December 18, 2018: Medora Ventures has closely followed the Opportunity Zone law since it passed in December of 2017 with a keen interest and focus on the potential to impact areas of the country that still require intentional support and long-term commitment from investors. We believe the impact intended by the authors of this law will only be recognized by active collaboration between Qualified Opportunity Funds and their managers and public sector leaders working to prepare their communities to receive Opportunity Zone investments.
While guidance issued on October 19 this year by the US Department of Treasury and the Internal Revenue Service provided significant clarity about the law, there are two areas of focus that we would like to raise for further consideration.
First, we hope Treasury and the IRS reconsider the gross income provision on page 67 of the ruling that requires “for each taxable year at least 50 percent of the gross income of a qualified Opportunity Zone business is derived from the active conduct or a trade or business in the qualified Opportunity Zone.” We believe this issue could significantly handicap communities the law intends to support most, and limits on where businesses sell or do commerce reduces the potential for investment in high-growth businesses and could dictate the types of businesses that will attract revenue. We urge removal of the gross income barrier to allow businesses located in Opportunity Zones to be able to conduct their “trade or business” in as broad a context as possible in order to be successful and create more wealth and opportunity.
Second, we believe the tax benefit of the Opportunity Zone law should follow the investor and should not penalize a business that is ready for growth by limiting their pace. The goal is to create businesses in zones that will expand and create more jobs, etc. Therefore, we believe that further guidance should address this by clearly stating that so long as an investor’s original investment stays in a fund, upon an exit from a high-growth business for any reason, and is re-invested in qualified businesses in a designated opportunity zone it should remain qualified for any benefits the law allows.
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 or how their business grows as a result of investment that occurs because of this law. We urge for changes in these provisions to encourage new businesses of all kinds to start and grow in Opportunity Zones.
Additionally, as we have stated in our perspective, we believe the greatest opportunity of this law is to create new models of impact through collaboration between public sector and private sector investors focusing on how their investments will create growth, support more diverse communities and build new models for partnerships and policy direction as the impact intended by this law is recognized. We are encouraged that the executive order signed by the Trump Administration on December 12, 2018 called for review of “what data, metrics, and methodologies can be used to measure the effectiveness of public and private investments in urban and economically distressed communities, including qualified opportunity zones.”
In the perspective that we issued on November 9, 2018, we stated our hope that the private sector will lead in need to develop and adhere to impact focus as they look for and work with communities they are investing in. We also urge local leaders to work with fund managers and investors to ensure that community needs are addressed with intentionality at the outset.
We remain confident that the law and future guidance creates immense potential, and we are hopeful that the lessons learned as this law is implemented will benefit communities beyond the currently designated zones.
Scott Shalett, Managing Partner
Rob Lalka, Co-Founder
Mike Culver, Co-Founder
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