OZ Reform Legislation: What Investors Need To Know, An OZ Pitch Day Panel

In April, members of Congress in the House and Senate introduced bipartisan Opportunity Zone legislation that would extend and improve the four-year-old tax policy.

In this panel from OZ Pitch Day Summer 2022, Blake Christian, partner at HCVT, and Reid Thomas, executive vice president at JTC Americas, discuss the new legislation and how it may impact investors and the OZ marketplace if enacted.

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Episode Highlights

  • A brief recap of how Opportunity Zones were enacted under the 2017 Tax Cuts & Jobs Act, and how pending legislation would reform Opportunity Zones if enacted.
  • How Qualified Opportunity Funds are responding to the potential for Opportunity Zones to be reformed and some high-income tracts to be disqualified early.
  • The common misconception that Opportunity Zones are rapidly expiring or have already expired.
  • The impact that the “fund of funds” concept may have on capital raising.
  • How the 10- and 15-percent basis step-up investment windows may reopen if the legislation is enacted.
  • Predictions for when and how the legislation may be enacted by Congress, possibly before the end of this year.
  • How the new reporting requirements may affect the program from an ESG effectiveness perspective.

OZ Pitch Day Panelists

Blake Christian and Reid Thomas on the Opportunity Zones Podcast

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.

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Show Transcript

Jimmy: In our next session here in the main session, we’re gonna be chatting about that OZ Reform Legislation that Erik and I were just discussing a moment ago. And to help me out with that I have two panelists today. One is Blake Christian from HCVT. Blake, I’m running you to panelist right now. And Reid Thomas from JTC Americas will also be joining us. I’m promoting Reid to panelist right now, as well. I’m gonna quickly kind of recap what the OZ Reform Legislation is. Maybe some of our attendees here aren’t sure what it is, or maybe they haven’t heard of it. Blake and Reid joining us from HCVT and JTC Americas respectively. Gentlemen, why don’t you introduce yourself very briefly, give us the elevator pitch on who you are and what your firms do. Blake, I’ll let you go first to go on in alphabetical order.

Blake: All right. Thanks again for having me. So, I’ve been a CPA for about 40 years with a large national firm, and I’ve set up about 180 OZ funds for various clients. I also have my own OZ fund which I’ll be talking about a little bit later. And just do consulting and the compliance work for all those funds.

Jimmy: Terrific. And, Reid, how about you? Tell us about you and JTC Americas and what they do.

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Reid: Yeah. Thanks, Jimmy. Thanks for having me on. JTC is a company that’s really focused on helping well-intended investment opportunities do the good that they’re intending to do. And so, we’re passionate about helping the opportunity program ultimately be successful. We have over 200 clients in the space today where we do the back office fund administration for Opportunity Zone. So, Urban Catalyst is a client of ours, I was just listening to Erik talk. So, we do the back office financial reporting. We do the compliance tracking to make sure all the funds are compliant. But in addition, all the investors have all of the information they need to remain compliant. And finally, we measure and track and report on the impact benefits that the fund is making on the local community.

Jimmy: Fantastic. Well, let’s dive into our panel. We’ve got about 20 minutes before our next segment and then we have 3 more qualified opportunity funds presenting today. We have Nest Opportunity Fund, Aguadilla R&D Industrial OZ Fund, and then we’re double dipping with Blake today. Blake is gonna come back and round out the day with MIT Modular QOF. That’s the rest of the agenda for today after we’re done here with this segment. To really quickly recap what’s going on with opportunity zones, as you may or may not know, opportunity zones are a tax policy that were enacted as part of the tax cuts and Jobs Act that was passed in December of 2017 under the Trump administration, so we’re about four years into the program now.

But there hasn’t really been any reform legislation that has been passed in the interim period. Earlier this year, at the beginning of April, we finally got a pretty comprehensive Opportunity Zone Reform Bill introduced simultaneously in both the House and the Senate. And what’s interesting about this reform legislation, unlike previous attempts, it has full bipartisan support and bicameral support. And it’s supported by the original co-sponsors of the investing and Opportunity Act and namely on the Senate side, at the very least, are Democratic Senator Cory Booker from New Jersey and Republican Senator Tim Scott from South Carolina, so it has a lot of weight behind it.

And what the OZ Reform Legislation is set to do should it get passed is, first of all, it’s going to extend opportunity zones by an additional two years. Currently, the program is set to sunset at the end of 2026, which means you need to trigger a capital gain prior to the end of ’26 in order to be eligible for any of the tax benefits associated with investing in a qualified Opportunity Fund. Depending on how you count your 180 days and whether it’s triggered through in a partnership or not, you potentially have up until near the middle of September of ’27 to actually invest in a QOF. This would extend all those end dates by two years.

It would also potentially open up some of the items that have already perished, the 10% basis step-up and the 15% basis step-up. We’ll get into that a little bit more in a moment here with my two panelists. Will also expand some of the reporting requirements, decertify some of the high-income opportunity zones and allow for the fund of funds. Currently, QOFs are not able to invest in other QOF. So, turning to my panelists now, Blake, I’ll turn to you first here again. What did I miss in my rundown there? Any high-level thoughts before we kind of dive into the weeds?

Blake: The one that’s a little muddy in the legislation we’re not quite sure if it’s an oversight or not is, yes, they’ll extend the deferral until November 31st, 2028, which means most people will pay April of 2029. But it does not extend the period for reinvestment. So, we still have a hard, you know, deadline of gains will have to be incurred before December 31st, 2026 and then you’ll have reinvestment 2027. But you won’t be able to invest all the way into 2029, which we kind of thought. Again, not clear if that was an oversight or purposeful, it’s a little unfortunate.

Jimmy: Well, potentially also, this is just the initial release that could potentially get clarified before it gets passed, right?

Blake: Exactly. Summarizing the provisions.

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Jimmy: Reid, any high-level thoughts from you and on the legislation? Did I miss anything?

Reid: No, I think you got it right.

Jimmy: Okay, good. Well, let’s talk about how this is impacting the folks that you two are engaged with. And, Reid, I’ll turn to you first here. How are the clients on your fund administration platform at JTC Americas, formerly you guys were NES Financial, for those wondering out there. How are they handling a potential OZ Reform Legislation? How are they responding to it? What are you hearing from some of your clients on that platform?

Reid: Well, I think in general, everybody’s very excited about it. You have a bill that’s not only bipartisan but has broad industry support. And so, I think it’s set up to be quite successful. Our clients…you know, what was surprising to me before this legislation, many clients said that potential investors understood that the program was winding down in fact, just because the sort of 15% step-up in basis opportunity had gone away. So, many were wondering, “Oh, the Opportunity Zone Act that’s old, right? It’s going away. So, why do I want to invest in it?”

So, this, even though that was not well understood, this has invested new energy into that and sort of taken that issue off the table. So, our clients find this very exciting. The fund-to-funds element that you mentioned, is also a massive opportunity that will help facilitate investment into our clients’ opportunity zone funds. I would say the preparation work that’s going on now is really related to the reporting elements of the new legislation and trying to make sure that they’re geared up to meet the new reporting requirements in the areas of impact and the like as they go forward.

Jimmy: Good. And, Blake, what about you? You advise a number of clients, I’m guessing both, you know, high net-worth investors, limited partners, but also probably funds and qualified opportunity zone businesses as well. What are you hearing from them in terms of how are they responding to this potential legislation? Are they rooting for it? Are they rooting against it? Does anything need to be fixed with it?

Blake: No, I really haven’t heard anybody bashing this legislation. And it’s completely consistent with, you know, what the sponsors wanted out of it. And I do wanna say I’m really happy Cory Booker signed this extension because, you know, he’s been kind of vocal that, you know, maybe there’s been some abuse in the program and things, so it’s nice to see him back in the fold. I agree with Reid completely, that you really…the fund-to-fund relaxation is a big deal. I have a number of clients because we’ll set up QOZ for them.

And then they wanna go in and invest in certain other QOZ. And you know, sometimes you’re negotiating to let allow them to invest down at the QOZB level. And because of their waterfalls and things, sometimes they don’t allow you to do that. So, that’s a big deal. But our clients are applauding this. It’s definitely helping from the fundraising side, too, I think, knowing that this is out there and some additional relief makes long-term OZ investing even more attractive than it was last year.

Jimmy: Yeah, I totally agree with that. And just my take anecdotally, I would say probably about 95% to 98% of the people that I interact with in the opportunity zone worlds are very supportive of the bill. I have heard one person tell me that it doesn’t…that it goes too far, the reporting requirements are a little bit too cumbersome, potentially. I had another person telling me that it doesn’t go far enough. He wishes that the reforms legislation did a little bit more. But for the most part, the consensus is…the general consensus in the industry is that it’s a very good bill and the vast majority the industry seems to be pulling for it. And particularly interesting is what Erik Hayden, our previous presenter had to say, he’s developing in Silicon Valley in downtown San Jose, a number of the census tracts where he is developing are likely to get disqualified early should this legislation pass. And despite that, he is rooting for it to pass because he knows it’s going to be a benefit to his investors in the long run.

So, I thought that was really telling, he’s putting on a firework show if the thing goes through. So, I think that’s pretty cool. What about that fund-of-funds concept? How big of a deal is that? How much more transaction volume do you think this may potentially unlock for opportunity zone development, opportunity zone capital deployment if this gets passed? And why were fund-to-funds disqualified in the first place? I don’t know which one of you wants to take that first, but just jump in.

Reid: Well, I’ll let Blake speak to why they might have been disqualified because I’m not exactly sure. But my sense is that there are a lot of very good opportunity zone projects out there, investment opportunities out there. In fact, the average fund size for opportunity zones is probably around $20 million, is sort of the average fund size, which by private equity standards is very small. And so, I think the fund-of-funds concept enables those types of funds to be much more successful.

And the good news is many of those funds are much more mission-driven in many ways. Are very focused on solving a specific challenge in a community, which is the spirit of the opportunity zone program anyway, right? So, providing a bigger menu of potential target investments like that helps the big funds diversify, helps the small funds do good things in communities and helps reinforce the good that this program is ultimately intending to do.

Jimmy: And Blake, what are your thoughts?

Blake: I agree. I mean, we heard, you know, earlier from the Columbus Opportunity Zone Fund, you know, these very, you know, micro-focused funds, you know, these people are living in those communities, and so they know them best. And so, if you have one of these much larger funds that want to diversify, I mean, why not allow that fund to invest in that other fund with boots on the ground that knows that community and they’re gonna have a better impact? You know, one thing that I’ll just throw in, you know, a little off-topic, but, you know, I’ve been proposing for a few years, I would really like to see them also layer in sort of hiring credits and things because there’s not…

You know, the umbrella legislation is certainly meant to, you know, create jobs and things. But some of them are gonna be temporary, you know, they’re construction jobs and things. But if they did say, you know, “Hire from the local community, give us small tax credit for doing that training, credit, etc.,” I think that would further benefit the communities.

Jimmy: Yeah, good thought there, Blake. By the way, I had a question in the chat a moment ago about what is the bill number. I’ve posted a link to a summary article that we wrote at OpportunityDb back in April when this reform legislation was first introduced in both the House and the Senate. It’s House Resolution number 7467, and Senate Bill number 4065. I’ve just posted all of that in the Zoom chat, feel free to click over there and take a look at our summary there.

What are some other finer points of this reform legislation that you think are gonna be particularly impactful? And actually, you know, one thing that I’m a little bit unclear on that a lot of investors might be unclear on is how does it impact the 10% basis step-up, the 15% basis step-up, are those windows potentially reopening? How? When? Blake, I’ll turn to you because you’re the CPA in the group here, you’re probably the most in tune with this than anyone else. What is happening exactly with those potential windows there according to provisions of this bill?

Blake: So, it’s a great question, but the way that it’s drafted right now, even people that have invested already so if they’re not even incentivized at this point anymore, they’ll just ride this legislation if they invested last year. And as long as they reach a six-year hold by the time December 31st of ’28 comes around, they’ll get a 15% step-up. If lowered just because you’re not gonna…somebody investing right now won’t reach a 7-year hold, they lowered the 15-year step-up to a 6-year period. So, as long as you invest by the end of 2022, let’s see, you’ll…

Jimmy: Yeah, you’ll hit it.

Blake: …the 15% test. And you invest by the end of 2023, 5-year, hence, you’ll meet the 5-year test, and you’ll get a 10% step-up. But yeah, people that have already invested will be grandfathered. It’s not a, you know, kind of a prospective test to be investing.

Jimmy: Right. It kind of necessitates them. And by them, I mean Congress passing this bill before the end of this year for us to know with certainty whether or not the 15% basis step-up is going to apply to ’21 and ’22 investors. What are you guys hearing in terms of when might this legislation get passed? What are the odds of it getting passed? How would it get passed? Reid, have you heard anything? I know you have some contacts with their ear to the ground. What are you hearing in terms of whether or not this thing gets passed? And how? And when?

Reid: Well, I mean, optimistically you hear that it’s gonna be passed in the fall, you know, September, October. But what I’m starting to learn about politics a little bit is sometimes these things are left until after the election. So, I think the folks who know a lot more about this than me are saying this is something that’s gonna go down after the election in November when it’s sort of lame duck or whatever the appropriate terminology is because there’s certain types of legislation, those that tend to be more partisan, get focused on now. And those that tend to be more bipartisan like this will happen after the election. Not sure I understand the logic there but that’s Congress for you.

Jimmy: Yeah. Absolutely. Blake, I don’t know if you’ve heard anything different. If you have any additional thoughts to add?

Blake: I have a terrible legislative crystal ball as far as timing goes. But, you know, again, the fact that it’s bipartisan, it really I think depends on if there’s some, you know, moderate-size tax bill that goes through. If there were…if Build Back Better came back from the ashes in some small form, it gets tacked on to that, and maybe we’d see it sooner. But I tend to agree with Reid that it’ll probably got to let the dust settle after the midterms and then see what happens, you know, the Democrats [inaudible 00:18:05] say, “Let’s pass this, it’s good for job growth, etc.” We’ll see.

Jimmy: Yeah. That’s what I’ve heard as well. And I’ve gone on the record as predicting that. I think it’s gonna get passed before this session of Congress expires probably the end of this year, lame duck session after the midterms. So, that’s my big prediction. That’s what my crystal ball says. I don’t know how clear or murky it is. But we’ll find out over the next few months, I guess and we are rooting for it to pass. We’ve got a few more minutes here before we need to call it quits.

So, we’ll address any questions that you have. If you have questions on the legislation or anything else OZ for us please use the Q&A tool in your Zoom toolbar. We got one question from an anonymous attendee asks, “How, if at all, do you guys think the new reporting requirements under this legislation will affect the program from an ESG effectiveness perspective?” Reid, I’ll turn to you first. I know that your platform has an impact reporting framework that is highly regarded. What are your thoughts there on how this is gonna affect ESG effectiveness?

Reid: Well, I think this is gonna be a good example of ESG, real ESG getting done because of the requirement to do measurement and reporting here. You know, we talked about a lot of folks will describe opportunity zones as a tax incentive, which it is, but that’s not primarily why it exists, right? Why it exists is to do good in communities in need. So, by definition, it’s a social impact program, which is right in the heart of what ESG is all about.

So, I’m delighted to see these kinds of rules come out because, as happens with many well-intended programs, they get politicized and then there’s lots of folks trying to kill it before the results are in as to whether it’s actually doing good. My belief is, we see a lot of good things going on in this space. Remember, it takes a long time to get…if you’re in a real estate world to get building permits done, and projects lined up and financing together. You know, this program has been around for three or four years now. So, we’re just starting to see these things come to life. So, I think it’s gonna be a very, very good example of an ESG done right.

Jimmy: Perfect. Blake, I’ll turn to you for some last thoughts here if you wanna chime in there, or any other last thoughts before we wrap things up.

Blake: I agree 100% with Reid. My personal fund is an ESG fund. So, you know, we applaud you know, the reporting. I will tell you, I don’t think this has come up yet but the failure to timely report is $500 a day up to, I think it might be $200,000. So, it could be very costly for not complying. So, any practitioners out there need to pay attention to this.

Jimmy: Yeah. Absolutely. Well, I think we’ll finish up there. If you have any questions you wanna follow up with our panelists today, Blake Christian is at HCVT and Reid Thomas is at JTC Americas. I’ll post some contact information for both of them in the chat in the next few minutes here, but for now, we’ll cut you guys loose there. Thank you so much for participating today. Reid, I’ll see you some other time. And Blake, I’ll see you and I think you’re back on here in not too long, about a half an hour or so you’ll be back on presenting the MIT Modular. So, thank you, gentlemen both.

Reid: Take care, everybody.

Jimmy: All right. Thank you.