November 10, 2018: Ever since the tax reform law passed last December, we have been working with an enthused network of impact investors, mission-oriented businesses and public-sector leaders eager to identify new sources of private capital for some of our country’s most distressed areas — 8,761 census tracts designated as "Opportunity zones."
The U.S. Department of Treasury and the Internal Revenue Service released guidance on how to invest in zones on Oct. 19, which provided significant clarity about the law and opened a 60-day period for public comment.
Even while most media coverage has focused on the $6.1 trillion in potential private investment that could benefit from this incentive, we decided to speak up about two key points in order to keep the 35 million Americans who live in Opportunity Zones at the forefront of the discussion.
First, we hope Treasury and the IRS reconsider their gross income provisions, which could inadvertently undermine the full potential of the law. On page 67, the ruling requires that “for each taxable year at least 50 percent of the gross income of a qualified Opportunity Zone business is derived from the active conduct of a trade or business in the qualified Opportunity Zone.”
Any enterprise that hopes to expand outside of its neighborhood or conduct more than half of its business online would be punished by this provision.
We live in a global, interconnected and internet-enabled economy. America’s free-market system gives us an incomparable edge and our policies for open competitiveness have made us the envy of the world. But we can do better.
Many of the economic disparities in this country are directly related to limited access to capital and the concentration of technology-related entrepreneurship on the coasts. To build stronger communities and create high-paying jobs everywhere, we should not disincentivize investment in companies that sell online.
We are certain that the policymakers who crafted the law did not intend on excluding certain types of operating businesses simply because of where they happened to sell their products or services. We urge for a change in this provision to encourage new businesses of all kinds to start and grow in Opportunity Zones.
Second, if the government does not require tracking of impact, the private sector and communities must lead. There is zero cap on the number of Qualified Opportunity Funds that can be created and zero limit to the total dollars that can be invested.
As a result, groups like the Rockefeller Foundation have stated that Opportunity Zones have the potential to become the largest community development program in our nation’s history.
What is more, Qualified Opportunity Funds are not currently required to track impact metrics like jobs created, unlike previous programs such as Enterprise Zones or New Markets Tax Credits.
Qualified Opportunity Funds simply have to self-certify in order to qualify and there are no federally mandated reporting requirements on job creation or poverty reduction.
As a result, impact measurement and accountability will need to be developed in the private sector, as has been called for by the Beeck Center for Social Impact and Innovation at Georgetown University, the U.S. Impact Investing Alliance and the New York Federal Reserve, among others.
Our many years of experience in public affairs and community investing have taught us that embedding an impact focus and seeking community input at the outset is far easier and more effective early on, rather than attempting to retroactively measure such non-monetary results or rebuild trust with communities after investments have been made.
The future of this program will, in many ways, be shaped by the first movers who find ways to blend impact real estate and entrepreneurship. If abuse leads to results-blind tax havens, the communities in the designated Opportunity Zones will once again be left behind.
One of the first movers we have supported has a strategy to do this the right way. Launch Pad is a large-scale co-working space that started in New Orleans after Hurricane Katrina.
Their members have created over 5,000 jobs, leased 600,000+ square feet of new office space and raised over $160 million in funding — all while giving New Orleans a vibrant entrepreneurial hub, strong real estate partnerships and startups that are supported from seed to scale.
Launch Pad was betting on what they call “momentum markets” in New Orleans, Newark, Memphis and Nashville before the law was passed or any zones were designated.
Their expansion plan is twofold: First, purchase real estate, work with city leaders to create hubs of innovation and strengthen the surrounding neighborhood while tracking a range of metrics. Second, use their real estate locations as platforms to identify high-potential companies to invest in through their venture fund.
Launch Pad’s combination of collaborative workspaces, inclusive programming to support entrepreneurs of all kinds and funds to drive investment can deliver on the promise of this important legislation. As impact real estate projects that enliven communities, all of Launch Pad’s real estate investments are in Opportunity Zones.
By investing in high-growth entrepreneurs that create jobs, all of the Launch Pad venture fund investments will be in businesses that are in Opportunity Zones. And by collaborating with civic leaders, listening to community priorities, and measuring their impact, they will spur economic growth in partnership with communities that need it most.
Simply put, Launch Pad is a prime case Treasury and the IRS should consider when fixing the gross income provision. The private sector and local leaders should likewise follow Launch Pad’s lead when planning community engagement and impact reporting.
We have 6.1 trillion reasons to get this right and ensure the law reaches its full potential, or more accurately, 35 million of them.
Rob Lalka is cofounder and partner at Medora Ventures, a strategy consulting firm, and professor of practice at Tulane’s A.B. Freeman School of Business, where he is the executive director of the Albert Lepage Center for Entrepreneurship and Innovation.
Scott Shalett is managing partner and head of public affairs at Medora Ventures, the former head of civic engagement at JPMorgan Chase & Co. and former senior advisor to the U.S. Conference of Mayors.
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