project between Mastronardi, Clear Water Farms, LiDestri Food and Drink. The plans involve a state-of-the-art, 1,000-acre agriculture technology campus in Hampton County, South Carolina. The combined $314 million investment is expected to create more than 1,500 new jobs over the next five years. [4] In addition, the project will provide food security for the southeastern US.
150 Factory Jobs in Dover, Delaware
Corrugated packaging manufacturer, U.S. Corrugated, plans to build a 497,000 square foot, $80 million manufacturing plant near Dover. The location in an Opportunity Zone played a critical role in its selection of its expansion site.
200 Renewable Energy Jobs in South Carolina
BioEconomy Solutions, a biomass-based diesel feedstock company received an investment from IMPACT Carolina Fund to provide financing for renewable diesel plant in Georgetown, South Carolina. Over the next 12-to-18 months, the company will train farmers in the area and anticipate creating 200 renewable energy jobs at the plant.
50 Manufacturing Jobs in Erie, Pennsylvania
Erie Insurance invested in the new plastics recycling plant operated by International Recycling Group. The $100 million IRG plant is expected to create 50 manufacturing jobs at the onset and additional jobs during its expansion. The high-tech plant will sort and separate plastics from homes and businesses reducing the amount of material that enters landfills.
100 Gaming, Software Jobs in Erie, Pennsylvania
Erie Insurance’s Opportunity Zone Fund invested $1.2 million in Whitethorn games. Whitehorn is an early-stage venture company that develops and publishes video games. James Grunke, CEO of the Erie Regional Chamber and Growth Partnership (ERCGP) explained, "According to our projections, this industry is positioned to bring 100 additional jobs in game design, software, computer systems, and data science and analytics into Erie over the next five years." [5]
50 Manufacturing Jobs, Growing to 200 Jobs in Nevada
The American Battery Metals Corporation, an American-owned extraction and battery recycling technology company, is constructing its first lithium-ion battery metals recycling plant. The recycling facility will be housed in a to-be-constructed 30,000 square foot industrial building. Upon construction completion in early 2021, the company expects to create 50 new jobs initially, and then, within a 24-month period grow that to as many as 200 jobs.
465 Technology Jobs in Atlanta
A women-owned tech firm, Milletech Systems Inc., is moving its operations to an OZ in Atlanta, Georgia which will create an estimated 465 jobs. Millitech will scout over 100 students from Historically Black Colleges and Universities, the University System of Georgia (which comprises of 26 public institutions across the state) and Atlanta’s workforce development agency and hire these students for full-time positions in the cloud technology space. Millitech CEO, Nasir Mujawar, spoke on the importance of this location, “This facility is a first-of-its-kind software development center, which will provide career pathways to Georgia’s local talent pool while boosting the state economy.” [6]
In addition to investments in existing companies, the OZ incentives have attracted capital to early-stage companies such as those funded by the Verte Opportunity Fund. Two examples of Verte investments include the Outlook Company and Solve. Verte invested in the Outlook Company, a full-service production, animation, and content company. As the first studio of its kind in the region and one of two minority-owned animation studios in the U.S., the Outlook Company plans to hire local animators and actors with the hopes of sparking economic growth. The Outlook Company has been rapidly expanding under the leadership of co-founder Trevor Pryce, a former 14-year NFL All-Pro defensive lineman. Pryce has been pursuing his passions in music, film, and writing since his days in the NFL, and recently had the chance to serve as creator and executive producer for two Netflix series.
A mission-based Chicago software company, Solve specializes in job training and placement, and is moving to an OZ in Chicago. Verte Opportunity Fund invested in the technology company that connects underrepresented job seekers to a broad network of employment opportunities and resources, including training programs, employers, career pathways, and support services.
THE NEXT PHASE FOR OZs IN 2021
Importantly, the OZ tax incentives will continue to be available under a Biden Administration. The fact that President Biden has included the OZ program in his Build Back Better plan means that he agrees that this bipartisan legislation is helping build and re-build low- and moderate-income communities. Since Biden’s plan outlines certain proposed changes to the OZ tax incentives, the plan is implicitly affirming the continuing bipartisan support for these OZ incentives.
The changes to OZ are likely to come in the form of greater reporting requirements and enhanced qualified opportunity fund (QOF) certification. In terms of the former, currently, the IRS does not think it can add additional reporting requirements through the regulatory process. The IRS staff has stated as much in OZ hearings. For example, they have concerns about privacy and how to handle reporting since it was not included in the original OZ legislation (TCJA). Thus, reporting legislation would need to be passed, and Senator Tim Scott (R-SC) has offered relatively broad and well-conceived reporting requirements in his proposed IMPACT Act.
There is also interest in enhanced QOF certification requirements. Currently, QOFs are automatically certified by filing a Form 8996 with the IRS and structuring the investment appropriately. Currently, if the QOF does not adhere to the OZ requirements, the QOF will be subject to penalties and face other problems and risks (including possibly losing its status as a QOF). So, to be clear, it is extremely important for QOFs to adhere to the letter and spirit of the law and regulations even now.
The Biden administration may add additional requirements to the process of OZ certification. The Biden campaign outlined their policy goals in that plan: (https://joebiden.com/racial-economic-equity/#). However, the details have not been described in particular and, as we all know, the devil is in the details. For example, when Biden cites partnering with “non-profit or community-oriented organizations, and jointly produce a community-benefit plan for each investment,” is he intending for QOFs just to engage the community (which is so commonplace it is worth mentioning only when projects do not engage the community) or will he require OZ project sponsors to pay a “living wage” and only use unionized labor to construct the property? These details are critical. They are the difference between loading up the OZ tax incentive with crippling compliance burdens and reporting requirements and ending up with a politicized government run program versus continuing a vibrant marketplace of OZ investments and jobs in low-income communities.
The hope is that the positive changes accomplished under the OZ program will be enhanced with appropriate additional reporting requirements (such as those proposed by Senator Tim Scott in the IMPACT Act) and a relatively light touch beyond that.
OZs are working. Let us all hope that the new administration does not undermine the hope, change and optimism that the OZ incentive has enabled to date.
Notes:
[1] White House The Impact of Opportunity Zones: An Initial Assessment Report
[2] The Impact of Opportunity Zones: An Initial Assessment p. 3
[3] The Impact of Opportunity Zones: An Initial Assessment p. 1 & p.2
[4] $314 million Agriculture Technology Campus coming to Hampton Co
[5] Whitethorn Games Named as First Opportunity Zone Investment, Will Bring Up to 25 Jobs to Erie
[6] Tech company to bring 465 jobs to Atlanta
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