Opportunity Zone Reporting
What is an Opportunity Zones?
Opportunity Zones are economically disadvantaged communities in the United States that have been officially designated by states and then certified at a federal level so that private investment in these areas can be made eligible for special tax treatment.
The purpose of Opportunity Zones, which were introduced in 2017 as part of the Tax Cuts and Jobs Act (which included the Investing in Opportunity Act), is to catalyze private capital (instead of taxpayer funds) stimulate growth in these traditionally marginalized communities.
As an investment vehicle, they offer tax incentives that encourage investment in underserved and undercapitalized communities hoping to reduce inequality. What is underserved and undercapitalized? The investment incentives created by this program represent a remarkable opportunity to catalyze entrepreneurship and promote long-term investment in economically distressed communities.
Opportunity Zones have captured the attention of funders, investors, asset managers, policymakers, and community development financial institutions. The new policy will unlock billions of dollars to support thriving community development projects and create economic opportunities in identified distressed areas while improving end beneficiaries' wellbeing. As interest in Opportunity Zones rises, early participants in the Opportunity Zones market must maintain focus. Achieving goals, such as positive economic and social outcomes, will define the market. The U.S. Department of the Treasury in June 2018 certified over 8,700 census tracts as Qualified Opportunity Zones in every U.S. state and territory.
Opportunity Zones Tax Benefits and Incentives
The program provides three main tax benefits for investing unrealized capital gains in Opportunity Zones:
- Temporary deferral of taxes on previously earned capital gains. Investors can place existing assets with accumulated capital gains into Opportunity Funds. Those existing capital gains are not taxed until the end of 2026 or when the asset is disposed of.
- Basis step-up of previously earned capital gains invested. For capital gains placed in Opportunity Funds for at least 5 years, investors’ basis on the original investment increases by 10 percent. If invested for at least 7 years, investors’ basis on the original investment increases by 15 percent.
- Permanent exclusion of taxable income on new gains. For investments held for at least 10 years, investors pay no taxes on any capital gains produced through their investment in Opportunity Funds (the investment vehicle that invests in Opportunity Zones).
To read the official Internal Revenue Code (1400Z-2) related to the special rules for capital gains invested in opportunity zones, click here.
The Economic Innovation Group (EIG) analyzed data from the Federal Reserve and found that there are $2.3 of unrealized capital gains if one examines just stocks and funds. That was in 2016. In 2017, that number was $3.8 trillion. Considering the unrealized capital gains held by U.S. corporations, there is over $6 trillion eligible for Opportunity Zone investing.
It should be made clear that Zones are not part of any tax credit program. They are governed by IRS code sections that change the tax treatment of capital gains.
What Qualifies as an Opportunity Zone?
State governments nominate Opportunity Zones, and the U.S. Treasury officially recognizes them. States use census tracts to identify low-income areas/communities' regions to be designated as a Zone. Once certified by the Treasury, these areas hold the Zone status for a period of ten years.
Specific qualification requirements used by both states and the Treasury for Zone designation for each census tract are as follows:
- At least 20% poverty rate
- Median family income that is less than 80% of median family income for census tracts not found within its state’s metropolitan areas
- Median family income that is less than 80% of the statewide median family income or the median family income within the state’s metropolitan areas
- No more than 25% of eligible census tracts within each jurisdiction can be nominated
- 5% more within each jurisdiction could be nominated if there is a census tract that borders an Opportunity Zone and has a median family income of less than 125% of that Zone.
OPPORTUNITY ZONE INVESTMENTSFind out what you need to know more about opportunity zone investments
How Many Opportunity Zones are There?
As of the year 2018, there have been 8,700 Opportunity Zones officially designated. This official designation became a reality on June 14th of that year when the United States Treasury approved states’ (including the District of Columbia) final Zone designations. The Zones represent 12% of the census tracts in the United States.
Map of Opportunity Zones
The Economic Innovation Group, a bipartisan public policy organization that was crucial in the initial development of the Investment Opportunity Act, produced a map that shows the distribution of Opportunity Zones across the United States. Users can zoom in on the interactive map's different areas and adjust how the data is displayed. Click on the image below to go to the map.
Residents of the communities and the investors
Opportunity Zones are an economic development tool, it is designed to spur economic development and job creation in distressed communities.
The image was adapted from ozcatalyst.org
How Does Opportunity Zone Impact Investing Work?
Access to capital gains tax incentives may be the initial characteristic that gets most investors interested in learning more about Zone investing. Of course, impact investors will also want to know what kind of impact outcomes can be expected by putting money into an Opportunity Fund.
An Opportunity Fund is the investment vehicle through which investors can invest in Opportunity Zones and access the tax benefits. The Funds take the form of a U.S. partnership or corporation that allocates a minimum of 90% of its holdings into at least one Opportunity Zone.
Keep in mind that the Fund itself has the responsibility to ensure it is meeting the guidelines for the regulations regarding Opportunity Zones.
For example, these Funds must invest in Qualified Opportunity Zone properties. These investments are defined as meeting at least one of the following criteria:
- Real estate within the Zone
- Partnership interests of businesses within the Zone
- Stock ownership of businesses within the Zone.
The above business assets must operate or conduct most of their operations in the zone. For real estate assets, a Fund must invest in constructing new buildings or to improve unused existing buildings. Complete development of buildings must be done less than 30 months after purchase.
Opportunity Zone and Social Impact
What to measure?
The Economic Innovation Group (EIG) recently led a broad coalition of stakeholders in submitting detailed recommendations to the U.S. Department of the Treasury, calling for the adoption of a reporting framework for investments in Qualified Opportunity Zones.
The Opportunity Zones incentive has unlocked very much needed new capital sources for low-income communities across the country, but how do we know it is bringing intended benefits without measuring the full impact of this policy?
We need the shared, common, and collective metrics utilized by all stakeholders across the Opportunity Zones landscape. Consistent data points from the beginning of the process can bring a deep understanding of the effects across the Opportunity Zones landscape – what is working, the risks, the barriers, and where policy adjustments or enhancements may be needed.
Opportunity Zone Reporting
Opportunity Zone Framework
The U.S. Impact Investing Alliance, the Beeck Center, and the Federal Reserve Bank of New York
The Opportunity Zones Reporting Framework is a guideline designed to define investor's and fund managers' best practices. It includes a set of first principles and a detailed impact measurement framework.
The U.S. Impact Investing Alliance, the Beeck Center at Georgetown University, and the Federal Reserve Bank of New York, along with multiple researchers, policymakers, and other practitioners, proposed the following approach.
• Investors must have guiding principles that are core to adequate and equitable communities.
• They must follow the standard reporting framework to promote and scale beneficial Opportunity Zones.
• Government and industry groups may collect and need different types or amounts of data; they have to have shared goals of measuring outcomes.
Developing deeper layers of data collection and building on the common Reporting Framework is the most effective way to scale and achieve the Opportunity Zones policy's outcomes.
Guidelines for Opportunity Zones Reporting
The U.S. Impact Investing Alliance designs these principles, the Beeck Center at Georgetown University, and the Federal Reserve Bank of New York to guide stakeholders of all kinds as they conceptualize and implement their Opportunity Zones activities.
1. Community Engagement: Opportunity Fund investors should request that fund managers integrate local communities' needs into the formation and implementation of the funds, reaching low-income and underinvested communities with attention to diversity.
2. Equity: Opportunity Fund investments should seek to generate equitable community benefits, leverage other incentives, and aim for responsible exits.
3. Transparency: Opportunity Fund investors should be transparent and hold themselves accountable, with processes and practices that remain fair and clear.
4. Measurement: Opportunity Fund investors should voluntarily monitor, measure, and track progress against specific impact objectives, identifying key outcome measures and allowing for continuous improvement.
5. Outcomes: Opportunity Fund metrics should track real change, understanding that both quantitative and qualitative measures are valuable indicators of progress.
Opportunity Zone Housing Framework
Description. Step by step process for building OZ Framework For Your Investments
What to Measure and What are the OZ Reporting Risks?
There are recommended elements to include in the impact report for Opportunity Zone before, during, and periodically for years to come. The report should at least have these elements but not limited to them,
Mission statement: Key target impact of investments.
Investment Thesis: What are the sectors or industries in which the fund seeks to invest and why?
Commitment to report publicly: Yes/No
- Size of the fund
- Location of capital deployment (census tracts)
- Type of qualifying property or business
- GP demographics (race and gender composition)
Intended impact: Defined for each fund and investment. [There are existing tools available for fund managers to help define, measure and quantify impact]. Intended impact, e.g. (not limited to)
- Education – high school graduation rates, school retention rates, job retained
- Affordable housing – number of affordable units created as % of development
- Jobs – number of jobs retained within community, % of salary increase for lowest paid employees
- Entrepreneurship – number of new businesses started, number of female and minority owned businesses created
- Access to healthy food
- Environment impact
- Method of community engagement
- Type of feedback incorporated
- Partnerships with local organizations and type of partnership
- Community needs assessment or alignment with established community priorities
- How investment is aligned with local/regional economic development strategies Post-Exit Evaluation
- Community impact beyond hold period
- Variation from original intention
What are the Risks of Opportunity Zone?
Opportunity Zones have the potential to mobilize an estimated $6.1 trillion in private capital investment towards distressed opportunity zone-communities across the country. If even a fraction of this money could be turned into investment capital for OZs, this policy would become one of the largest community development initiatives in history. But should the effort fail, it will be written-off as yet another tax shelter for wealthy investors. As high-profile Wall Street, Silicon Valley, and real estate investors rush to profit from it, critics are raising sensible concerns about the policy. As the Center on Budget Policy and Priorities points out,
- Investment in Opportunity Zone could divert investment from truly disadvantaged communities.
- This tax break could amount to a “subsidy for gentrification” in many areas.
- The new tax break will cost an estimated $1.6 billion in lost federal revenue over ten years, according to Congress’ Joint Committee on Taxation, but the costs could be significantly higher after the first decade.
Aligning to GIIN-IRIS and SDG
Investors interested in deploying capital into investments aligned with the strategic goal of Financial Inclusion should consider the scale of the addressable problem, what positive outcomes might be, and how important the change would be to the people or planet experiencing the issue.
- What tells us what outcomes the enterprise is contributing to and how important the outcomes are to stakeholders.
Example goals to measure, each goal can be aligned with indicators and metrics from (GIIN) IRIS.
1) Improving access to and use of responsible financial services for historically underserved populations.
2) Improving financial health.
3) Supporting decent jobs and fostering economic development
4) Increasing gender equality through financial inclusion
5) Improving rural economies through access to financial inclusion.
- Who tells us which stakeholders are experiencing the outcome and how underserved they were prior to the enterprise’s effect.
Examples are, Target Stakeholders, Target Stakeholder Demographic, Target Stakeholder Socioeconomics, Target Stakeholder Setting, Target Stakeholder Geography
- How Much tells us how many stakeholders experienced the outcome, what degree of change they experienced, and how long they experienced the outcome for. Examples are,
Client Individuals: Total, Number of Voluntary Savings Accounts, Client Individuals: Provided New Access, Client Individuals: Active, Client Organizations: SME, Client Individuals: Female, Client Individuals: Rural
- Contribution tells us whether an enterprise’s and/or investor’s efforts resulted in outcomes that were likely better than what would have occurred otherwise.
As noted by the Impact Management Project, investors can use a range of strategies to contribute to impact, often in combination: - Signal that measurable impact matters - Engage actively - Grow new or undersupplied capital markets - Provide flexible capital For further details, refer to How Investors Manage Impact.
- Risk tells us the likelihood that the impact will be different than expected.
Risk factors identified as material for this strategic objective. Examples are:
1) Stakeholder Participation Risk: Increased access may not lead to increased participation. To mitigate this risk, financial service providers should pay proper attention to client protection, tailor products appropriately to the objectives and experience of their intended clients, and actively address their possible lack of technical and financial literacy or lack of trust in providers of financial and technology services.
2) External Risk: An unsupportive local regulatory framework, inappropriate government intervention, or both could impede the healthy development of the market.
3) External Execution Risk: Economic, political, or social instability could make it difficult for local organizations to operate effectively, reducing potential outreach or client access, especially for credit services.
4) Contribution Risk: Market over-saturation could lead to the client's over-indebtedness (refer to MIMOSA rankings).
5) Drop Off Risk: Despite the positive impacts of financial products and services, financial service providers often persistently face generally low client uptake of certain products (e.g., savings).
- SDG alignments to the goals:
- A consistent framework for assessing the impact
- Use all five elements of IMP to assess potential investments consistently.
- Articulate a baseline from which to measure each investment’s results
- Qualitative impact data is most valuable for assessing investor contribution.
- The qualitative commentary that includes relevant contextual detail adds substantial value to the impact performance assessment, even when quantitative data is available.
- Qualitative data to be particularly useful in assessing fund managers’ impact management processes and contribute to the impact of the underlying enterprises.
- Opportunity Zones: Tapping into a $6 Trillion Market
- Defining and Measuring Opportunity
- How and why to measure the impact of investments in Opportunity Zones
- Impact Investment and Standards Alignments with Impact Cloud®
- The Fundrise Opportunity Fund
- The Fundrise Opportunity Fund Calculator
- Economic Innovation Group Resources
- Economic Innovation Group’s Map of Opportunity Zones
- Tax Policy Center: What are Opportunity Zones?
- Opportunity Zones Frequently Asked Questions (IRS)
- Enterprise Community Partners
- Opportunity Zones Reporting Framework Summary
- Opportunity Zone Fund Directory
- Opportunity Funds Listing from Novogradac
- Opportunity Zones Fundamentals (Mission Investors Exchange)
- The GIIN