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Portfolio > Mutual Funds

Opportunity Zone Funds: Who Really Benefits?

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When the concept of opportunity zones was created in the 2017 tax cut bill, there were hopes that investments in those zones through opportunity zone funds would yield two benefits: tax advantages for investors and economic improvements for local communities. 

It’s too early to tell if those intentions will be fulfilled, but there are multiple indications that tax cuts for investors, including well-connected ones, rather than community impact, is taking precedence.

Case in point: the Treasury’s new proposed draft form to collect data about opportunity zone funds. 

New IRS Proposed Form 8996

The new proposed Form 8996 requires an opportunity zone fund to disclose the census tracts of its investments, the values of its assets along with the Tax IDs of the businesses in which it has an interest. It does not require the exact addresses of those properties or businesses, the closing dates for investments or the potential impact of these investments on their host communities.

Moreover, the proposed form does not require that any of its information be made public — information that potential investors may want to have along with members of host  communities.

“This is certainly a departure from typical accountability for federal community development programs,” says Brady Meixell, research analyst at the Urban Institute. “As long as there’s no public reporting it’s just a guess about who, what, where and how much money” is being deployed, which would also help “get at those impact measures,” adds Meixell.

The IRS, however, could use the data to develop its own analysis about the socioeconomic impact of an opportunity fund’s investments, but there’s no indication yet that it will.

John Lettieri, president of the Economic Innovation Group, which helped develop the concept of opportunity zones and OZ funds, told Bloomberg ‘s Daily Tax Report that the draft tax form  “will be unlikely to satisfy” those individuals and groups “looking for more a more comprehensive data regime.”

At best the tax form is a “first step towards meaningful accountability in the opportunity zones market,” but Treasury “should go further and ensure that accurate transaction-level data is available to the market,” said Fran Seegull, executive director of the U.S. Impact Investing Alliance. 

The alliance, along with several other nonprofit groups and the Federal Reserve Bank of New York, has recommended that opportunity zone reporting include nonfinancial metrics such as the number of jobs and affordable housing units created or improved outcomes in education or health.

Also to that end a bipartisan group of senators — Democrats Cory Booker of New Jersey and Maggie Hassan of New Hampshire and Republicans Tim Scott of South Carolina and Todd Young of Indiana — introduced a bill in May that would require more oversight of opportunity zone funds, disclosure of their impact on communities and support for new businesses.

Tax Savings and the Sophisticated Investor

For investors in opportunity funds, the impact is tax savings but only over time. Investors can reduce their tax bill in several ways: defer taxes on previously earned capital gains until the end of 2026 so long as the gains are invested in a fund within six months; reduce taxes on those previous gains if they stick with the fund for at least five years (the basis for those gains is discounted 10% after five years and 15% after seven); and pay no taxes on gains from their opportunity fund investment if they remain invested for at least 10 years.

Savvy investors with large capital gains can even set up their own qualified opportunity zone fund to invest in a qualified opportunity zone business. They would first need to create separate limited liability companies for the fund and business and document what the business does and why it qualifies as an opportunity zone business, said Michael Krueger, an attorney at Newmeyer Dillion who represents investors, developers, fund managers and brokerage firms involved in opportunity zone projects. 

Among its many requirements, an opportunity zone fund must invest at least 90% of its assets in a property or business located in an opportunity zone — there are more than 8,700 zones in the country, including almost the entire island of Puerto Rico. 

But opportunity zone funds, unlike other investment vehicles like mutual funds or ETFs, do not require approval from a federal agency before they can take in investments, although they must comply with securities regulations from states and the Securities and Exchange Commission when selling interests to investors.

Opportunity zone funds self-certify through IRS Form 8996. It is that form that the Treasury is now in the process of revising with its proposed new draft.

“It’s easy to qualify but also easy to get out of compliance,” said Krueger. “We’ve been waiting for this form.” Once finalized, Form 8996 will allow accountants and tax professionals to see how funds qualify under the program and could give investors more confidence in the program, Krueger said.

While the new draft form may provide more confidence in the opportunity zone funds, there are indications that certain investors stand to benefit the most.

Preferential Treatment for Connected Investors?

The New York Times recently reported that the Treasury Department ignored its own guidelines when it reversed an earlier decision, allowing Storey County in Nevada to be designated as an opportunity zone. The county includes a nearly 700-acre site co-owned by former junk bond king and convicted felon Michael Milken, who pleaded guilty to securities fraud in 1990, and is reportedly a friend of Treasury Secretary Steven Mnuchin.

ProPublica similarly reported that the White House reversed its earlier decision about a downtown Detroit tract dominated by Cleveland Cavaliers owner Dan Gilbert, ultimately designating it as an opportunity zone after previously excluding it from the program because it did not meet  poverty level requirements.

Following these reports, Booker, along with Reps. Emanuel Cleaver II, D-Mo., and Ron Kind, D-Wis., last week asked the acting inspector general of the Treasury to conduct a “complete review of of all Treasury Department-certified Opportunity Zones for eligibility requirement conformance” and provide details on actions taken by agency officials not in compliance with the guidelines.

“Opportunity Zones seem to be a class by themselves,” wrote Howard Gleckman, senior fellow at the Tax Policy Center, a joint venture of the Urban Institute and Brookings Institution, in a September Forbes column. “They may, in the end, finance investment in some distressed communities. But while we speculate about the future of OZs, we can be sure of one thing: They already have created an enormously generous tax shelter for some of the nation’s wealthiest investors.”

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