Uncertainty produces hesitation among investors

While there may be significant benefits associated with opportunity-zone investments, a cloud of uncertainty hovers over the program, and many questions about how these zones will be regulated remain unanswered.

“The lack of regulatory guidance from the Department of the Treasury has stymied investment into operating businesses — more complicated than investment into structures but ultimately a more powerful force for sustainable and inclusive growth — in underserved areas,” according to a recent report from the Economic Innovation Group, a bipartisan think tank and economic policy advocacy organization. “If critical issues that would open the door for business investments are not addressed, opportunity zones will fail to achieve their full potential.”

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Because the zones were established before concrete tax guidelines were established, Longmont Economic Development Partnership president Jessica Erickson said, understanding the program is “like building the plane as we are flying it.”

Part of the reason guidance from regulators has been slow to materialize is due to the prolonged partial government shutdown that paralyzed many federal agencies in December and January, Erickson said. “We had been hoping we would have guidelines in hand by now,” she said.

After the government reopened, the U.S. Internal Revenue Service hosted a highly anticipated public hearing Feb. 14 on opportunity zones.

Testimony from 23 experts lasted five hours, and the IRS received upward of 175 written comments.

One such written comment came from a group called the Opportunity Zones Coalition, made up of dozens of diverse stakeholder organizations from Wall Street investment firms to the National Foundation for Affordable Housing Solutions to the Rural Community Assistance Partnership.

The letter, which echoes comments from many other groups, requests regulatory guidance on a trio of key issues.

The coalition asked regulators to remove barriers to the formation of multi-asset opportunity funds, clarify rules about investing not only in real estate projects but also in businesses already in operation, and create reporting requirements on investments that will “provide basic information about investments in [opportunity-zone] communities to inform investment and policy decisions” and deter abuse by investors looking to take advantage of the program.

While there have been a host of other recommendations provided to regulators, “without adequate guidance in the three key areas noted above, the [opportunity-zone] tax incentive will fail to achieve the impact Congress intended,” according to the Opportunity Zones Coalition’s comments to the IRS.

Other issues raised during February’s IRS hearing included increasing regulatory flexibility to make it easier for projects to qualify as appropriate zone projects and clarity on how investors can exit an opportunity fund.

Regulators have yet to follow up on February’s meeting with additional guidance.

“During that February hearing, the IRS was just gathering information from the experts,” Paul Mueller, a partner in the local accounting firm Mueller Pye & Associates, said. “They haven’t tipped their hand yet as far as what they are going to do next.”

Because this kind of investment is so new, experts are warning investors to be particularly careful in their due diligence before diving into opportunity zones.

Despite the growing interest in opportunity zones — and likely, at least part, because of ongoing uncertainty — investors have been somewhat hesitant to pump money into opportunity-zone funds.

“Frankly, until the rules and guidelines are clarified, clients are probably not going to express much interest in investing in these opportunity zones,” Mueller said. “ … The rubber doesn’t really hit the road until the investors and developers start putting money and skin in the game.”

In a recent survey, financial data and investment research firm Preqin found that 92 percent of participating investors do not currently have any investments in opportunity zone funds.

“However 51 percent of respondents are considering investing in [the funds] in the next 12 months, and a further 12 percent would be interested in investing after this timeframe, highlighting the interest in this nascent industry,” the survey found

A Preqin report called 2019 the “pacemaker year” for opportunity zones.

“Investors are cautiously optimistic about investing in opportunity zones, in spite of the risk of investing in property in low-income areas, and the prevailing uncertainty as [opportunity zone fund] regulations are finalized,” the report said. “The potential tax benefits of [opportunity zone funds] are highly attractive, but fund managers will have to ensure that these projects fit stringent underwriting requirements before exposing significant capital to risk.”

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