Draft regs for Opportunity Zones offer great promise and uncertainty

By Tom Ballard, Chief Alliance Officer, PYA

After hearing two different panels on Friday in Nashville discuss the new federal Opportunity Zone initiative, two conclusions can be drawn: the path forward on real estate is fairly clear, but there is still a good deal of uncertainty when it comes to investments in active businesses.

The program, authorized under the “Tax Cuts and Jobs Act” passed by Congress in late 2017, is designed as a tax incentive for investors to re-invest their unrealized capital gains into Opportunity Funds that are dedicated to investing in Opportunity Zones (O-Zones) designated by the chief executives of every U.S. state and territory.

In the case of Tennessee, there are 176 O-Zones. Click here for a list plus other related information.

One panel presentation occurred at the “Governor’s Conference on Economic and Community Development.” It featured Kenan Fikri, Director of Research for the Economic Innovation Group which helped conceive the O-Zone idea; Alex Flachsbart, Founder and Chief Executive Officer of Opportunity Alabama, a new non-profit focused on helping that state capitalize on the O-Zone program; and John Lanahan, Director of Capital Formation at Launch Tennessee.

“The (O-Zone) program was forged in the fires of the fractured recovery,” Fikri told a roomful of economic developers. “Distressed communities are struggling with market retreat.” With an estimated $6 trillion – that’s correct, trillion – in unrealized capital gains at the end of 2018, the O-Zone initiative is intended to drive more investment in struggling communities and subsets of those cities.

As described by Flachsbart, the goal was to spur investments in everything from commercial and industrial facilities and multi-family housing to start-ups, infrastructure, R&D, hospitals and other community assets. Those investments must be made through a qualified Opportunity Fund, and Flachsbart said two dozen national funds have already been established as people wait for the final rules.

When the U.S. Department of Treasury and the Internal Revenue Service issued draft regulations on October 19, they clearly muddied the water in regard to the active business operating class, all panelists said in one way or another.

“What we thought the statute said was to facilitate operating companies on Main Street,” Flachsbart explained. The draft regs do not reflect what those most involved in the program thought the intent was in that area, and there was some belief that there was too much “cut and paste” involved from other programs like the “New Market Tax Credits.”

Regardless, the public comment period on the draft regs ends December 28. Both written and electronic comments are being accepted. For more information on how to submit, click here.

In the case of Launch Tennessee, the O-Zone program is an important additional tool for start-ups. “We see this huge opportunity for entrepreneurs, and we want to be at the forefront,” Lanahan told the attendees at the “Governor’s Conference.” Launch Tennessee is focused on making people aware of the O-Zone program, helping with deal flow by building a database of possible investments, developing a list of firms qualified to help with compliance, and promoting possible new state incentives.

Compliance was a topic emphasized repeatedly with several panelists advising attendees to find a knowledgeable accountant and attorney before wading too far into the O-Zone program.

During the “Governor’s Conference” presentation, Flachsbart outlined the framework he is using in Alabama. It involves building two pipelines – one of opportunities and the other of investors, marketing those opportunities, creating investment mechanisms (e.g., what he called “local mousetraps”), preparing communities for the investment, and developing a mechanism for data collection and compliance.

Launch Tennessee joined with Cherry Bekaert to host an informational luncheon later on Friday. Several of the accounting firm’s leaders joined Nashville Venture Capitalist Vic Gatto and Road Ammons of ECD Capital to discuss how they are preparing for the O-Zone program and also reacting to the ambiguity and uncertainty around the non-real estate component.

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