A New Bipartisan Bill to Reform & Extend Opportunity Zones

Since its inception in 2017, and real roll out in 2019, there has been a great deal of curiosity as to what policymakers will do with Opportunity Zones as time goes on. Will the program be allowed to sunset, or will there be adaptations and extensions along the way? While many experts in the Opportunity Zones (OZ) space feared that the program was not a priority for policymakers in the Biden Administration, it appears that senators and representatives from both parties are interested in a new look at the incentive. A new bipartisan bill has emerged to modify and extend the OZ program. 

Rare Bipartisan Action

If you’re unfamiliar with the origins of the Opportunity Zone legislation originally, check out our Bipartisan Beginnings for Opportunity Zones. As we know, there is not much that Democrats and Republicans can agree on these days. So, for Opportunity Zones to be successful there must be something in it to please everyone.

On April 7, 2022, US Senators Cory Booker (D-NJ) and Tim Scott (R-SC), and US Representatives Ron Kind (D-WI) and Mike Kelly (R-PA) introduced a bipartisan and bicameral bill reforming and extending Opportunity Zones. Called the Opportunity Zones Transparency, Extension and Improvement Act, the bill also has a bipartisan host of co-sponsors: US Senators Mark Warner (D-VA), Chris Van Hollen (D-MD) and Todd Young (R-IN), and US Representatives Terri Sewell (D-AL-07), Dan Kildee (D-MI-05) and Jackie Walorski (R-IN-02). The senators introducing the bill are the same team who introduced the Investing in Opportunity Act in 2016, which was eventually included in the 2017 Tax Cuts & Jobs Act, the legislation that brought about the beginning of the Opportunity Zone program. 

The Opportunity Zones Transparency, Extension & Improvement Act is an acknowledgement that the initiative is beginning to live up to its promise, bringing private capital to distressed and underserved communities, providing improved and new affordable housing, and new business to these communities. Of course, there are changes to make sure that the OZ program is fulfilling its purpose. So, what’s included in the new act? Let’s have a look.

Propose changes to opportunity zones: 

• Early sunset for census tracts with higher median incomes: Some Opportunity Zones exist in census tracts that policymakers do not believe are truly impoverished, despite them meeting the standards for the first implementation of the OZ program. This new legislation would sunset census tracts with a median family income (MFI) at or above 130% of the national MFI. Additionally, states will have the opportunity to sunset additional OZs, and also replace the sunsetted zones with new ones that meet the new criteria on a one-for-one basis. 

• Expanded reporting requirements: The original legislation that dreamt up Opportunity Zones, The Investing in Opportunity Act, included specific reporting requirements for OZ projects. Due to procedural rules, these requirements were stripped from the provision included in the Tax Cuts and Jobs Act that made Opportunity Zones a reality. These reporting requirements will bring transparency across the board, allow policymakers to monitor and ensure its working as intended, and give a basis to track the long-term impact of the OZ projects in impoverished communities. 

• Make it easier to create smaller investments: The new legislation would allow Qualified Opportunity Funds to be organized as a “fund of funds”, or feeder funds that can invest in other QOFs planning smaller projects. This will help bring necessary funding to smaller projects in smaller communities. 

• Creation of a State & Community Dynamism Fund: Creates a flexible federal grant program for state governments to assist and promote OZ developments. 

• Extension of the investment deadline:  Since it took nearly 2 years for the government to issue final regulations for OZs, and since many low-middle-income communities took significant hits from the COVID-19 pandemic, the new legislation would extend the investment deadline for 2 years (to December 31, 2028) to help investors and community stakeholders use the OZ tool as intended. 

• Extension of the step-up in basis for early investors: The new legislation would extend the step-up in basis benefits for OZ investments. Practically, this means a reinstatement of these benefits as the last one is currently expired as of December 31, 2021. If the legislation passes, the 15% basis step-up will be good for investments made in 2021 and 2022, and the 10% basis step-up will be good for investments made in 2023. 

• Holding period requirement change: The holding period requirement for forgiveness of 15% of the deferred capital gain will change from a 7 year holding period to a 6 year holding period. 

• Inclusion of Brownfields: Eligibility for Opportunity Zone status will be expanded to add some zero-population areas not initially qualified to become OZs, specifically former industrial sites commonly referred to as ‘brownfields’.

What are Policymakers Saying? 

In a press release on April 7, 2022, Senator Tim Scott was quoted, “The Opportunity Zone program represents the good that leaders can do for communities across the country when we work together toward common sense solutions. Independent reporting shows that investments in the Opportunity Zones are making a huge impact across the country, with billions of dollars flowing into impoverished neighborhoods. I am glad to build on that success with this legislation to make the program stronger, so that we can ensure  this incentive is benefitting the Americans who need it most.”

Co-sponsor Cory Booker said, “The Opportunity Zone incentive has the potential to unleash much-needed economic growth in high poverty communities across the country – communities that investors too often overlook. But without robust guardrails in place, the incentive could be undermined or abused by those who aren’t committed to uplifting rural and urban communities across the country. I am proud to introduce this legislation with Senator Scott to help restore the original promise of opportunity zones by steering private capital to reinvest in underserved communities that have been historically left behind and working to level the economic playing field.”

 OZ FundHub is thrilled to see the push to update the Opportunity Zone program in the federal government. Stay tuned to our blog for updates as the legislative process moves along. Interested in discussing these changes with investors, fund managers and other OZ experts? Join in the discussion on our OZ Forum today!

 *Important Notice: OZ FundHub is not a licensed tax or accounting firm. All Information contained is for educational purposes only.*