Funding Group Pushes for More in Proposed O-Zone Regs

December 19, 2018

CC:PA:LPD:PR (REG-115420-18), Room 5203
Internal Revenue Service
PO Box 7604
Ben Franklin Station
Washington, DC 20224

On behalf of Enterprise Community Partners (Enterprise), I want to thank you for this opportunity to offer comments on the proposed rule for Investing in Qualified Opportunity Funds.

Enterprise is a leading provider of the development capital and expertise it takes to create well-designed, affordable homes and vibrant communities. Since 1982, we have raised and invested $36 billion in equity, grants and loans to help build or preserve nearly 529,000 affordable homes in diverse, thriving communities. This includes community investments through Enterprise Community Loan Fund, a Department of Treasury-certified Community Development Financial Institution (CDFI) and one of the largest nonprofit loan funds in the country.

Enterprise has been deeply engaged in Opportunity Zones since the enactment of the Tax Cuts and Jobs Act of 2017. In May 2018 our chief executive officer testified before the Joint Economic Committee on The Promise of Opportunity Zones (Appendix A). In August we announced the creation of one of the first Qualified Opportunity Funds. In partnership with Rivermont Capital and Beekman Advisors, the Rivermont Enterprise Emergent Communities Fund aims to raise $250 million with a first close in December 2018 and will invest in main streets and support local entrepreneurs across small cities and towns in the Southeast United States.

Enterprise also submitted comments to the Department of Treasury and IRS on this tax incentive in March and again in July of this year, urging the Administration to ensure Opportunity Fund investments are accountable to community needs and clarify that residential rental property qualifies as an Opportunity Zone Business (Appendices B and C).

The guidance provided by IRS in this initial round of regulations was helpful in several areas for the diverse array of stakeholders seeking to structure Opportunity Funds. For example, while an affirmative statement remains preferable, we infer through examples provided in the proposed rule that residential rental property is indeed a qualified business activity. We are also pleased to see IRS commit to addressing information reporting requirements in the next round of proposed rules, and we continue to stress that transparency and accountability are the keystone to fulfilling the tax incentive's original intent of transforming economically distressed communities.

However, some topics require further clarification. Based on our current work structuring Opportunity Funds and engaging with communities and investors, we offer the following insight as top priorities at this stage in the rule-making process:

• Prevent predatory or speculative purchasing of vacant land under the substantial improvement test

• Require a higher “Substantially All” threshold for real estate projects

• Provide flexibility for the means of measuring compliance with the 90-percent asset test

• Provide regulations that encourage pairing investments with other tax credits

• Track and report outcomes of Opportunity Fund investments

Prevent Predatory or Speculative Purchasing of Vacant Land Under the Substantial Improvement Test

Enterprise appreciates the flexibility that the IRS has provided by excluding the value of land from the substantial improvement test for tangible property. We believe this will be particularly conducive to our efforts to preserve existing affordable homes, especially in high-cost areas where rapidly rising costs often contribute to the displacement of low- and moderate-income residents in unsubsidized, market rate housing.

Enterprise is concerned about how this rule may incent predatory or speculative purchasing of vacant land with minimal physical improvement. This kind of activity is ultimately detrimental to the community, and we therefore urge IRS to consider regulations to prevent such abuse. Subtracting the value of land from Qualified Opportunity Zone (QOZ) Property could be especially problematic in the case of land that is vacant, significantly underdeveloped or with significantly depreciating assets (i.e. dilapidated or uninhabitable structures). In such cases, the substantial improvement test would result in little or no improvement to QOZ Property. We are concerned about the potential for speculative investments, particularly in areas that have already experienced rising costs and where investors could gain a profit by simply buying and holding a piece of valuable land to the detriment of broader community revitalization efforts.

Enterprise urges the IRS to explicitly prevent these predatory or speculative activities under the Opportunity Zones regulations. This practice would be counter to the statute's intent since it would provide no economic or other benefit to the community, and we caution against the potential for negative media coverage of the Opportunity Zones initiative overall should such activity take place.

Enterprise also requests guidance on which entity will be designated to appraise QOZ Property.

Require a Higher “Substantially All” Threshold for Real Estate Projects

Enterprise urges the IRS to consider creating separate “substantially all” threshold tests for real estate projects and other qualified investments. The statute requires substantially all of a partnership or corporation's tangible property owned or leased to be QOZ Business Property, and the IRS has proposed 70 percent as the threshold for meeting this test.

Although the 70 percent threshold may make sense for investments in qualified business activity, which may be more fluid and require such flexibility to be successful, we believe there should be a separate and higher threshold for real estate investments since those projects are static. Again, Enterprise cautions against the perception of real estate receiving preferential tax treatment from the federal government if it is located outside of a Qualified Opportunity Zone.

Provide Flexibility for the Means of Measuring Compliance with the 90-Percent Asset Test

Under “Valuation of assets for purposes of the 90-percent asset test” in the proposed regulations, there is a reference to the concept of “applicable financial statements” within Section 1.475(a)-4(h) of the Internal Revenue Code. Given the varied nature of potential investment structures, we urge the IRS to clarify that Opportunity Funds have the flexibility to use a basis other than US GAAP for measuring compliance with the 90-percent asset test. For example, Opportunity Funds have considered using a ground lease structure to successfully execute investments in Indian Country. The preferred method to value those assets would be on a cost basis. This lack of certainty and flexibility may create a barrier to investing in the 248 Qualified Opportunity Zones located in Indian Country.

Provide Regulations that Encourage Pairing Investments with other Tax Credits

Enterprise believes that Opportunity Zone investments will be the most impactful when paired with existing federal, state and local community development initiatives, such as the Low-Income Housing Tax Credit (Housing Credit) and New Markets Tax Credit (NMTC). Opportunity Zones provide another source of private capital to advance community revitalization efforts and could complement existing programs and efforts.

Housing Credit developments have been prioritized by each state based on local needs, and developers go through an exceptionally competitive and rigorous application process with State Housing Finance Agencies to be awarded Housing Credits. Community Development Entities (CDEs) go through a similarly competitive application process with the Treasury Department's Community Development Financial Institution (CDFI) Fund to receive NMTCs, which are required to be located in low-income census tracts. Both public-private partnerships have a proven history of spurring private investment and revitalization in communities that most need it.

Considering the alignment of mission between these tax credits and the new Opportunity Zones benefit, we strongly urge the IRS to issue regulations that most efficiently allow the Credits to be paired with Opportunity Fund equity. Combining Opportunity Zone equity investments with Housing Credits and NMTCs will maximize the impact each will have in low-income communities.

Track and Report Outcomes of Opportunity Fund Investments

We were pleased to see the IRS commit to addressing information reporting requirements in the next round of proposed rules on Opportunity Zones. We were also encouraged to see the White House direct federal agencies to evaluate the effect of public and private investments in distressed communities, including in Qualified Opportunity Zones, in the Executive Order on Establishing the White House Opportunity and Revitalization Council that President Trump signed on December 12. This indicates that the Administration believes that reporting and tracking outcomes is a critical component of monitoring success and efficacy, and we urge the IRS to enact regulations that fulfill this commitment.

As we noted in our previous comment letters to the Treasury Department and IRS, Enterprise urges Treasury to follow Congress's guidance — included in the Investing in Opportunity Act and clarified in the Conference Report that accompanied Tax Cuts and Jobs Act — and collect and make publicly available transaction-level data from Opportunity Funds so that the public and Congress can evaluate the efficacy of the Opportunity Zones tax incentive.

The Conference Report that accompanied the Tax Cuts and Jobs Act included the following guidance related to annual reporting requirements:

In addition to the metrics outlined in the Conference Report — job creation, poverty reduction, and new business starts — Enterprise urges the collection of data on the number of dedicated affordable housing units (for households earning 120 percent of area median income or less) created or preserved. Collecting and analyzing this data will be critical, particularly when considering the impact on residents who were living in the community at the time the census tract was designated as a Qualified Opportunity Zone. Enterprise would be happy to provide additional support through our free Opportunity360 data and mapping platform to help Treasury identify appropriate metrics and indicators.

Final regulations for Opportunity Zones must include provisions that promote the transparency of Opportunity Fund activities and ensure accountability to prevent abuse. There is precedent for the Treasury Department to collect and publicly report data on NMTC and CDFI Fund-supported deals, and we encourage the IRS to consider using existing infrastructure to accomplish the information reporting needed for Opportunity Zones.

In addition to the areas of requested clarification above, we urge the IRS to address the information requested by the Opportunity Zones Working Group hosted by Novogradac & Company, of which Enterprise is an active participant.

Enterprise looks forward to working with Treasury to ensure that Opportunity Zones are a successful community investment tool that brings equitable and inclusive growth to the more than 8,700 designated areas. If you have any questions regarding these comments, please do not hesitate to reach me at lblatchford@enterprisecommunity.org.

Laurel Blatchford
President
Enterprise Community Partners
Columbia, MD