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Kresge encourages OZ reporting with further investor incentives

April 04, 2019
By: Jason Rittenberg

Many people have noticed that the Opportunity Zones tax incentive, intended to encourage investments in economically-distressed areas, lacks the type of reporting requirements that could help determine the real impacts of the incentive. Kresge Foundation is one organization that has been concerned by this information gap and has been working to implement solutions. The ultimate impact of Kresge’s latest effort is to provide further investor incentives in exchange for reporting compliance.

Kresge recently announced it had selected two organizations to receive guarantees for new OZ investment funds. The organizations are Arctaris Impact, which was one of the managers of Michigan’s State Small Business Credit Initiative funds, and Community Capital Management (CCM), which has a history of Community Reinvestment Act investing. Arctaris is receiving $15 million for guarantees against a $500 million fund, and CCM is receiving $7 million for a $300 million fund.

Details on the funds are still forthcoming, but the joint press release clarifies that the purpose of the guarantee is to help protect investors in the case of any losses. Arctaris further states that their fund is targeting further guarantee dollars in order to be “principal protected,” with the implication that the full initial investment amount will be guaranteed. 

Investors participating in one of these funds will therefore not only be able to benefit from (a) capital gains tax deferment and reduction and (b) potential complete exclusion from gains on the OZ investment but also (c) be able to make this commitment without actually risking the initial OZ investment (in whole or in part, depending on the guarantee amount and the fund’s level of losses).

In exchange for receiving guarantee funds from Kresge, Arctaris and CCM are agreeing to comply with a set of reporting and management practices developed with funding from Kresge and published earlier this year by Georgetown’s Beeck Center and the U.S. Impact Investing Alliance and were also funded by Rockefeller Foundation.

The purpose of the practices is to help ensure that funds and projects will achieve positive economic outcomes for the people currently residing in the economically-distressed OZs, and help tell the story of the investments. The “guiding principles” of the practices are community engagement, equity, transparency, measurement, and outcomes. In addition to following the reporting recommendations from the practices, the press release says that both Arctaris and CCM will complete the community engagement portion of the practices by operating New Markets Tax Credits-like advisory boards.

Measurements of how OZ investments affected the OZ regions and population are clearly critical to evaluating the program and likely important to any attempt to reauthorize the incentive — something investors and fund managers are likely to be interested in achieving, particularly as the IRS’s delays in rulemaking seem increasingly likely to put pressure on some of the statutory investing deadlines. Kresge’s approach ensures that at least two funds will follow thorough reporting practices.

opportunity zones