Strengthening Communities With Opportunity Zone Investments

The opportunity zone tax incentiveis designed to complement existingcommunity development toolsand debt financing products andto be flexible enough to meet thediverse needs of a wide range ofcommunities.State and local governmentshave organized efforts to attractopportunity zone investmentsthat will support local economicdevelopment strategies. These effortsinclude developing communityprospectuses;6 offering businessesadditional incentives such as statetax credits, job training programs,small business loans, and affordablehousing incentives;7 and facilitatingQOF investments to meet communitypriorities, such as affordable housingand renewable energy.8 Banks haveparticipated in these organizingefforts, contributing importantleadership and resources that bringparties together to form constructive,transformational strategies.The U.S. Impact Investing Alliance,the Beeck Center for Social Impactand Innovation at GeorgetownUniversity, and the Federal ReserveBank of New York, after consultationwith a wide range of industry leaders,developed an approach to manageand measure the economic and socialoutcomes of opportunity zoneinvestments. The resulting frameworkrecommends that investors and QOFmanagers integrate the needs oflocal communities into the formationand implementation of the QOFs.9Community engagement could behelpful when developing a QOF’smanagement strategy.How Can Banks Participatein Opportunity ZoneTransactions?Banks can participate in opportunityzone transactions in a number ofways.Brokering Opportunity ZoneTransactionsOpportunity zone transactions canbring investors into economicallydistressed areas, and those investorsmay be new to communitydevelopment finance. The capitalthat finances a communitydevelopment project often involvesnumerous public and private entities.Community-oriented development,such as affordable housing orcommunity facilities, often involvessubsidies or concessionary financing.Banks have experience in thesetypes of transactions, knowledge oflocal projects and businesses, andconnections to local partners, whichmay help bring critical projects tofruition.6For example, refer to Opportunity Zone Investment Prospectus Guide.7Refer to examples in Maryland and Colorado.8Refer to California Opportunity Zone Partnership.9The Opportunity Zones Reporting Framework includes five guiding principles:Lending in Opportunity ZoneTransactionsOpportunity zones may createnew lending prospects for banks,including prospects for commercialreal estate loans, constructionloans, and bridge loans. Althoughthese loans are not eligible for theopportunity zone tax incentives, theycan potentially be profitable lendingopportunities for banks.Due to their CRA responsibilities,banks have traditionally been activelenders in economically distressedareas well before the opportunityzone designation. Loans inopportunity zone transactions may beeligible for CRA consideration.Managing QualifiedOpportunity FundsA bank may be the general partneror managing member of a QOF thatmanages investments from the bankitself or from third-party investors.To form a QOF, an eligiblecorporation or partnership selfcertifies by filing Form 8996,Qualified Opportunity Fund, with itsfederal income tax return.The QOF plays severalimportant roles in opportunityzone transactions, includingcommunicating with investors,identifying qualifying projects in anopportunity zone, structuring Community engagement: QOF investors should request that fund managers integrate the needs of local communities into the formation and implementation ofthe funds, reaching low- income and underinvested communities with attention to diversity. Equity: QOF investments should seek to generate equitable community benefits, leverage other incentives, and aim for responsible exits. Transparency: QOF investors should be transparent and hold themselves accountable, with processes and practices that remain fair and clear. Measurement: QOF investors should voluntarily monitor, measure, and track progress against specific impact objectives, identifying key outcome measures andallowing for continuous improvement. Outcomes: QOF metrics should track real change, with an understanding that both quantitative and qualitative measures are valuable indicators of progress.January 20215

transactions, and complying withall applicable opportunity zoneregulations.Banks with experience in complextax transactions and communityrevitalization strategies may seemanaging a QOF as an extension ofexisting activities. Banks managingQOFs should understand and managethe risks inherent in fulfilling theseroles. A bank considering whether toundertake the management of a QOFshould contact its supervisory officeto understand any regulatory issuesrelated to these activities.Investing in QualifiedOpportunity FundsA bank with a capital gain maychoose to invest that gain in a QOF.By investing in a QOF, which theninvests in qualified opportunity zoneproperty, an investor can receive upto three tax benefits:101. Tax deferment: Investors candefer tax on any prior capitalgains invested in a QOF untilthe earlier of the date on whichthe investment in a QOF is soldor exchanged, or December 31,2026.11 The capital gains mustbe invested in a QOF within180 days of realization.2. Partial tax forgiveness: If theQOF investment is held forlonger than five years, there is10a 10 percent exclusion of thedeferred gain, decreasing theinvestor’s tax liability upon saleof the investment or whenthe deferral expires in 2026.If the investment is held formore than seven years, theexclusion increases to 15percent.123. Exclusion of further gains:QOF investors can permanentlyexclude from taxation anycapital gains that accrue aftertheir investment in a QOF, ifthe investment is held for atleast 10 years. After 10 years,the investor is eligible for anincrease in the tax basis of theQOF investment equal to its fairmarket value on the date thatthe QOF investment is sold orexchanged.13A QOF must hold at least 90percent of its assets in a qualifiedopportunity zone property. ThoseQOF investments can be investeddirectly into a qualified opportunityzone business property or indirectlyby investing in a stock or partnershipinterest in an opportunity zonebusiness.14A qualified opportunity zonebusiness (QOZB) is a trade orbusiness in which substantially allthe tangible property owned by thebusiness is qualified opportunityzone business property. At least50 percent of the gross income ofthe QOZB must be derived from theactive conduct of a trade or businessin qualified opportunity zones.15The QOZB may not operate or leasemore than de minimis property to anyprivate or commercial golf course,country club, massage parlor, hottub facility, suntan facility, racetrackor other facility used for gambling,or any store the principal businessof which is the sale of alcoholicbeverages for consumption offpremises.16A qualified opportunity zonebusiness property is tangible propertyused in the trade or business of aQOF or QOZB. The property musthave been acquired by purchase froman unrelated party after December 31,2017. In addition, either the originaluse of the property originates withthe QOF or the QOF substantiallyrehabilitates the property duringa 30-month holding period afteracquisition.17 Additional restrictions,which are discussed in the IRSopportunity zone regulations, apply.18Public Welfare InvestmentAuthorityNational banks, under conditionsdescribed in this section of this article,may make investments in QOFs underthe public welfare investmentRefer to Opportunity Zones Frequently Asked Questions.The tax on the original capital gain can be deferred until no later than December 31, 2026. Investors should plan on having sufficient funds to pay the tax if theydon’t want to liquidate their investment in the QOF at that time.11The final date to receive the full tax forgiveness benefit of an opportunity zone investment was December 31, 2019. After this date, the full 15 percent step-up inbasis after a seven-year hold expired, as it is no longer possible to achieve a seven-year hold before the end of 2026, when the original deferred gain is recognized.The final date to receive any basis step-up on the original gain is December 31, 2021. After December 31, 2021, the 10 percent step-up in basis after a five-year holdexpires, as it will no longer be possible to achieve a five-year hold before the end of 2026.1213No gain is recognized on disposition of the investment, provided the disposition occurs on or before December 31, 2047.The term “qualified opportunity fund” is defined as any investment vehicle that is organized as a corporation or a partnership for the purpose of investing inqualified opportunity zone property (other than another qualified opportunity fund).1415The IRS regulations also provide three safe harbors that businesses may use to satisfy this test. Refer to 26 CFR 1.1400Z2(d)-1(d)(3)(i)(A), (B), (C), or (D).16Refer to 26 CFR 1.1400Z2(d)-1(d)(4).17Additions to basis must exceed an amount equal to the adjusted basis of such property at the beginning of such period. 26 USC 1400z-2(d)(2)(D)(ii).18Refer to section 1400Z of Pub. L. 115-97 and Final Regulations 1400Z-2.6Community Developments Investments

(PWI) authority. The investment isgenerally permissible if it is “designedprimarily to promote the publicwelfare, including the welfare of lowand moderate-income communitiesor families (such as by providinghousing, services, or jobs).”19The PWI regulations require aqualified community developmentinvestment to primarily benefitlow- and moderate-income (LMI)individuals, LMI areas,20 or otherareas targeted by a governmentalentity for redevelopment. Inaddition, an investment wouldbe eligible as a PWI if it wouldreceive consideration as a qualifiedcommunity development investmentunder the CRA regulations.21 APWI must not expose the bank tounlimited liability, and a bank’saggregate PWIs must not exceed 15percent of its capital and surplus.22 Abank’s opportunity zone investmentmay not automatically qualify asa PWI and may require the OCC’sprior approval, including if thereis uncertainty as to whether theinvestment meets the regulations’criteria.2319Federal savings associations (FSA)may invest in a QOF under severalinvestment authorities, including community development-relatedequity investments in real estatepursuant to section 5(c)(3)(A) ofthe Home Owners’ Loan Act; investments in service corporationsfor community developmentpursuant to 12 CFR 5.59; and de minimis investments in theaggregate up to 1 percent of theFSA’s total capital or 250,000in community developmentinvestments of the type permittedfor a national bank under 12 CFR24, pursuant to 12 CFR 160.36.For more information on the FSAPWI authorities, including permittedactivities, consult the FSA sectionon the OCC’s Public WelfareInvestment Resource Directory.Volcker RuleSection 13 of the Bank HoldingCompany Act, also known as theVolcker rule, generally prohibitsany banking entity from acquiringor retaining an ownership interestin, sponsoring, or having certainrelationships with a hedge fund orprivate equity fund (covered fund). InJuly 2020, amendmentsto the Volcker rule clarified that acovered fund does not include anissuer that is a QOF, as defined in26 USC 1400Z–2(d).24CRA ConsiderationUnder the CRA regulation in effectfor OCC-supervised banks untilOctober 1, 2020, loans, investments,or services in an opportunityzone transaction were eligiblefor CRA consideration if theymet the definition of communitydevelopment.25Under the CRA rules for OCCsupervised banks that took effecton October 1, 2020,26 a communitydevelopment loan, communitydevelopment investment, orcommunity development servicethat helps meet the credit needs of abank’s entire community, includingLMI communities, is a qualifyingactivity if it meets the criteria in 12CFR 25.04.27 These criteria includeactivities that finance qualifiedopportunity funds, as defined in 26USC 1400Z-2(d)(1), that benefitLMI-qualified opportunity zones, asdefined in 26 USC 1400Z-1(a).28For more information, contact DavidBlack at David.Black@occ.treas.gov.Refer to 12 USC 24(Eleventh) and its implementing regulation, 12 CFR 24. Examples of investments that qualify under the PWI authority are at 12 CFR 24.6.The PWI LMI eligibility definition is different than the U.S. Internal Revenue Code Section 45D(e) low-income criteria for the purposes of determining whether anarea qualifies under the opportunity zone provisions. Under the opportunity zone regulations, for a census tract to be designated a “low-income” qualified opportunityzone tract, it must have a poverty rate of at least 20 percent or a median family income of (a) no more than 80 percent of the statewide median family income forcensus tracts within non-metropolitan areas, or (b) no more than 80 percent of the greater statewide median family income or the overall metropolitan median familyincome for census tracts within metropolitan areas. The PWI definitions of low-income and moderate-income follow the same definitions as the CRA. Banks seekingto qualify a QOF investment for PWI should use the definitions at 12 CFR 24.2(f).2021Refer to 12 CFR 24.3.22Refer to 12 CFR 24.4.23The prior approval process for PWIs is outlined in 12 CFR 24.5 (national banks).24Refer to OCC Bulletin 2020-71, “Volcker Rule Covered Funds: Final Rule.”2512 CFR 25, Appendix C, and 12 CFR 25.12(g) (national banks); 12 CFR 25, Appendix C, and 12 CFR 195.12(g) (FSAs).26Refer to “Community Reinvestment Act Regulations, Final Rule,” 85 Fed. Reg. No. 109, pp. 34734–34834.The final rule consolidates 12 CFR 25, the OCC’s national bank CRA rule, with 12 CFR 195, the OCC’s federal savings association CRA rule, by applying 12 CFR25 to savings associations and removing the current 12 CFR 195.2728Refer to “Community Reinvestment Act Regulations, Final Rule,” 85 Fed. Reg. No. 109, p. 34796. Also see the CRA Illustrative List.January 20217

Opportunity Zone Measures of DistressThe goal of the federalopportunity zone tax incentiveis to increase investment ineconomically distressed communitiesacross the nation. By many measuresof socioeconomic well-being,opportunity zones are, on the whole,among the highest-need communitiesin the United States.High poverty rate: Opportunityzones have an average poverty rateof 27.7 percent compared with thenational poverty rate of 14.1 percent.Persistent poverty: Even thoughopportunity zones only cover onequarter of the country’s low-incomecensus tracts, they cover 38 percentof all U.S. census tracts that havebeen persistently poor (with a povertyrate of at least 20 percent) since atleast 1980. Opportunity zones cover49 percent—essentially half—of thecountry’s pockets of concentratedpersistent poverty, meaning censustracts in which at least 40 percent ofthe population has lived in povertysince at least 1980.High unemployment: Thirty-onepercent of prime age adults residing8in opportunity zones are not working,compared with 22 percent across theUnited States.High housing vacancy rates: Theaverage opportunity zone housingvacancy rate is 13 percent comparedwith 8 percent nationally.Older housing stock: The housingstock in opportunity zones is mucholder than that of non-opportunityzone areas; in the typical zone, themedian residence was built 50 yearsago—more than 10 years before themedian residence nationwide.Low home values: The medianhome is worth less than 100,000 in43 percent of opportunity zones. In46.5 percent of opportunity zones,the median value of homes surveyedbetween 2014 and 2018 was lowerthan that surveyed between 2006 and2010.Low homeownership rate:Homeownership rates are lower inopportunity zones than the nationalaverage, and 46 percent of theopportunity zone population ownsa home, compared with 64 percentnationwide.Limited economic mobility:Economic mobility for children frompoor backgrounds is measurablyworse in opportunity zones thanoutside these zones. Only 7.3 percentof children born to poor parents inthe average opportunity zone wereable to climb into the top fifth of theincome distribution upon adulthood,lower than the 13.2 percent averagefor poor children outside ofopportunity zones.High prevalence of brownfieldsites: Opportunity zones, whichrepresent only 10.7 percent ofall U.S. census tracts, containnearly one-third (32 percent) ofthe country’s brownfield sites,which are properties that havebeen contaminated by prior (oftenindustrial) use and typically standvacant for years or decades. Thecountry’s opportunity zones containover 14,700 known brownfield sites.Source: Economic Innovation GroupCommunity Developments Investments

PNC Bank: Strengthening Communities ThroughStrategic Opportunity Zone InvestmentsCathy Niederberger, Executive Vice President of Community Development Banking, PNC BankPNC Bank, N.A. (PNC) worksto make communities strongerand more prosperous as partof our culture as a communityfocused “Main Street” bank. Thoseof us working with lower-incomecommunities understand thattruly transformative developmentopportunities don’t come around veryoften but, project by project, theseopportunities accumulate to maintainand strengthen disadvantagedcommunities across the country.Part of PNC’s aim to do right by itscustomers and communities involvesus exploring new programs andavenues, particularly in communitiesthat need them most. PNC recognizesthat new financing options havethe potential to be game changersfor low-income communities. Forexample, the low-income housing taxcredit (LIHTC) was first introducedin 1986. Today, LIHTCs havebecome a pillar of the affordablehousing industry. The new marketstax credit, introduced in 2000, hassince demonstrated many successesin stimulating economic developmentin lower-income areas.At the end of 2017, a new tool wasadded to the community developmenttoolbox with the introduction ofopportunity zones and qualifiedopportunity funds (QOF).Congress created opportunity zoneswith the Tax Cuts and Jobs Act(TCJA) of 2017 to help reduceeconomic inequality by stimulatingthe economy in low-income andeconomically disadvantagedcommunities through the investmentJanuary 2021of realized capitalgains. Opportunityzones are primarilyin low-incomecensus tractsdesignated by eachstate’s governorthat can benefitfrom privatePNC Bankinvestment spurredArchitect’s rendering of the East York Street development,by these taxa new 56-unit building with ground-floor retail and transitincentives.centered workforce housing in the East Kensingtonneighborhood of Philadelphia.Investors, likePNC, reinvestdebt service coverage to meet therealized capital gains into QOFs,opportunity zone program timelines.which in turn are used to help financeprojects located in the opportunityAnother PNC consideration waszones. The investments into QOFsdetermining the purpose of the QOFenable investors to temporarily delayand subsequent project investments.and potentially eliminate a percentageFrom a programmatic perspective,of the taxes on realized capital gains,opportunity zones generally arewith the amount varying based on theintended to benefit distressedlength of the investment. Investmentcommunities. Current regulationsterms in QOFs vary from five to 10do not, however, provide specificyears, and the longer the investmentrequirements on projects a QOFin the opportunity zone, the greatermight finance. The lack of specificthe tax incen

For more information on how opportunity zones work, refer to the Treasury Department's Community Development Financial Institutions Fund's Opportunity Zones Resources. 4. 13823 of Pub. L. 115-97.Section . 5. For example, refer to Opportunity Zones Frequently Asked Questions. N. ational banks and federal savings associations (collectively .