The U.S. Treasury Department and the Internal Revenue Service recently issued proposed regulations and guidance for the new Opportunity Zone Funds (OF). The public is invited to comment on the proposed regulations before December 28, 2018.

As CMF reported in May, Opportunity Zones, created through the 2017 tax reform legislation, are designed to incentivize investments in low-income communities or areas directly adjacent to one or more low-income communities. 

There are 288 census tracts in Michigan designated as Opportunity Zones. Deloitte Tax, a CMF member, prepared this one-pager to explain the incentives of Opportunity Zones.

To support understanding of the proposed regulations, CMF member, Jaffe Raitt Heuer & Weiss P.C. has provided a briefing memo for CMF members.

Here are a few highlights of the proposed regulations:

• Almost all capital gains qualify for deferral. To qualify, the amount of a capital gain must be invested in a Qualified Opportunity Fund within a specified time period.

• The Opportunity Fund doesn’t need to be a newly created fund, but the investment in the fund must be new to qualify for the new tax benefits.

• To be considered a qualified business for Opportunity Zone investment, the business must have at least 70 percent of its property inside the zone.

• There’s currently no government coordination with key stakeholders and no evaluation of the outcomes required for these investments.

The Council on Foundations (COF) hosted a webinar last week to discuss the proposed regulations and the roles foundations can play in supporting communities and investments to capitalize on the Opportunity Zones.

The panelists on the COF webinar explained that, as further guidance is currently being crafted by the federal government, now is the opportune time for foundations to promote more strategic practices to ensure further provisions align with equitable community development practices.

How funders can get involved:

• Provide feedback to the federal government on the need for requirements for tracking, evaluating and reporting outcomes on investments.

• Lead or participate in conversations about how the field can influence investment activities and protect vulnerable populations.

• Serve as a convener, promoting coordination of investors, local government, nonprofits and community members.

• Educate the community – including potential investors – about the Opportunity Zone legislation and how they may benefit from it while also helping communities in need.

• Gather local agencies in your community or mission area to brainstorm Opportunity Zone-qualified projects that could be undertaken.

Details are provided in the proposed regulations.

The state of Michigan is keenly interested in assuring the benefits of the Opportunity Zone legislation are realized for the 288 designated zones in Michigan. Based upon the decades of experience of successful public-private partnerships with philanthropy, the Michigan State Housing Development Authority (MSHDA) told CMF late last week that there is a need for foundations to assist in support of this community investment vehicle.

In addition to what was mentioned in the COF webinar, MSHDA shared the following ways funders can get involved:

• Promote completion of the form on the MSHDA website to identify those interested in creating an Opportunity Fund so they can be connected with state agencies to support their efforts.

• Invest alongside Opportunity Fund investments to diversify and leverage the capital stack.

• Invest in capacity building and/or technical assistance for entities, especially those from the nonprofit sector, involved in projects to grow the likelihood of success. For instance, assisting social service agencies and other nonprofits to pre-package investable deals in Opportunity Zones, that align with the investment criteria, so that they’re investor-ready.

CMF member, The Kresge Foundation, has been very engaged in working to ensure racial equity and responsible community development are guiding Opportunity Zone investments. Aaron Seybert, social investment officer at The Kresge Foundation served on the COF panel to share how the foundation has been doing this.

The foundation did a call for proposals to find potential Opportunity Zone projects that aligned with the foundation’s work. The foundation received more than 140 responses and from that pool, selected a small group of fund managers to support in bringing ideas to the marketplace with the hope of setting an example of best practices in socially responsible community investments, guided by transparency, research and reporting.

“The amount of interest from fund managers open to partnering with philanthropy was far higher than we anticipated,” Kimberlee Cornett, managing director of Kresge’s Social Investment Practice said in a blog. “At Kresge, our goal is to identify funds that are focused on truly driving positive outcomes in low-income communities and on shaping the Opportunity Zones market to be one that is mutually beneficial to investors and residents of these communities. We’re continuing to work toward that goal.”

The Treasury Department and the IRS are working on additional guidance which will likely be released by the end of the year. CMF will follow any developments and share updates with you as they become available.

Want more?

Check out MSHDA’s Opportunity Zones resources.

Learn more about how funders can get involved. 

View Mission Investors Exchange’s (MIE) Opportunity Zones resources.

Read the federal guidelines.

Provide feedback to the IRS.