In the wake of the midterm elections, how might the balance of power in the next session of Congress affect Opportunity Zones in 2023 and beyond? Also, potential legislative changes that could form a new “Version 2.0” of Opportunity Zones, and what the OZ industry can do to help its own cause.

Alex Bhathal, managing partner at Revitate, and Brett Siglin, partner at Jennings Strouss Law Firm, join the show to discuss the impact of the 2022 midterm elections and the future of OZ tax policy.

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Episode Highlights

• Assessment of the potential for an extension of the OZ program given the results of the midterm elections.
• The fate of the co-sponsors of the proposed legislation in the midterm elections.
• Strategies for convincing skeptical lawmakers on the effectiveness and potential of the OZ program.
• Potential for this legislation to cement the OZ legislation as a part of the U.S. tax code.
• Concerns about the impact of reporting requirements and penalties on smaller OZ projects.
• The importance of improving the incentives for operating businesses.
• Live Q&A with webinar attendees.

Featured On This Episode

• New Legislation Would Extend and Improve Opportunity Zones (OpportunityDb)
• OZ Advocacy Toolkit (OpportunityDb)

Today’s Guests: Alex Bhathal, Revitate and Brett Siglin, Jennings Strauss

• Alex Bhathal on LinkedIn
• Brett Siglin on LinkedIn
• Revitate
• Jennings Strouss

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: Alex Bhathal is the executive chairman and managing partner at Revitate, and he’s also… His family is the co-owner of the NBA franchise, the Sacramento Kings. They have done a lot of development in Opportunity Zones and have had Senator Tim Scott out to one or two ribbon cuttings over the last couple years, I believe. And so, Alex, we’re happy to have you here with us today. Alex Bhathal speak on this topic of the new Congress and Opportunity Zones. And, Brett Siglin, he’s in Phoenix now, but he’s spent some time practicing law in Washington, D.C. So I thought, let’s bring Brett in too. He’s a partner at Jennings, Strouss Law Firm in Phoenix, Arizona, and that firm, and Brett, in particular, has a lot of expertise with Opportunity Zones. So, Brett, welcome to you as well.

Well, I touched on the high-level overview of the Opportunity Zone reform legislation as best I can. I kind of wanna talk about that reform legislation, get your thoughts on it from both of you, and also discuss maybe other things on the table for Opportunity Zones in 2023 and beyond, how the policy may change. I was hoping that we would know the outcome of the midterm election by the time we got on stage here for this panel this afternoon, gentlemen. And we’ve got a pretty good idea now. We didn’t see a red wave. We don’t have a clear takeover of both houses of Congress by the Republicans, but it looks like we’ll have a Democrat-led Senate. We’ll probably know with more certainty in the next few days here. Maybe it won’t be until December 6th after the Georgia runoff. And it also looks like we do… We are going to have most likely still up in the air the Republicans retake the House. But let me turn to you first, Alex. What do you expect from the outcome of the election? What are your thoughts on it? And how might the makeup of Congress in the next session, starting in January, affect Opportunity Zone policy?

Alex: Thanks, Jimmy. It’s a great question and I think the results of the election are emblematic of the divide that even division that we have in today’s political environment, and that it’s… There’s no major swings one way or the other. It would be great if there was clarity at this point. That said, I agree with you. It seems like at least one of the houses of Congress are most likely going to change. And therefore we’ll be in an era of divided government. And in an era of divided government, the window of legislative actions becomes narrower because by definition, both sides, or a bipartisan consensus is gonna be really important to get something passed through the House, the Senate, and finally, the White House administration. So therefore programs like the Opportunity Zone legislation do rise up in importance because it is bipartisan, it’s bicameral since its very beginnings. And we do believe that those bipartisan-bicameral roots are gonna shine through, not just in this lame-duck session, but in the years to come as the more one-sided legislative acts become less likely to get passed.

Jimmy: And Brett, let me turn to you now. Let’s get your thoughts on the midterm. Were you surprised by the results or lack thereof? And how might that outcome impact Opportunity Zones going forward, either in the lame-duck session here or in 2023?

Brett: Yeah, thanks, Jimmy. Again, great to be a part of this here today. Yeah, I’d say I’m most surprised by the lack of results. You know, I’ve been kind of pouring over the results starting last night, this morning, kind of in preparation. And like you said, I think there’s a pretty good shot here that the Republicans will take control of the house, and looks like the Democrats are gonna maintain the Senate. I think what’s important to maybe point out is that, as far as I can tell so far, all the sponsors and co-sponsors survived. So, you know, when the Opportunity Zones Transparency Extension Act was introduced back in the spring in each of the House and the Senate, I think everybody survived, either they weren’t running as a senator. I know Tim Scott won handily. Cory Booker is still safe. You know, Mark Warner, Chris Van Hollen, and Todd Young, I think they all are still, you know, on board in the Senate. And then, you know, the only change that I saw, I think Ron Kind of Wisconsin decided not to run. So, you know, he’ll be here, you know, for the next few months. But I’m wondering if maybe that’ll give us a shot of getting this through in the next two months. I mean, nobody has a crystal ball, right? But, you know, I think you’ve touched on this with others throughout the day and in preceding conferences, and it’s certainly at the Opportunity Zone Expo. We were on a panel together last month. Nobody really knows whether this is gonna squeak through in this lame-duck session. But I’d like to think there’s still maybe a chance here, especially knowing, you know, Ron Kind is gonna kind of bow out. You know, maybe he can do something to make a move, you know, before the House turns over.

Jimmy: Yeah. You mentioned a lot of the supporters of Opportunity Zones are still around, but possibly one of its biggest detractors is Senator Ron Wyden from Oregon. He’s chair of the Senate Finance Committee. And he’s been very critical of Opportunity Zones and has ruffled a lot of feathers about it, sending out letters, demanding responses from a handful of qualified opportunity funds earlier this year. And he did win reelection in Oregon last night. I don’t know if that might impact anything or not, but I just wanted to point that out, that we still have Senator Wyden to… I wouldn’t say contend with, but maybe we can soften his view of Opportunity Zones. Alex, what are your thoughts on what the industry needs, and how we could talk with senators and congressmen and congresswomen who may not love Opportunity Zones the same way that a Senator Cory Booker or a Senator Tim Scott may appreciate it, and certainly like the members of our community here today. What can we do to change the minds, or influence policy going forward as an industry?

Alex: Well, specifically, I think communicating with policymakers, and politicians, and letting the voice be heard, I think that’s number one in Government 101, is elected leaders are beholden to their constituencies. So to the extent that they hear from people in their districts and people in their states in support of this initiative, then that does make an impact because they are inherently by necessity responsive to their constituents. More broadly than that, I think the good news and the good stories that are coming out of Opportunity Zones and the actual work that’s being done on the ground is really meaningful, and it’s really important. It took a little while for this incentive to be utilized due to the regulations being written and then being implemented.

And by the nature of this program, it’s geared towards development. So, there’s a natural lag in terms of seeing tangible results. But now we’re at the stage, you mentioned Senator Scott came out for a ribbon cutting for one of our projects. We now have three projects that have completed. We’re not the only ones, we started early in the space, but there are many other fund managers and developers who have projects that are coming online. And it’s becoming very tangible for all stakeholders to see the economic and the social impact that these developments and these projects can have in a community and the jobs that get created, and the increase in Wi-Fi and broadband and parks and all the advantages that come with proper urban development, or proper development in lower-income areas. And that is getting the notice of the media, in some cases, the local politicians, especially at the municipal level. Investors have shown a tremendous receptivity to this program. So, it’s that grassroots storytelling, and you do a great job on your podcast, Jimmy, of getting the word out about the benefits of Opportunity Zones, where it’s not just a great tax incentive for investors, but it’s actually doing the intention of the program, which is bringing private capital to historically lower income areas and creating impact.

Jimmy: Brett, I don’t know if you have anything else to add there, Alex did a great job answering that question. But anything else that the industry can do to kind of help its own cause and advance the Opportunity Zone policy?

Brett: Absolutely. No, I mean, I know you had John Sciarretti earlier from Novogradac. They’ve certainly done a phenomenal job over the last three years, you know, lobbying, getting the word out, kind of keeping people informed, you know, working with treasury. You know, there’s certainly others out there doing that. I think the more of us that stay active, especially in the coming months, the better. You know, I’m still hopeful, you know, this was always a bipartisan concept from the outset. You know, the same people that, you know, kind of kicked this into gear four years ago, they’re still around, they’re still sponsoring. We’ve built up a lot of I think good rapport, you know, in the early Biden years here. You know, there’s certainly less negative messaging out there than there was, say, two years ago.

And, you know, you’re right about Senator Wyden, but I think, you know, his message is toned down significantly, I think, this year too. So, you know, maybe the biggest challenge is it’s just not getting enough attention certainly, you know, from the Biden administration. I mean, obviously, there’s lots of other priorities right now, and this is kind of a small piece of a huge puzzle. But, you know, I think the more, you know, the message gets out as a positive message, you know, I think we’ve got pretty high hopes, even if it doesn’t, you know, pass through, you know, this next few months. Ideally, it’ll happen early in ’23. You know, I’ve heard, you know, that Republicans, if they control the house, and maybe they want us to be their bill next year, or, you know, maybe they wanna just get this outta the way and start clean, you know, hopefully, in 2023.

Jimmy: Yeah, it’s interesting. We really haven’t heard anything from the federal government, the administration, in particular, I should say, the White House about Opportunity Zones since Biden took office back in January of… What year was that? January of ’21. Almost two years ago.

Brett: Almost two years.

Jimmy: Also, it’s interesting to note that two and a half years ago, we weren’t sure who the Democrat nomination for president was gonna be. And I was worried, and I was telling people, “Hey, what if Bernie Sanders or Elizabeth Warren win the candidacy for the Democrats and ends up advancing to the White House, we could be in danger of possibly unwinding the entire TCJA, and maybe Opportunity Zones go by the wayside entirely as well.” So the fact that Joe Biden a little bit more advanced to the White House eventually two years ago, and he basically, his office has been silent on Opportunity Zones since he won election two years ago.

I think maybe that’s been good news, although, you know, I’d kind of like to see some sort of advancement of the program come about. So that’s why we’re talking about, at least we do have this reform legislation that’s been advanced in the House and the Senate introduced bicameraly back in April by both chambers and sponsored by the same co-sponsors that co-sponsored the original Investing in Opportunity Act way back when that eventually became packaged as part of the Tax Cuts and Jobs Act that led to Opportunity Zones. I wanna ask both of you, what are your overall impressions and thoughts of the OZ reform legislation, and do you wish it had anything more or less, or, you know, what are some of your hopes for it if it gets redrafted, potentially? Alex, I’ll start with you.

Alex: Well, definitely, we’re very supportive of the pending legislation and are cautiously optimistic that it will receive a vote before the end of the year. The provisions in it are fun-friendly, investor-friendly, and also are reforming some of the criticisms with the high-income zones, as you mentioned, the sun-setting of those, the reporting requirements for which were always supposed to be part of the legislation, but got stripped out due to the reconciliation process in which the original law was passed. So, it’s kind of bringing back some of the original intent. So, we see this as a modest reform effort, something that both sides have a lot to like, and are confident that it’s another milestone if it were to be passed that cements the Opportunity Zone legislation as part of our tax code that is resilient across administrations, across parties, across time, and really just the first step of what we believe could be a more expansive bill in future congresses.

And in some of those areas, we’d like to see this tool be utilized for operating businesses. That’s something that people have done. But there have been some obstacles and restrictions that have prevented the ability for operating businesses to take advantage of this incentive. And there’s some really smart ideas on how to create a better alignment for that category of business. And also a focus on areas of deeper need. So there’s 8,700 Opportunity Zones across the country. They come in all shapes and sizes based on income. They range from deep poverty to areas that are already experiencing economic revitalization. And we think this tool can be used as an important lever in addressing some of the areas of deepest poverty. So, most of the OZ dollars have been allocated to probably the middle income and above within the OZ bound. And if there can be greater enhancements that help facilitate development in the lowest-income areas, we think that could be beneficial for all stakeholders involved.

Jimmy: That’s great. Well, I wanna get back to you on that, and get some more specific thoughts, drill into that a little more in a minute, but I wanna turn to Brett now and get his take. Brett, what’s your impression of the Opportunity Zone reform legislation that hit the floor back in April, and if it gets changed at all? I mean, what’s on your wishlist to how to improve it?

Brett: Yeah, like most people, I think it’s generally positive. I think, you know, the timing now is especially good. You know, we’ve talked about this before, Jimmy, that, you know, there’s usually an uptick in activity towards the end of the year. And ideally, you know, if this could get extended here in the next few months, that might help us with, you know, increased activity in the fourth quarter. I think it’s great that, you know, we get the…you know, investors would get that extended deferral period, you know, it even relates back to those that would’ve invested in 2021 and keep the 15% step up for six years. And then, of course, anybody that gets in by the end of next year will get the 10% step up, all positive for really, you know, everybody across the board. You know, I also think, you know, it’s pretty obvious there needs to be some reporting component.

People have been talking about this for four years. It really should have been part of the initial legislation and was left out for whatever reason. But I would just say, you know, one warning, you know, like, we’ve talked about before too the Phoenix OZ Expo, there’s been a lot of mistakes made in filing, you know, both on behalf of funds and on behalf of investors, and there’s been quite a lot of activity, you know, with the treasury setting out letters to QOFs that, you know, filed their returns incorrectly, say, for the 2019, 2020 year. I am concerned about, you know, what those reporting requirements will do, especially to the smaller sponsors out there that maybe aren’t as…you know, don’t have the most sophisticated CPAs, they’re more likely to make mistakes.

You know, I think there probably is consensus that this could consolidate the industry somewhat because, you know, the uptick in keeping track of those filings, you know, filing the 89-96 properly is gonna be more of a burden, I think, you know, if this legislation passes. So that’s one thing. And then the penalties too are pretty severe. So those who, you know, fail to file correctly could be subject to daily penalties of $500. You know, I think it could go up to $50,000 depending on the size of your fund. So it’s really nothing to shake your hand at. I mean, it’s gonna be serious, you know, if these reporting requirements, the way they were set forth in the initial legislation are enacted.

I think the other thing that, you know, concerns me though, too, is the early sunset for some of these, you know, high-income census tracks. I mean, whether we like it or not, a lot of investment has been in, you know, like the very most desirable of the 8,700 plus Opportunity Zones. And yeah, I’m concerned about the political backlash that could create in the upcoming year or two, or even lawsuits. And, you know, it’s also gonna…it’s gonna create opportunities for governors and their staff and others at the local level to designate new zones. You know, that’s gonna be inherently political process too, as it always is. So I think that’s something to kind of be, you know, forewarned about.

Jimmy: No, for sure. And, yeah, Brett, a lot of the thoughts you just shared you shared with me a short while ago when we recorded our episode of the “Opportunity Zones Podcast,” which hasn’t aired yet, but it’s gonna air sometime in the next few weeks, so be on the lookout for that. I really appreciate your thoughts here today as well, Brett. I wanted to talk about, you know, the thought of this reform legislation, maybe being the first step in getting this Opportunity Zone policy extended permanently at some point. Do you think that’s possibly on the table and what else might be in a version 2.0 of Opportunity Zones if we are looking at, you know, a post-reform legislation passing period of a new Congress in ’23 and ’24? What else might be on the table for Opportunity Zones going forward? Best case scenario, let’s say that the legislation does get passed before the end of the year. Alex, I’ll let you go.

Alex: Well, I wish I had the ability to waive magic wand and write the law the way that I would want. And it doesn’t work that way, unfortunately. And we do have two parties and two congresses, and a really important think tank in EIG, actually, who’s spending a lot of time, and has provided leadership on this issue since the very beginning. So I think it’s gonna take into consideration all of the stakeholders, whether they be the municipal level, the state level, obviously, the investors and fund managers, and then the lawmakers in Washington, D.C., and there’ll be a tug of war. I kind of previewed some of the areas that I think will be important in Opportunity Zones 2.0, being improving the incentive as a tool for operating businesses, improving the tool to focus on the communities most in need.

I do think that having more conformity around the country where there’s a variety of conforming measures within the states if there can be…and that is our federal system. So each state has its own right to conforming their own way within their respective tax codes. Some states like California have chosen not to conform at all, which given that the State of California is the largest Opportunity Zone… Has produced the most amount of capital for Opportunity Zone investment, and also received a fair amount as well, we certainly see the opportunity to enhance that activity, enhance the size of OZ dollars in the universe if California were to pursue some form of conformity, even a limited conformity. So, those are some of the things that are top of mind, but with more time in a couple of years to work on it, I can come back here and give you some more detailed thoughts.

Jimmy: Well, that’d be great. That be tremendous if we can get you back on in a year or so to give us an update there. Brett, I don’t know if you had any thoughts on that question or not.

Brett: Yeah. No. I mean, I think, you know, the most important thing would be to, you know, maybe have some flexibility on those penalties for failure to report, especially if it’s not intentional. Maybe give some more guidance on, you know, how to file, you know, the 89-97 properly. And, you know, I guess the other things that comes to mind, you know, treasury has been extremely flexible from the outset with, you know, giving sponsors more time, especially the Working Capital Safe Harbor comes to mind. You know, we’ve been talking a lot about that recently. You know, maybe additional flexibility there in the coming years especially is difficult as it is now to raise capital. I mean, things have really changed. And maybe finding…you know, there’s some great relief during COVID that was passed and, you know, maybe something like that in the coming months in light of sort of the pending recession we’re in.

Jimmy: All right. Excellent. Well, let’s get to some Q&A. To move on with the questions here now, let’s see. I’ve got… I’ll address this one to Brett. I haven’t heard much about the Dynamism Fund. Could you provide a summary of the expected impact of this piece of the legislation? What do you know about the Community Dynamism Fund, Brett?

Brett: Yeah, it’s a billion dollars for state and community to assist state and local governments with technical assistance, capacity building in financing support. I appreciate that question because I think you’re right. Nobody’s really talking about it, but, you know, it’s a great way to potentially, you know, serve underserved communities and, you know, provide ability for projects in some low-income areas to get additional funding.

Jimmy: Alex, maybe you can answer this next one here. For the governors who are going to lose some Opportunity Zones, they’ll get the opportunity to nominate Replacement OZs. What advice or suggestions would you offer to those governors?

Alex: To the Governors? A great question. It’s gonna be difficult to avoid politics, I think, in that, and governors in their duties should really look at the needs of the communities versus the needs of their donors.

Jimmy: Excellent. Let’s see here. Brett, this one’s for you. You mentioned a minute ago lawsuits that might occur from the backlash. What kind of lawsuits were you hinting at there exactly?

Brett: Yeah, I hate to open the door to that, but, you know, I think anyone who’s affected by, you know, an early sunset would certainly be pretty vocal about it. I mean, the good news is, there is, you know, this new category for a preexisting trader business. So if I’m a sponsor and I’m actively engaged and, you know, participating in a qualified opportunity fund or QOZB that’s in one of these designated tracks, and, you know, as long as I’ve spent $250,000, or I’ve put for some sort of private placement offering or registered with the SEC, then I’ll have, you know, a pretty good shot. And, you know, one could even argue that those that got in early will have a huge competitive advantage in those, you know, really hot census tracks.

But, you know, I’d be concerned about those others, you know, developers and others out there that are getting pinched out, you know, say, somewhere in Silicon Valley, or Long Beach, or some of these really hot markets that are kind of…you know, there’s been a lot of changes since 2010 when the tracks…when the data was collected, and we’re going off to 2020 census track data now. I think there’s also potential for, you know, I don’t know about lawsuits, but maybe just backlash at the local level, you know, knowing how this process may play out in designating new zones.

Jimmy: Good answer there. Two more questions and then we’ll cut you guys loose. We got another 60 to 90 seconds here. This question’s a little bit pessimistic. I think it comes from somebody who’s been disappointed at the election results, it sounds like. This person says, “It seems like this election result might embolden Democrats in Congress to push back on anything that even hints at a tax break for the wealthy. Is there a chance that Democrat overperformance in the midterms last night has tanked any potential OZ extension?” That’s a tough one. Alex, I’ll let you take that one.

Alex: Thanks, Jimmy. Appreciate that. But no softball. I think it’s too early to tell. There is gonna be different leverage points, and different biases in the horse training between now and the end of the year. And the fact of the matter is, we do believe that Congress is gonna change hands. So, therefore, if the Democrats in the congressional…in the House wanna have a say in what the extension looks like, this is still their best chance in having a voice on and an input into it. So we’ll see.

Jimmy: All right. Last 30 seconds. Need a quick answer from both you. What percentage chance do you give the legislation of going through, we’ll say before the end of this year? That wasn’t part of the question, but I’ll put a time parameter on it, before the end of this year. Alex, you go first.

Alex: It was 65 as of yesterday. Now it’s probably 58.

Jimmy: All right. And Brett.

Brett: I’m gonna say something closer to 45.

Jimmy: All right. I’m going 65. I’m the most optimistic one here. So, that’s great. Gentlemen, been a pleasure speaking with both of you today, Alex and Brett. Thank you so much. And we’re gonna move along with the program, but I appreciate your time today.

Alex: Thank you, Jimmy. Thank you, Brett.

Brett: Thank you, Jim.

Jimmy: Oh, and Alex, have fun, enjoy your event later this evening. Good luck out there.

Alex: Oh, great. Appreciate it. Thank you. We’re having our Social Impact Summit this afternoon.

Jimmy: Fantastic. Good luck out there.