THE OPPORTUNITY ZONE INCENTIVE : POISED TO LEAD IN THE UPCOMING ECONOMIC RECOVERY
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BUSINESS FRIENDLY REGULATIONS AND PATIENT CAPITAL
Fortune recently reported that approximately 100,000 businesses have been permanently shut down as a result of the COVID-19 pandemic . 7 The good news is that the final regulations that were released in December 2019 were favorable for operating businesses , and in particular , start-up businesses . There are a number of requirements for an operating business to satisfy to be considered a “ qualified opportunity zone business ” ( a QOZB ). The final regulations provided business friendly rules for entities to qualify as QOZBs with respect to certain situs requirements involving both location of employees and location of assets in a QOZ .
As stated above , investors in a QOF are required to hold their qualifying investment for at least ten years in order to obtain the exclusion of the gain on disposition . This long-term holding requirement has often been referred to as “ patient capital .” Patient capital is important for business owners since it relieves the pressure to produce immediate results for the investors and allows the owners to concentrate on achieving long term growth . Obtaining patient capital can also be helpful for operating businesses struggling with fixed payment costs such as rent and debt service .
Committee on Small Business in October 2019 , that the central purpose of the OZ incentive was to support new businesses and existing small and medium sized firms in need of growth capital . It was further stated by EIG that roughly 75 % of venture capital goes to just three states .
As legislation is crafted in response to this economic crisis , consideration should be given to possible changes to the OZ incentive that can make this incentive even more impactful . Some of these possible changes are already part of proposed legislation . For example , Representative John Curtis ( R-UT-3 ) proposed relaxing the 70 % asset test for small businesses located in an OZ . 10 Proposals to extend the OZ incentive have been made as well as other useful changes . Efforts should be made to consider some of these proposals in any upcoming economic recovery legislation .
FAST DEPLOYMENT OF CAPITAL IS CRITICAL
New incentives may be developed as a response to this economic crisis . However , timing is everything with respect to any crisis , and new incentives may not be immediately impactful . The OZ incentive already has a track record for both raising and deploying capital .
Novogradac & Company LLP has been keeping track of 927 qualified opportunity funds . As of Dec . 31 , 2020 , 659 of these funds have reported to have raised $ 15.16 billion in capital . 8 This represented a $ 3.11 billion increase from their last update , which was data through Aug . 31 , 2020 . Note that this data does not include information proprietary or private funds that are owned or managed by their principal investors . The Council of Economic Advisors recently made an initial assessment that $ 75 billion of private capital had been raised as of the fall of 2020 . 9 Whether or not this estimate is correct , the fund raising performance of the OZ Incentive speaks for itself .
Another critical factor to consider in favor of the OZ incentive is that an entire industry has been developed in this space . State and local governments have spent considerable time understanding this incentive . Many states have developed complementary placed-based incentives . Professionals such lawyers , accountants , and business consultants have developed expertise in this area , and have been engaged in the deployment of the capital raised by QOFs . Real estate developers have been using this incentive on a regular and frequent basis to raise and deploy capital for their projects .
THE FUTURE OF OPPORTUNITY ZONES
The use of the OZ incentive for operating businesses is an area that remains untapped . Ironically , the incentive was created to provide venture equity to operating businesses . In fact , John Lettieri , President and CEO of EIG , testified to the House
Marc L . Schultz currently chairs Snell & Wilmer ’ s Tax Credit Finance and Renewable Energy practices and founded and co-chairs the Opportunity Zone industry group . Schultz regularly advises fund sponsors in forming and structuring Opportunity Funds and drafted and provided technical advice on a number of comment letters with respect to the Opportunity Zone regulations .
Schultz recently served on panels at the White House and Small Business Administration Opportunity Revitalization & Entrepreneurship Summits . He has also been a speaker and panelist at statewide Opportunity Zone conferences .
Sources : 1 U . S . Bureau of Labor Statistics , Economic News Release ( February 5 , 2021 ).
2 The U . S . labor market remains 9.9 million jobs below pre-pandemic levels , News from EPI ( February 5 , 2021 ). 3 Id .
4 Opportunity Zones , Facts and Figures , EIG Website .
5 Id .
6 Id .
7 Nearly 100,000 Establishments that Temporarily Shut Down due to the Pandemic are now out of Business , Fortune Magazine ( September 28 , 2020 ). 8 Novogradac Opportunity Zones Investment Report : Data through Dec . 31 , 2020 .
9 The Impact of Opportunity Zones : An Initial Assessment , The Council of Economic Advisors ( August 2020 ). 10
H . R . 6529 – COVID-19-Impacted Small Business Opportunity Zone Act ( Introduced 04 / 17 / 2020 ).
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