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Bipartisan and bicameral legislation was introduced to further improve Opportunity Zones and push back the tax incentive’s deferral date by two years, from 2026 to 2028. The extension will allow OZ investors to continue attracting capital for these social-impact, tax-incentivized funds. And for investors seeking clarity around eligibility and timing requirements, the new legislation would achieve just that.
Shay Hawkins, founder and CEO of the Opportunity Funds Association (OFA) — a Washington, DC-based advocacy, education, and communications group for the QOF industry, shares his perspectives on the new legislation and how OZ stakeholders can advocate for the legislation’s enactment.
Click the play button above to listen to our conversation with Shay.
- Overview of The Opportunity Zones Improvement, Transparency, and Extension Act and the new mandates that would reform the Opportunity Zones tax incentive.
- Why legislation seeks to reform and extend the Opportunity Zone program.
- Expanding reporting requirements for added transparency into how the Opportunity Zone incentive is working.
- How CDFIs can help raise opportunity zone capital.
- The process for sunsetting certain high-income census tracts from the OZ program.
- The misconceptions associated with OZ law.
- Market trends and investor perception specific to opportunity zones in 2022 and beyond.
Featured On This Episode
- Shay Hawkins on LinkedIn
- Opportunity Funds Association
- Shay Hawkins for Congress
- The Opportunity Zones Improvement, Transparency, and Extension Act
- IMPACT Act
- The Community Development Financial Institutions Fund (CDFI Fund)
Industry Spotlight: Opportunity Funds Association
The Opportunity Funds Association is an advocacy, education, and communications organization established to enable Opportunity Fund managers and investors in Opportunity Funds to participate in public policy, share best practices, and communicate the industry’s contributions to distressed rural and urban communities across the country.
Learn More About OFA
- Visit ZoneFunds.org
About The Opportunity Zones Podcast
Hosted by OpportunityDb.com founder Jimmy Atkinson, The Opportunity Zones Podcast features guest interviews from fund managers, advisors, policymakers, tax professionals, and other foremost experts in opportunity zones.
Jimmy: Welcome to The Opportunity Zones podcast. I’m your host, Jimmy Atkinson joining you from the road today. I’m in a rental car here with Mr. Shay Hawkins, my guest on the podcast today. We are driving up to Long Beach for the Novogradac Spring 2022 Opportunity Zones conference. And Shay is president of the Opportunity Funds Association and a candidate for Congress in his home state of Ohio.
Shay: Yes, sir.
Jimmy: Shay, thanks for going for a ride with me today.
Shay: Hey, thanks for having me. This is great. We get to conference first thing tomorrow, Novogradac’s spring conference. The weather is great here in Southern California and it looks like we’re gonna have a good conference tomorrow. Got some exciting new legislation to discuss.
Jimmy: That’s right. And that’s what I want to discuss with you today on this episode of the podcast, Shay. I wanna talk about the Opportunity Zone reform legislation that will greatly expand the tax policy by a couple of years and expand it in some other ways as well. Put some guardrails around the program.
Shay: Yes, absolutely.
Jimmy: Introduce some reporting and transparency. What can you tell us about this reform legislation?
Shay: Sure, sure.
Jimmy: Break it down for us.
Shay: Yes, sir. Yes, sir. Well, this legislation is exciting for a number of reasons. One, it is a further bipartisan affirmation of the effectiveness of the Opportunity Zones policy. So, Opportunity Zone started off as a bipartisan concept. Forty-four Democrats and 44 Republicans in the House were sponsors. Seven Democrats and seven Republicans were sponsors on the Senate side of the Investing in Opportunity Act, IIOA. And that’s the basic language that I use to draft the Opportunity Zone policy into the tax reform bill. So, it’s been bipartisan from the beginning. So, it’s great to see this bipartisan marker laid down. And the legislation is out there, you know. We’ve got some great summaries, but just to summarize the key points, it includes a key bipartisan priority, which is to add transparency and reporting requirements to the actual legislation.
So, beyond anything that’s required by treasury, now we would have some very straightforward transparency reporting legislation that’s based on Senator Scott and Senator Sinema’s IMPACT Act, IMPACT, all capital letters. And basically, all you have to do if you’re a fund, you’re gonna have to let the IRS, on an annual basis, know about how many direct jobs you expect to create, what industries you’re investing in, whether real estate or if operating businesses what sick codes, where you’re investing and, you know, about how much you expect to invest. This is information that for the small investor, if it’s a couple of guys who are investing in a brand new subway franchise in a distressed community, rural-urban, then they can do it in one form or one-pager. And if you’re a large fund investing $0.5 billion dollars over 10 years like some of our members, then it’s information that you would have to provide to your investors, anyway. There’s some great platforms out there that are developing in anticipation of the IMPACT Act being rolled into a bigger bill. So, you know, some of the backend fund administrate like JCT Americas and others who are doing some great work, they already have built out the backend platforms that the larger funds would need.
Jimmy: And they’re already tracking a lot of this data.
Shay: And they’re already tracking a lot of this data for these funds. And so, the transparency reporting is important.
Jimmy: Because right now the IRS form that gets collected from each Qualified Opportunity Fund form 8996, it only asks for very basic information. It asks for which census tracks you’re investing in and how much money.
Jimmy: Essentially, that’s it. So, this just…
Shay: This goes a few steps beyond this, yes.
Jimmy: Goes a few steps further, but the way you characterize it sounds like it’s kind of found the sweet spot between not getting enough information and asking for too much information that would be burdensome to too many funds. Okay.
Jimmy: Go on, Shay. What else does the bill do?
Shay: And so, beyond that, the bill will allow for a fund to fund structure for Opportunity Funds, which for those of you or most people listed in this are involved in other areas of finance or had been. In the hedge fund and private equity community, there’s often a structure where investors can invest in a fund that then invests in other hedge funds or private equity funds, right? And it’s a way to deploy capital in a way that’s a little more industry agnostic. You know, what I know is that if people are skilled at identifying investors in the same way that other funds are skilled in identifying investments, if you will, then it allows for additional capital to come in. And this is something that had been a long-time priority of folks in the Opportunity Zone world, folks at EIG, at Economic Innovation Group really pushed for this as we were drafting the policy into law in the first place. What it allows is significantly more capital to come into these distressed communities and do good because investors will have one more significant platform in which to get involved.
Jimmy: Right. Right now, fund to funds is prohibited by the regulations. Even if you have your own Qualified Opportunity Fund, sometimes it can be rather burdensome to have to go out and find a project that qualifies within that certain time period and might force you to unwind your own Qualified Opportunity Fund. This just gives those types of funds another outlet you can just simply kind of tag along with another larger existing fund, have your fund invest directly in another fund. That’s the way I look at too.
Shay: Absolutely. And that’s really critical, another priority. There are a handful of extremely high average income census tracks that were designated by governors, and most of them were clustered around the coast as you would expect. And what this bill does is it says if you have an investment in those areas today, then you’re fine. No problem. That investment can carry through to the time that you…a lot of that investment all the year deferment carries through through the normal deferment period. But they’re saying no new invest within a time period of I believe it’s four months after enactment of this bill, okay?
Jimmy: So, essentially, you’re talking about disqualifying a handful of high-income census tracks, but there’d be a grandfathering provision.
Shay: Absolutely. For existing investors.
Jimmy: So it wouldn’t blow up an existing fund.
Jimmy: Okay. And how many Opportunity Zones do you estimate would fall into that disqualification criteria?
Shay: You’d be looking at a couple of dozen. It’s really just a handful, and that’s out of the 8,700 that are there. So, that’s something where there’s safe harbors built-in, so if you have an investment that’s gotten started, are they still being good? And also one of the key elements that we really push for at the Opportunity Funds Association. One of our top priorities along with transparency reporting was to build in an extension of the policy, right?
Jimmy: Well, hang on. Before we get to that, can we back up for a second and talk about the disqualification of Opportunity Zones?
Shay: Sure. Let’s use the language of the bill. Let’s say sunset.
Jimmy: Sunset. Yeah. Sunset. If a zone gets early sunsetted, the state has the ability to…
Shay: Yeah. Absolutely. That’s a key part. I’m glad you pointed that out.
Jimmy: Yeah. Yeah.
Shay: Yeah. As the policy was initially designed, we wanted to put the power into the hands of governors and take the power out of the hands of the White House and Treasury, right? And so, yes, governors will have the ability to redesignate those sunset census tracks and allow them the shot at creating additional Opportunity Zones and an additional shot at some job-creating investment in those states. So, that’s very exciting.
Jimmy: So, we’re in California, and possibly California being one of those states along the coast with some high-income OZs might have a handful that get early sunsetted. Well, Governor Newsom will have the ability to designate some new tracks.
Shay: He will.
Jimmy: Which will be really interesting to see how that unfolds.
Shay: And one of the natural elements that you see across the country is inevitably there were tracks that were left out that in hindsight people feel should have been in and vice versa. So, to an extent, as relates to this handful of subset zones, this will give governors another shot. So, that’s very exciting as well. I’m glad you noted that.
Jimmy: Yeah. Yeah. Well, so you were about to talk about the extension, right?
Jimmy: So, tell us about that.
Shay: And so, the bill builds in a very straightforward overall extension of the deferment period. So, right now, if you invest in a Qualified Opportunity Zone business, you can defer the capital gains you invest in that business for as long as you hold the investment in an Opportunity Fund or until December 31st, 2026. All this does is pushes that out to December 31st, 2028, right? Which is key because the Opportunity Zone, the Invest in Opportunity Act, the language that we used as the basis for Opportunity Zone to tax reform was structured as a standalone bill, but it was passed in a $1.5 trillion tax bill with a ton of implementation responsibilities for the Treasury Department. That ended up taking years not months. And so, this extension takes into account, one, the long-range implementation process, particularly that we saw around operating businesses. Those regs took quite a bit of time to develop. But it also helps us to account for some of the lost time that we saw due to COVID-19. And so, the Treasury Department, thankfully, when COVID first hit laid out some regulations, and a lot of folks waited on that process. They get some relief there on some of the timelines but are having a legislative vehicle to actually push the end date of new investments under the policy, I should say, is even more effective. And we also saw a one-year extension of the step-up basis. So, that’s another key. So, you’re essentially looking at a year on a step-up basis and then two years on the overall new investments in Opportunity Zones.
Jimmy: Yeah. So, just give investors more time to defer their capital gains into Qualified Opportunity Funds. Right now, they have to realize a gain prior to the end of 2026 in order for it to be eligible for deployment into a Qualified Opportunity Fund.
Jimmy: Give you the math, and if let’s say best case scenario you have the gain through a schedule K1 you have until September 11th of 2027 is really like the very final last day to make a Qualified Opportunity Fund. If it’s not through a K1 I think it’s June 27th or 28th-ish of that same year, 2027. This will push that out an additional two years, so that’s pretty big deal to extend that for two years.
Shay: Yeah, absolutely. I’m gonna have the guys at Novogradac, the accountants, I’m gonna bring the accountants into the room to double-check that, but it sounds right.
Jimmy: We’ll have to quiz them on that.
Shay: We’re gonna have to quiz them.
Jimmy: Overall, it’s gonna give investors more time, and more importantly, it’ll drive additional capital into these communities that need it.
Shay: Yes. Exactly.
Jimmy: Just give everybody a couple more years to get their arms around the program and drive more capital in.
Jimmy: So, what else is in the bill, or did you hit the high points already?
Shay: So, we hit the high points and one of the really exciting things when President Biden put out his statement on Opportunity Zones during his campaign, the goal that he laid out acknowledged their effectiveness and the goal he laid out was around transparency in reporting. So, this bill really addresses that stuff. It’s bipartisan in nature, and that’s critical. One of the most disappointing things, it was a huge victory to get Opportunity Zones included in the tax reform bill, huge. But one disappointing aspect of it is that the transparency reporting requirements, which I kind of laid out what’s there for fund managers, but Treasury also has a responsibility under this legislation to compare the performance of designated Opportunity Zones against the general economy and then to compare those to places that are financially distressed but weren’t designated as Opportunity Zones and things like that. So, they have some important requirements, and those requirements were a part of the original bill, but because we passed tax reform in a reconciliation vehicle, every element of the bill that didn’t have a direct budget impact was vulnerable to being attacked on the Senate floor as the bill was passing, and if the parliamentarian agreed that there was no direct budget impact, then that provision, meaning the entire Opportunity Zones provision could have been removed. So, I had to make the decision, unfortunately, to remove the transparency reporting provisions because it was clear that the minority, in this case, the Democrats, were gonna challenge everything that was challengable including the best part of Opportunity Zones, the part that allows us to track how well they’re performing. I mean, we all know.
Jimmy: And it would have put the whole bill out of that risk.
Shay: The whole bill at risk.
Jimmy: All of Opportunity Zones.
Shay: Exactly. And so, I was working as tax counsel for Senator Tim Scott at the time and I wasn’t gonna gamble or let the leadership gamble with my boss’s money, so I stripped it out in the hopes that we could add those transparency reporting requirements back later. And sure enough, later down the road, we had the IMPACT Act introduced in December 2019 with then-Senate Finance Committee chairman, Chuck Grassley, leading along with Senator Tim Scott, who’s always been a leader in this space, and we had bipartisan support from Senator Sinema from Arizona. And there’s a great clip during the State of the Union where the President mentions Opportunity Zones and he mentions Senator Scott, particularly, but Senator Scott gets up and waves and Senator Sinema is there giving part of the standing ovation. It’s very, very moving given that, you know, I was a Republican president at that time and that she’s a Democrat and Senator Scott is a Republican, but it’s very moving. And so, we saw that.
Jimmy: Oh, we’re getting directions.
Shay: We’re getting directions.
Jimmy: Yeah. We’re getting close. It was a pretty drive up the Pacific Coast Highway.
Shay: It was. Very nice drive. Perfect day here. But, you know, it was great to see it introduce the IMPACT Act. And great to see the IMPACT Act folded into this broader bill. So, that’s a real joy to bipartisan nature. The sponsors, as we speak, are on the Republican side, Senator Tim Scott on the Senate, and we’ve got Senator Young as well. On the Democratic side, we’ve got Senator Warner, Senator Booker, and also Senator Van Hollen. But we’re not only bipartisan on this bill. We’re also bicameral. So, on the House side, we’ve got Congresswoman Terri Sewell from Alabama. We’ve got Representative Ron Kind from Wisconsin. And on the Republican side, we’ve got Congressman Mike Kelly from Pennsylvania. These are people who’ve always been involved and stakeholders in Opportunity Zones. And it’s good to see a comprehensive bill come together. It’s just the beginning because if we can get this pass either in this Congress or even future Congress with the support of everyone involved, that is really gonna give us the tools we need, particularly around transparency reporting to demonstrate in concrete numbers how effective opportunities are for revitalizing distressed communities. So, it’s very exciting.
Jimmy: It is indeed. And I think a lot of the industry is hoping that this legislation gets pushed through at some point if not in this session at Congress or maybe a lame-duck session after the election, hopefully, next session.
Shay: Or maybe future Congress with some new members.
Jimmy: Maybe Shay Hawkins is one of them. We’ve got your primary coming up in a couple of weeks here.
Shay: Yes, sir.
Jimmy: And I know you’re running in large part on Opportunity Zones and what you plan to do with Opportunity Zones.
Jimmy: I know you have some plans for reform and certainly, you’ll be supportive of this bill.
Jimmy: What if this bill gets passed before you take your seat in the House of Representatives. If you are to win, what are your plans for some future reform?
Shay: You know what? Lord willing it will be passed before I get there. Hopefully, it’ll be passed as soon as possible. They’re looking for vehicles now and the bill is ready to go. And that’s very similar to how Opportunity Zones develop. The Investing in Opportunity Act had been introduced in the previous Congress to where tax reform occurred.
Shay: So, it was a bill that was out there gathering, cosponsored, but it was just looking for a vehicle. And so, now we have an expansion bill that’s just looking for a vehicle. So, hopefully, it will be there. If it’s not passed, then I would want to be a leader in Congress in getting that passed. It’s a great bill and it’s got that bipartisan support and I would love to fight for it. But if we get it passed, then we’re gonna be looking at the next round of reasonable expansions of the policy.
Jimmy: And now we’re getting ahead of ourselves, but what might that look like?
Shay: Sure. And the thing is, Jimmy, I use the word reasonable because there are 1,000 ideas on how to improve Opportunity Zones.
Jimmy: Oh, sure.
Shay: And as I’ve told you before, 990 of those are probably pretty bad. So, I work on a dozen or so ideas that, one, have a chance of actually passing, you know, any Congress, but, two, would serve the purpose of increasing the amount of capital that benefits the existing residents of Opportunity Zones. That’s what’s key. That’s all it meant. And so, one of the things that has been discussed and that we really wanna take a close look at is allowing CDFIs, community development finance institutions, to take a more active role in Opportunity Zones. So, this is something that many members, particularly on the Democratic side had set out there as a priority. And it could get very complicated because banks are not allowed to be invested in as Qualified Opportunity Zone businesses. CDFIs are a different type of entity, you know. They’re non-profit but they are financial in nature. So, it could be difficult, but the general principle would be to allow CDFIs to exist and be invested in as a Qualified Opportunity Zone business. Then they would take that additional capital and deploy it as they always have, making small-scale loans to small businesses within distressed communities, right?
Jimmy: But investments in the CDFIs would receive all the tax benefits of Opportunity Zones?
Shay: Yes. Exactly.
Shay: And so, the return may not be as high as some of the things that we’re seeing in current operating businesses, but CDFIs in the communities are already doing good, and so we can really kind of build on that. And so, the other thing that we would love to look at closely is we would love to see for the sake of the 10-year step-up at basis, right? So, if you hold an investment for 10 plus years, then the new investment in the zone, call it like Hawkins corp or whatever invest $1 million in the Eastside of Cleveland. So, the idea there is that if that investment goes from $1 million to $100 million, there’s a $99 million capital gain there. What this policy says is that if you hold that capital gain for 10 plus years, call it 10 years and a day, whatever, when you sell Hawkins corp, that investment is 100% capital gains tax-free. It is a 100% step-up basis.
Jimmy: No tax on that $99 million gain.
Shay: So, what I would love to see is for after those tax dollars, non-capital gain dollars to be able to be invested for the sake of that benefit.
Shay: If you’re willing to invest dollars that have already been taxed and hold that investment in a distressed community for 10 plus years…
Jimmy: You should get that benefit.
Shay: You should get that benefit. And so, that’s something that would be very attractive. There’s been some discussions.
Jimmy: I can’t tell you how many times I’ve gotten that question from would-be investors, “Hey, I don’t have a capital gain. Can I just put regular money in?” I say, “Yeah, you can but it doesn’t get any of the benefits on [inaudible 00:21:07].
Shay: Doesn’t get any of the benefits. And so, that’s just one of those things that would be a really reasonable expansion and it would really drive a lot of capital into those operating businesses, particularly, because the operating businesses are where that upside potential really…where you really see it coming to play. And so, given that, and that’s also where you can really see a lot of exciting job creation. And so, given that, I’d love to work on that. There’s some other ideas that are very interesting, but I don’t want to understate what has been accomplished in the bill that was just introduced because that really was some of our key concern that we’ve had ever since we literally founded the Opportunity Funds Association to get to this point and to push past this point to passage. So, if I’m elected in November, like you said, I got my primary on May 3rd. And if I get to the primary and I’m elected in November, then this is gonna be my top priority because it really was one of the largest accomplishments in tax fraud that came out for everybody from the community development standpoint. The White House Council of Economic Advisors estimates that $75 billion in equity investments will come into Opportunity Zones over 10 years, and that’s not including the debt dollars that will follow.
Jimmy: Well, I think we’ve already blown through that number.
Shay: We have, and that’s…
Jimmy: The Novogradac survey, and were headed up to their conference, right? Their survey shows I think it was $24 billion or $29 billion. I get a…okay that was next stop.
Shay: Already I think it’s $29 billion.
Jimmy: Already and they estimate that the actual number is three to four times higher than that because they’re only surveying a small portion of the universe of Qualified Opportunity Funds. So, actually, on our last event that we did OZ pitch day a few weeks ago, Shay, I hinted at the possibility that we may have already blown through the $100 billion mark.
Shay: Which would be a beautiful thing.
Jimmy: Right. And then if you include debt and other financing, there might be $500 billion, $0.5 trillion dollars of Opportunity Zone projects that already exist out there.
Shay: Yeah. And what’s exciting is that with the transparency reporting, we’ll be able to track that much more closer and really advocate for these additional expansions and extensions. That data is what’s really critical to make the case to members of Congress that your constituents in America’s writ large are gonna benefit by this. So, that will be my priority if elected. We got a great district that’s in Northeast Ohio where I was born and grew up. Born in the city of Cleveland, raised in the suburbs of Cleveland. So, this district includes all of Summit County, including the city of Akron, which is just below Cleveland, and half of Stark County, which includes all of the city of Kenton. And so, we’ve got about a dozen Opportunity Zones there, and so being blessed to be a part of this process. Also, I’ve been blessed to create jobs in a community where I’m now running for Congress before I ever served in Congress. So, it’s very exciting and we are working very hard. I spent from about 8:00 a.m. to 3:00 p.m. calling donors and trying to raise money. Like I said, the primary is in two weeks. And then I spend every day from 3:00 p.m. to 8:00 p.m. calling voters. And so, we made thousands of phone calls, and our team has made even more and we’re just pushing through to May 3rd.
Jimmy: Well, all the best of luck to you, Shay.
Shay: Oh, thank you, sir. Thank you.
Jimmy: If our listeners wanna learn more about the Opportunity Funds Association or your campaign, where can they head?
Shay: Yes. So, in two separate ideas, as it were, the website for the Opportunity Funds Association is www.zonefunds.org. And on the campaign side of things, you can go to our campaign website, which is www.shayhawkinsforcongress.com, and there’s there when you can do anything from sign up to make phone calls to if you’re in Summit County grabbing a yard sign or in Stark County to display in your yard, just share posts on social media and an encouragement or donating. Those are all critical aspects of this campaign as we come into the home stretch here. We’re looking at the less than two weeks.
Jimmy: That’s right. Well, Shay, we have arrived in downtown Long Beach. It looks like we’re just a few blocks from the convention center or the hotel where we’re gonna be having the conference. So, I think we’ll cut you loose here, but appreciate you joining us. We’ll be sure to link to zonefunds.org and shayhawkinsforcongress.com on the show notes page for today’s episode. You can find those show notes at opportunitydb.com/podcast that you will find links to all of the resources that Shay and I discussed on today’s show. Shay, it has always been a pleasure and I think pretty successful first-ever roadshow.
Jimmy: On the road.
Shay: Took it on the road, Jimmy. We took it on the road.
Jimmy: On the road with The Opportunity Zones podcast. Thanks, Shay.
Shay: All right. Thanks so much, Jimmy.