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January 29, 2019 | Tom Ballard

OUTLOOK SERIES PART 8: Impact of Opportunity Zones on start-ups and their communities

(EDITOR’S NOTE: Thanks to the participation of Angel and Venture Capitalists located in East Tennessee, we are able to annually offer their insights on the past year’s activities and their outlook for 2019. This is the eighth article in this year’s series.)

Today’s question that we posed was as follows: “There’s a good deal of talk these days about the federal Opportunity Zone (OZ) legislation. At this stage, the final regulations have not been issued, but there are potential positive implications for the start-up community. How closely are you following these regs and how important do you see the program as a complement to your efforts?”

Eric Dobson, Chief Executive Officer, Angel Capital Group: Sadly, this is another example of great intentions with lousy execution. The way the draft regulations are worded, it is an ideal tax deferment strategy for the very wealthy to invest in shovel-ready real estate projects. But, it is not going to work for start-ups, and potentially not for private equity style investments or buyouts as a venture model, which was my strong hope. I think Opportunity Zone funds are going to find a path to large real estate development projects as a mode. It also seems designed to refurbish buildings in rural areas, which is-and-of-itself good. But, if there are no businesses to occupy these spaces, then it could be all for naught. I wish there was a provision for investing in private equity businesses allowing the same tax advantages. That would drive investment in businesses in the “Heartland” in an unprecedented fashion to match the clear applicability of these funds to real estate development. As it stands, I see it impacting real estate almost exclusively.

Tony Lettich, Managing Director, The Angel Roundtable: While we are optimistic about the potential of the Opportunity Zone legislation, The Angel Roundtable (ART) believes there are other organizations within Tennessee which are better positioned strategically to track related efforts. ART will act as a follower and await the finalization of the regs, assessing the implications and opportunities as it’s implemented.

Kristina Montague, Managing Partner, The JumpFund: Very important. There are several OZ funds starting in Chattanooga and around the state, many focused on real estate, but some on small to medium-sized business growth. OZ investment in real estate ventures that offer opportunities for companies to establish and grow in our region are a welcome compliment to the JumpFund’s efforts to seed and grow women-led companies in the Southeast.

John Morris, Fund Manager, The Lighthouse Fund: As mentioned previously, Opportunity Zones can be a game changer, depending on how they are organized. We are following these developments closely and have had discussions with potential partners.

Grady Vanderhoofven, President and Chief Executive Officer, Three Roots Capital: We are following O-Zone and related O-Fund developments closely. We believe the legislation originally passed in December 2017 has the potential to be impactful in a positive way with respect to driving capital into companies and projects in Opportunity Zones. We also believe the practical implementation of the legislation and the realization of the potential benefits of the legislation will depend in large part on how the intent of the legislation is translated into policy and regulations. Right now, real estate projects appear to be the low hanging fruit with respect to realizing the benefits of the legislation. The legislation could have benefits for investors in operating businesses, including start-ups, but right now that is a more complex scenario, and it remains to be seen how effective the new legislation will be in helping to drive equity into operating companies in Opportunity Zones.

Courtney Watson, Partner, Chattanooga Renaissance Fund: I am interested in the potential for the Opportunity Zone legislation to be a part of transforming communities, supporting entrepreneurship, and catalyzing change; thus, I am closely following the regulations. We await further clarification around several key aspects of the legislation. There are several aspects of the proposed legislation that make it more challenging for immediate alignment of Opportunity Zones with the traditional venture capital community. For venture funds, Opportunity Zones are a tool, and as such can be viewed simply as a source of capital. They can also be utilized as a means to expand a current investment strategy or to forge a new strategy that is more comprehensive in the types of businesses and entrepreneurs it supports. In addition, I believe that cities will be competing for this new source of capital that has the potential to reinvigorate distressed communities and fund more entrepreneurs. Both cities and entrepreneurs will be well-served to understand the strategy and expectations of the investors and funds participating in this next wave of capital to ensure awareness of each other’s motivations and desired outcomes to make the best use of this capital

Ken Woody, President, Innova Memphis: We are following these regulations very closely. There is a lot to learn. Currently, they are very long-term in vision, so it is essential that all involved understand the ramifications of funds or investments. It looks promising but may mean closer interaction between city, county, state and investors.

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