DOS_patos
Unverified Legion of Trill member
The Tax Cuts and Jobs Act (TCJA,) known for creating Opportunity Zones, is often celebrated for its potential to move billions of dollars into low-income communities. However, there remains an open question as to whether this program will ultimately serve to add value, or extract values, from these communities.
Opportunity Zones (OZs) are defined as “economically-distressed communities where new investments, under certain conditions, may be eligible for preferential tax treatment.” First conceived in April of 2018, OZ plans are now in place for communities in all 50 states this year. How it works is that each state nominates blocks of low-income areas by census tract, which are then certified by the Secretary of the U.S. Treasury via his delegation of authority to the Internal Revenue Service. Through the IRS, investors can file a Form 8896 to create a Qualified Opportunity Fund — vehicles structured as either a partnership or corporation for the purpose of investing in an OZ census track, whether in real estate or directly in businesses through equity. The fund is required to hold at least 90% of its assets in that qualifying OZ area.
Simply understanding the mechanisms of OZs creates a major barrier to entry for more socially-minded investors. This interview aims to unpack some of the mystery. Markeze Bryant works at Acumen America; a seed stage investment fund focused on helping low-income families generate better access to health care, education, and financial services — taking a start up approach and working with early stage companies. He was born in a now-designated OZ, went to college in an OZ, and most recently was married in an OZ. He has been working diligently to identify, and maximize, the impact opportunity of opportunity zones — and shared his insight on how communities across America can best benefit from the program.
According to the IRS’s website, over the next few months “the Treasury Department will be providing further details, including additional legal guidance, on this new tax benefit.” At this point, can you break down how OZs will work mechanically?
OZs are places in the U.S. where over 30 million people live and work across our country. They cover downtown, industrial, suburban, and rural areas. They’re part of daily life for a lot of people.
To make a profit, essentially a taxpayer must sell an asset and generate a capital gain. The taxpayer then puts the capital gain into a Qualified OZ fund. There is ultimately delay and reduction of taxes owed to the government — if held for 10 years, that taxpayer can pay zero capital gains tax on the new investment in the fund. I think that’s the real prize: if you hold your investment in some of these opportunity zones from funds, you essentially pay no tax on your returns, which could lead to a 30-40% increase in your annualized return. That’s what I want people to really understand: this isn’t a small tax benefit, it’s pretty massive.
The problem in our country is that capital has moved in a predictable fashion, to serve certain regions and populations, the last hundred years or so. That’s why certain groups and places continue to be left behind. OZs are simply an incentive to move capital across America in a more inclusive fashion; more quickly and to more places where it just naturally wouldn’t end up.
Are OZs going to be universally extractive or additive? In other words, who tends to benefit more with projects like these — the investors holding the wealth, or the communities getting new businesses and real estate built?
I think they’re both. They are extractive because investors with wealth from across the country are investing in low-income places and expect to generate a return on their investment. That capital will not be owned by the people that need "opportunity." However, OZs are also additive because entrepreneurs can open businesses and develop real estate using "Other People's Money” as a catalyst. That’s how people have generated wealth since the 1600s. Additionally, money is just one form of capital. Investments in human capital can remain even after an investment is exited — like investing in an entrepreneur who still has that experience, that context, the contacts, and the ability to move onto something bigger and better.
One of my mentors told me that you really need to follow policy, because policy is how capital moves. If you think about mortgage interest tax deduction, that’s why we have such a huge single family home real estate economy. You look at 401ks, that's why we have this huge retirement market. It’s all because of government incentives. So I see opportunity zones as very structural incentives that can have sweeping effects around impact investing.
We’re hearing more and more the use of the term “impact washing” across the sector. Are you seeing this happen in OZ projects?
Impact washing is definitely a thing. I cringe when I hear of investments in self-storage centers or luxury condos in OZs. And I think the reason is that these investments just have pretty low multiplier effects. Who is really going to benefit from this — that needs to and can’t benefit otherwise — in these low income communities? I don’t see a need for condos that are going to be priced three, four, five times what the average person can afford to pay there. It’s just a low, unproductive use of capital in my mind.
To be fair, those investors are just taking advantage of a tax tool, most are not claiming to have any social impact. What matters most is that these investments don’t absorb too much capital that will prevent or delay high-impact investments. The ones that do generate impact need to be 80, 90% plus of the deals done, and they need to be highlighted. We need the brightest minds from the impact investing world to be working on OZ investments.
What would a non-extractive OZ look like, and what are best practices for these projects?
A non-extractive OZ project is one where the value created is shared. I’d like to see a good blend of broad-based ownership for employees and contractors, training and apprenticeships, and general acknowledgement of existing community efforts. A lot of people are doing these things, but they are on the margins.
We need to ask… if a project generates $100M in profits, where does this money flow? How much of it is left in the community? I just wanted to call out that a $100M dollar investment with a little bit of philanthropy wrapped around it and some kind of job fair, that doesn’t really cut it.
Paying living wage jobs is very important, but I think we need to go beyond just job creation and more about jobs that allow people to build enough wealth that they can in turn invest. And then it’s the natural question of “well, how do you make sure that people who live in opportunity zones can get hired in some of these roles?” So a specific budget for training and helping people fulfill those skills as a part of the opportunity zone investment I see as being very interesting, and need to be a focus of the board and the fund manager and the LP.
Opportunity Zones (OZs) are defined as “economically-distressed communities where new investments, under certain conditions, may be eligible for preferential tax treatment.” First conceived in April of 2018, OZ plans are now in place for communities in all 50 states this year. How it works is that each state nominates blocks of low-income areas by census tract, which are then certified by the Secretary of the U.S. Treasury via his delegation of authority to the Internal Revenue Service. Through the IRS, investors can file a Form 8896 to create a Qualified Opportunity Fund — vehicles structured as either a partnership or corporation for the purpose of investing in an OZ census track, whether in real estate or directly in businesses through equity. The fund is required to hold at least 90% of its assets in that qualifying OZ area.
Simply understanding the mechanisms of OZs creates a major barrier to entry for more socially-minded investors. This interview aims to unpack some of the mystery. Markeze Bryant works at Acumen America; a seed stage investment fund focused on helping low-income families generate better access to health care, education, and financial services — taking a start up approach and working with early stage companies. He was born in a now-designated OZ, went to college in an OZ, and most recently was married in an OZ. He has been working diligently to identify, and maximize, the impact opportunity of opportunity zones — and shared his insight on how communities across America can best benefit from the program.
According to the IRS’s website, over the next few months “the Treasury Department will be providing further details, including additional legal guidance, on this new tax benefit.” At this point, can you break down how OZs will work mechanically?
OZs are places in the U.S. where over 30 million people live and work across our country. They cover downtown, industrial, suburban, and rural areas. They’re part of daily life for a lot of people.
To make a profit, essentially a taxpayer must sell an asset and generate a capital gain. The taxpayer then puts the capital gain into a Qualified OZ fund. There is ultimately delay and reduction of taxes owed to the government — if held for 10 years, that taxpayer can pay zero capital gains tax on the new investment in the fund. I think that’s the real prize: if you hold your investment in some of these opportunity zones from funds, you essentially pay no tax on your returns, which could lead to a 30-40% increase in your annualized return. That’s what I want people to really understand: this isn’t a small tax benefit, it’s pretty massive.
The problem in our country is that capital has moved in a predictable fashion, to serve certain regions and populations, the last hundred years or so. That’s why certain groups and places continue to be left behind. OZs are simply an incentive to move capital across America in a more inclusive fashion; more quickly and to more places where it just naturally wouldn’t end up.
Are OZs going to be universally extractive or additive? In other words, who tends to benefit more with projects like these — the investors holding the wealth, or the communities getting new businesses and real estate built?
I think they’re both. They are extractive because investors with wealth from across the country are investing in low-income places and expect to generate a return on their investment. That capital will not be owned by the people that need "opportunity." However, OZs are also additive because entrepreneurs can open businesses and develop real estate using "Other People's Money” as a catalyst. That’s how people have generated wealth since the 1600s. Additionally, money is just one form of capital. Investments in human capital can remain even after an investment is exited — like investing in an entrepreneur who still has that experience, that context, the contacts, and the ability to move onto something bigger and better.
One of my mentors told me that you really need to follow policy, because policy is how capital moves. If you think about mortgage interest tax deduction, that’s why we have such a huge single family home real estate economy. You look at 401ks, that's why we have this huge retirement market. It’s all because of government incentives. So I see opportunity zones as very structural incentives that can have sweeping effects around impact investing.
We’re hearing more and more the use of the term “impact washing” across the sector. Are you seeing this happen in OZ projects?
Impact washing is definitely a thing. I cringe when I hear of investments in self-storage centers or luxury condos in OZs. And I think the reason is that these investments just have pretty low multiplier effects. Who is really going to benefit from this — that needs to and can’t benefit otherwise — in these low income communities? I don’t see a need for condos that are going to be priced three, four, five times what the average person can afford to pay there. It’s just a low, unproductive use of capital in my mind.
To be fair, those investors are just taking advantage of a tax tool, most are not claiming to have any social impact. What matters most is that these investments don’t absorb too much capital that will prevent or delay high-impact investments. The ones that do generate impact need to be 80, 90% plus of the deals done, and they need to be highlighted. We need the brightest minds from the impact investing world to be working on OZ investments.
What would a non-extractive OZ look like, and what are best practices for these projects?
A non-extractive OZ project is one where the value created is shared. I’d like to see a good blend of broad-based ownership for employees and contractors, training and apprenticeships, and general acknowledgement of existing community efforts. A lot of people are doing these things, but they are on the margins.
We need to ask… if a project generates $100M in profits, where does this money flow? How much of it is left in the community? I just wanted to call out that a $100M dollar investment with a little bit of philanthropy wrapped around it and some kind of job fair, that doesn’t really cut it.
Paying living wage jobs is very important, but I think we need to go beyond just job creation and more about jobs that allow people to build enough wealth that they can in turn invest. And then it’s the natural question of “well, how do you make sure that people who live in opportunity zones can get hired in some of these roles?” So a specific budget for training and helping people fulfill those skills as a part of the opportunity zone investment I see as being very interesting, and need to be a focus of the board and the fund manager and the LP.