Program and technical fixes to the Opportunity Zone program would allow the incentive to better serve the needs of small businesses, according to experts testifying before the US House of Representatives Committee on Small Business.
Aaron Seybert, Managing Director of The Kresge Foundation, expressed concern about a mismatch between the needs of small business owners and the incentives for investors and fund managers.
- The majority of Opportunity Fund managers require a minimum investment of $250,000 and hope to raise many millions of dollars. By contrast, most small business are seeking $100,000 or less. Investors and fund managers are likely to favor much larger investment opportunities than small businesses provide.
- It is not clear how investors would exit from an equity investment in a small business. How would the small business return that capital at the end of the investment period, especially if it was invested in equipment or facilities? Is an equity tool even the best option for most small businesses in distressed locations?
- Business investments are far riskier than real estate investments. Many businesses fail or fail to grow, and they do not necessarily stay rooted in one location, meaning it may make business sense to move out of the designated OZ. Real estate investments will generally offer more secure returns and provide less compliance risk to the investor.
John Lettieri, President and CEO of the Economic Innovation Group, reiterated that the central intent of Opportunity Zones is “to support new businesses and existing small and medium-sized firms in need of growth capital.” He testified that a lack of regulatory clarity and technical issues may keep investors from deploying capital into operating businesses.
- Draft regulations require investments in existing businesses to demonstrate “substantial improvement” (significant economic value creation) on an asset-by-asset basis – a difficult test for many small businesses to meet.
- Opportunity Funds may need to deploy capital within 6 months, which may not be sufficient to identify qualifying business investments.
- Proposed taxation rules in the case of the sale of a business may deter investments.
Participants agreed that reporting requirements must be improved in order to determine the effectiveness of the Opportunity Zone tax break and to understand relevant outcomes at the community level. Brett Theodos, Senior Fellow at the Urban Institute, noted that proposed regulations on this matter are inadequate. He suggested that transaction-level data should be tracked, collected, and shared in order to “properly assess and monitor its results for communities.”
More information on this hearing is available at the Committee on Small Business website. Please also see our previous Opportunity Zone articles:
One-third of states consider creating incentives for investments in Opportunity Zones
Opportunity Zones Can Benefit From Incentives Lessons Learned
Opportunity Zones – Driving Community Development Finance Through Equity Investments
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