Write-Off: The Tax Blog

The Looming Lost Opportunity of OZs

Monday October 28, 2019 • Mary Margaret Frank, University of Virginia

My experience at a recent conference left me questioning the potential of Opportunity Zones (OZs) to create significant positive impact for members of the distressed communities. Why? Because the important stakeholders for the success of OZs do not appear to be in the same room, even at a conference where they are all gathered.

During the opening session of the conference, the speakers espoused the potential for the OZ legislation to lift communities out of poverty. Afterwards, I went to a breakout session focused on investors. The room was populated with OZ fund managers, family wealth investment professionals, and tax advisors. The conversation centered on the value of deferral, exemption and additional tax subsidies to improve investors’ after-tax returns. It wasn’t until the end of the session, when I raised the issue of impact, that a fund manager acknowledged their intended impact for the community. In all fairness to these finance professionals, this discussion simply reflects what their clients, the potential capital providers, are demanding: risk-adjusted, after-tax returns. My take-a-way from the session is that the majority of investors are interested in the tax break, and impact is an after-thought or “nice to have”. They are not impact investor, who have the “intention to generate positive, measurable social outcomes and environmental impact.”[1]

In contrast, the next breakout session that I attended was full of government and NGO participants whose enthusiasm for a potential new source of capital to improve the lives of others was inspiring. Good thing that they were not in my prior breakout session with the investor community. If they had been there, they would have concluded that the new capital from taxable investors will flow to real estate projects because depreciation recapture has been eliminated when investors exit OZ funds, but other types of investment in OZs are uncertain. My take-a-way from the session is that the majority of investors who seem willing to take on more risk in OZs to achieve more impact are the ones that don’t get any tax subsidy – the NGOs.

With my professional interests in tax and impact investing, I am intrigued by the potential of OZs. However, the conference left me doubtful that OZs will generate a significant positive impact for members of distressed communities unless there are more efforts to nudge investors, NGOs and local governments to work across sectors.

[1] Global Impact Investing Network

Posts and comments are solely the opinion of the author and not that of the UNC Tax Center or any other person or entity.