The federal Opportunity Zone program was created to incentivize new investment in low-income communities by providing tax incentives to individuals who invest unrealized capital gains in those underserved communities. The program seeks to create jobs, mitigate poverty, increase property values, and boost tax revenues by encouraging redevelopment and new business activity. But how will we know if the Opportunity Zone program is successful? Bipartisan legislation recently introduced in the U.S. Senate would establish reporting requirements to help measure the impact of Opportunity Zone (OZ) investments.
Coming just three weeks after the IRS released new guidance for Opportunity Zone investments in operating companies and real estate projects, U.S. Senators Cory Booker (D-NJ), Tim Scott (R-SC), Todd Young (R-IN) and Maggie Hassan (D-NH) announced legislation (S. 1344) that would require investors to report certain information on their investments in Qualified OZ Funds and would require the Secretary of the Treasury to issue a report annually to increase transparency on how and where OZ investments are made.
If passed and enacted, the bill would require the Secretary of the Treasury to collect the following information on investments held by Qualified OZ Funds:
- the number of Qualified OZ Funds,
- the amount of assets held in Qualified OZ Funds,
- the composition of Qualified OZ Fund investments by asset class,
- the percentage of OZ census tracts that received Qualified OZ Fund investments, and
- the impacts and outcomes on OZs, including economic indicators such as job creation, poverty reduction, new business starts, and other metrics the Secretary may require.
Additionally, for each investment, a Qualified OZ Fund would also be required to report:
- the total amount of the investment and the date it was made,
- the type of investment (e.g. in an existing business, new business, or real property),
- the location of the investment,
- the type of activity supported (e.g. single-family or multi-family residential properties, commercial properties, or the economic sectors in which the business operates),
- if the investment is in a business, the approximate number of full-time employees at the time the investment in such business was made, and
- if the investment is in real property, the approximate total square footage and, if applicable, the approximate number of residential units.
Using this data to appropriately measure the effects on low-income residents of OZs and the true causes of any improved economic conditions in OZs is sure to be a challenge. For example, economic indicators may not readily show whether longtime OZ residents and businesses are being elevated or displaced by new OZ investments. Unanswered questions remain on how to best measure outcomes. But this provides an opportunity to weigh in with lawmakers and make suggestions on how reporting should be used.
Furthermore, the extent of reporting has the potential to be burdensome to investors. To avoid causing undue burden or costly expenses for investors, the bill requires that collection of such information should not be duplicative or redundant. No detail is provided in the bill on how this would be accomplished, which creates an added opportunity to suggest how reporting should work. Additionally, any personally identifiable data included in the reported information would be protected and withheld from public disclosure.
However, the bill also requires public reporting to begin one (1) year after the date the legislation is enacted, which would mean that Qualified OZ Funds would need to rapidly gather this information immediately upon enactment. It is unlikely that these new reporting requirements will become law quickly, particularly as the next election cycle heats up. Still, the timing included in the bill would create a time crunch for Qualified OZ Funds to meet reporting requirements if enacted.
The federal OZ program has the potential to drive significant amounts of new capital into low-income communities. But data is needed to measure the success of the program and monitor its impact. KJK will keep you apprised as this new legislation establishing reporting requirements advances.
If you need guidance with applying Opportunity Zone program rules to your project or business, please contact Laura Englehart at firstname.lastname@example.org or 216.736.7270, or reach out to any of our Economic Development professionals.
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