Treasury has issued guidance and proposed regulations addressing investments in Opportunity Zones (OZs). Round one, issued in October 2018, enunciated a number of general principles, explaining, among other things, the type of gain that could use the incentive, certain timing parameters, and various mechanics attendant to the making of qualified investments. Round two, issued in April, expanded on the framework constructed by the first round and, in large measure, concentrated on business-friendly provisions.
However, Treasury has not yet published any administrative rules governing compliance with the OZ legislation, including explanations respecting the calculation and enforcement of penalties in the event of noncompliance with the legislation or if a Qualified Opportunity Fund (QOF)/ Qualified Opportunity Zone Business (QOZB) fails to satisfy a test. Treasury’s approach to date makes sense—one needs to know how to drive a car before worrying about speed limits or tickets for speeding. But, as sure as night follows day, reporting and disclosure requirements for QOFs are among the subjects to be addressed. It is important that industry stakeholders participate in the process and provide input, which may shape future guidelines.
There are three obvious forums for input. First, there is movement on the legislative front. On May 8, Sens. Cory Booker (D-N.J.), Tim Scott (R-S.C.), Margaret Hassan (D-N.H.), and Todd Young (R-Ind.) introduced legislation (S. 1344) that would require Treasury to collect certain information regarding OZ investments at a granular level and mandate that Treasury deliver annual reports to Congress (albeit five years after enactment of the legislation) that would include information about the number of QOFs, the amount of assets held in the those QOFs, and certain economic indicators.
The details of how the information is to be collected is left to Treasury, but there is a clear focus on breaking down QOF investments by state, by asset class, and by census tract. Although it is open to debate whether this legislative foray (or any other) will be enacted into law, the proposed legislation outlines what these senators believe should be collected, including:
· The amount and date of each investment;
· The type of investment (whether it is into an existing business, a new business, or into real property);
· The location of the business or the property; and
· If applicable, details as to the number of employees or residential housing units created.
Measurement of outcomes—the examination of the penetration of investments into lower-income geographies and the effect such investments have on the OZ communities—will be part of Treasury’s job if the legislation were enacted into law as written as Treasury’s report would include:
“… impacts and outcomes of zone designation on economic indicators, including job creation, poverty reduction, new business start-ups and other metrics …”
Any evaluation will rely heavily on publicly available granular evidence of the investments, whether such information is gathered by legislative fiat or agency rule-making.
Generally overlooked while the industry focused its attention on the substance of round two was Treasury’s Request for Information on Data Collection and Tracking for Qualified Opportunity Zones (QOZs) published in mid-April (the “Request”). The Request acknowledges that the current reporting requirement (essentially submission of Form 8996) does not gather enough information to measure “the effectiveness of the policy in achieving its stated goals.”
Treasury wants to know the following:
· “What data would be useful for tracking the effectiveness of providing tax incentives for investment in QOZs to bring economic development and job creation to distressed communities?”
· Is there information that could be collected on a tax form that would be helpful in measuring the effectiveness of the incentives?
· What data could be collected to determine the event of investment that would have occurred in QOZs even if there had been no OZ incentive?
The Request sets a May 31 deadline and a required submission mechanic. Interested parties need to read the Request and follow the required process for commenting to Treasury.
Treasury’s goal is clear—before setting the ground rules of reporting, and in keeping with how the OZ program has sequentially moved forward since its inception, Treasury wants to know what stakeholders in, and beneficiaries of, OZ investments think is the important information for the department to have to determine the effect of investments in the thousands of QOZs.
The request for comment regarding OZs did not end with Treasury. The Department of Housing and Urban Development (HUD) also issued a request for information in April. In an effort to “maximize the beneficial impact of investment in OZs,” HUD is soliciting public comment on actions the federal housing agency and others could take. Among the subjects on which HUD seeks comment are:
· “Whether HUD should create an information portal.”
· Identification of “tools” that HUD can provide to make stakeholders aware of the full range of financing and other incentives.
· Suggestions on how HUD can interact at the local level to effectively encourage investment in OZs and maximize success.
· “How can HUD ensure that existing residents, businesses and community organizations in the OZs benefit from the influx of investment” dollars?
Whether you choose to write to your favorite senator or you respond to Treasury and/or HUD, now is the time to influence the direction reporting will take.
