Opportunity Zones Slowly Beginning to Gather Company Investments

By David Robinson, The Montrose Group

The federal government’s Opportunity Zone program is beginning to gather investments in operating companies in markets across the United States.  Opportunity Zones are a federal government program that provides capital gains tax relief for taxpayers who invest in real estate or qualified companies in one of 8700 certified sites in all fifty states and US territories.

The accounting firm Novogradac reports that the 287 Opportunity Zone funds they are tracking represent $64.9 billion in community development investing capacity.  Furthermore, they reported that Qualified Opportunity Funds seeking capital from third-party investors is now at $3.17 billion based upon a survey of the 122 funds voluntarily reporting their investments. The investments target residential, commercial, operating businesses, hospitality and renewable energy.  Residential remains the prime known investment target for these Qualified Opportunity Funds but most of the funds provide a mix of investment categories.

Opportunity Fund investments in operating business are lagging driven by the US Treasury’s first round regulations which created substantial questions about how an Opportunity Zone Business is defined.  The second round of Treasury regulations provided more clarity tied to operating business investments but obviously these regulations are not flexible enough to make the Opportunity Zone a job producing program.  Novogradac reports that the Qualified Opportunity Funds they surveyed with operating businesses as a focus have raised only 2.6 percent of the total reported funds.

A couple examples of reported Opportunity Zone qualified companies include:

• Galen Robotics, a robotics startup company that focuses on precision of the brain, ear and throat microsurgeries is relocating from Silicon Valley into a Baltimore Opportunity Zone site base upon an investment from the Verte Opportunity Fund—which is a venture capital fund that invests in early stage companies in Opportunity Zones; and
• A Pittsburgh area Opportunity Zone is going to be the site of InCity Farms $30M, 180,000-square-foot aquaponics facility on 25 riverfront acres that should employee 130 people in Duquesne backed by the social impact investors Hollymead Capital, the nonprofit Food 21 and an opportunity zone fund, with support of Peoples Natural Gas.

Regions and states searching for Opportunity Zone Fund investments in operating companies should consider several steps that include advocating with the Trump Administration’s Treasury Department to remove the 50% test for how much business presence an operating company should have in the Opportunity Zone to qualify as an Opportunity Zone Business.  Rather, like other economic development programs, an Opportunity Zone Business should be defined as a company located in an opportunity zone that creates some level of payroll for any workers located in the Opportunity Zone.  Second, regions and states need to get their Opportunity Zone sites prepared for development through a site plan that defines the economic focus of the site, measures and designs with cost figures the site infrastructure and transportation investments required, and to market the site to Opportunity Zone funds with operating businesses as a target area.

Contact Dave Robinson, drobinson@montrosegroupllc.com or Nate Green, ngreen@montrosegroupllc.com if you have questions about Opportunity Zones or other topics.