January 10, 2018

Opportunity Funds: Tax Reform Created a New Class of Community Investment Vehicles

Today, trillions of dollars in unrealized capital gains are held in stocks and mutual funds alone. Can you imagine the powerful impact that would be created if those funds were instead placed into investment funds that support entrepreneurs or revitalize dilapidated Main Streets?

A new provision in the Tax Cuts and Jobs Act lays the foundation for just that.

The newly created Opportunity Zone Program is designed to drive long-term capital to distressed communities by providing tax benefits on investments in Opportunity Funds, or “O Funds”. This concept – originally introduced in the Investing in Opportunity Act (IIOA) – is the first new community development tax incentive program introduced since the Clinton Administration.

How It Works

Opportunity Funds are a new class of investment vehicles that aim to responsibly drive much-needed capital into distressed communities throughout the nation. O Funds will activate passive holdings by connecting investors to investment opportunities in Opportunity Zones.

The Tax Cuts and Jobs Act authorizes:

  • Treasury to certify O Funds which will be created to pool and deploy investment capital in Opportunity Zones for eligible purposes (stock, partnership interest, and business property).
  • U.S. investors to receive a temporary tax deferral and other tax benefits when they reinvest unrealized capital gains into O Funds for a minimum of five years.
  • Governors in every state, U.S. territory, and the Mayor of Washington, D.C. to designate a certain number of Opportunity Zones, the vast majority of which will be low-income census tracts.

For more details, read a full program overview from the Economic Innovation Group (EIG) which developed the Opportunity Zone concept, as well as coverage from impact investing industry leaders such as Impact Alpha.

What’s Next?

The Opportunity Zone Program must go through the formal rule-making process before the program can be finalized and investments can be made. Treasury must first propose a structure for implementing the new rule, after which the agency will issue a notice of proposed rule-making and will request public comments on the proposal. The comment period typically lasts from 30 to 60 days. Upon reviewing the comments and making any necessary changes to the rule, Treasury will issue a final rule that formally sets up the Opportunity Zone Program.

Enterprise is among a list of diverse groups from across the nation that supported IIOA given the innovative approach to unlocking long-term private investment with the potential to benefit the more than 52 million Americans living in distressed communities.

Community development and finance organizations are well-positioned to create O Funds that will deliver compelling double bottom line returns. Enterprise looks forward to working with Treasury to ensure that the Opportunity Zone Program is structured to effectively support reinvestment in distressed communities nationwide, and we are eager to continue our partnership with EIG as the Opportunity Zone Program is rolled out.