More Rules Coming on Opportunity Zones

WASHINGTON — A U.S. Treasury Department official on Wednesday updated mayors on some of what they can expect to see when the agency further spells out the proposed rules for a program meant to help revitalize some of the nation’s most distressed neighborhoods.

Treasury issued an initial round of draft Opportunity Zones rules last October, shedding light on the mechanics of the initiative, which was created as part of the sweeping federal tax bill approved in 2017. But the proposed regulations also left unresolved questions.

Daniel Kowalski, a counselor to Treasury Secretary Steven Mnuchin, indicated a forthcoming second round of guidance should help bring into clearer focus technical aspects of how the program will be implemented, including definitions for terms that help set guidelines for non-real estate business ventures.

Getting the details nailed down is important to people who are tracking the initiative, as they stress that specific guidelines are crucial for it to fully take off.

The Opportunity Zones program offers investors capital gains tax breaks meant to draw investment to low-income census tracts that have been designated as “zones.”

How the regulations ultimately take shape will help determine which businesses and projects in zones are eligible for investment from special “opportunity funds” formed as part of the program.

Kowalski noted that some comments on the first round of rules asked for more detail about a requirement for 50 percent of a business’s gross income to come from within a zone for it to be eligible for investment. He said Treasury is considering possible “safe harbors” for that rule, meant to make it easier for businesses to confidently locate in a zone and know they’ll qualify for investments under the program.

John Lettieri, president and CEO of the Economic Innovation Group, an organization that has advocated for Opportunity Zones, emphasized that widespread investment in operating businesses, and not just real estate, would be essential for the program to reach its full potential.

“We cannot do that now given the state of the regs,” he said.

Kowalski said Treasury anticipates releasing a third round of regulations later in the year, which will contain provisions for dealing with funds that run afoul of the program’s rules.

He also said the department is planning to initiate a discussion, seeking public input, about information reporting requirements for opportunity funds. These requirements are likely to be important for helping to determine how well the program is meeting its objectives.

Asked about the best way for cities to work with existing businesses in zones, Kowalski told the mayors that one issue to consider is that these businesses will have the meet the criteria for “substantial improvement” under the program’s rules.

“They really have to be in a position of needing substantial capital investment,” he said.

Kowalski made his remarks during a meeting of the U.S. Conference of Mayors Council on Metro Economies and the New American City. The Conference of Mayors is holding its annual winter gathering here in the nation’s capital this week.

Mayor Mike Duggan, of Detroit, said he and other mayors pushed during past meetings with Mnuchin to make sure that the Opportunity Zones rules were not so unwieldy that investors would be deterred from the program and opt to put their money elsewhere.

The mayor said he was pleased when he saw the first round of draft regulations from Treasury.

Duggan is optimistic about the program, but stressed it would require legwork and strategizing on the part of city officials. “You’re not going to put up a sign and say ‘Opportunity Zone district’ and a bunch of money floods in,” he said. “That’s not what’s going to happen.”

He described how the tax incentive program could be combined with other programs to make projects more attractive.

“If your project was close, it will be a tool that pushes projects over and makes less well-off areas marginally more attractive than more well-off areas,” he added.

Kathy Sheehan, mayor of Albany, New York, said there was an impression among some smaller-sized cities in upstate New York that the program is “so complex and so complicated” that it “isn’t a tool that we should really be spending a lot of time thinking about.”

Speaking to Route Fifty afterward the meeting, she elaborated, saying while Albany’s city government is up to speed on the program, local developers may be hesitant to embrace it.

“When they look at Opportunity Zones, they’re looking at another layer of reporting requirements and regulations that they have to understand,” she said.

Sheehan added that this wasn’t meant as a criticism as much as it was flagging the potential need for offering technical assistance for developers and investors in smaller towns. This is an area where she believes the city and its economic development arm could have a role.

One site in a zone in Albany where Sheehan said there’s potential is a roughly six-acre parcel where a convention center project was once planned but never completed.

Representatives from Accelerator for America told the mayors that the group has planned an Opportunity Zone summit at Stanford University, in California, on March 18, that is meant to bring together investors and cities that have laid groundwork for the program.