More than a year since Opportunity Zones were formally designated, Opportunity Fund capital has been flowing increasingly faster into real estate, while investment in businesses trickles in. Realizing the Transformative Potential of Opportunity Zone Business Investing: A Guide for Practitioners (pdf) highlights the gap emerging in OZ investment between high-volume real estate deals and less common operating business investment and offers solutions to help the existing legislation achieve its intended goals of creating quality local jobs, greater community wealth and stronger local economies. 

Co-authored by Lab Director Bruce Katz and Evan Weiss, senior advisor for Public Finance to Governor Phil Murphy of New Jersey, the report proposes changes and provides clarification to the legislation, as well as support for intermediary activities that will unlock investment in both startup and longtime OZ businesses across a variety of sectors.  The report comes at a key moment, while regulatory changes are being considered, and is intended  to elucidate both the problems and potential of Opportunity Zones, providing  a call to action for economic development practitioners across the country to work toward solutions to build lasting wealth in economically-distressed communities. As the report details, current Opportunity Zone rules are inscrutable and prevent communities from fully leveraging the tremendous potential of the legislation.

The report calls for more guardrails, strong reporting requirements and ways to ensure that all designated Opportunity Zones genuinely meet the intent of the law so that the legislation can live up to its potential. Recommendations for key regulatory adjustments include:

1. Clarify the 40 percent intangible property test to ensure investors feel confident investing in high potential IP-intensive businesses like tech and biosciences. Following the multiple methodology tests for the 50 percent gross income requirement developed for the April 2019 regulations would offer a strong solution here.
2. Drop the “asset by asset” substantial improvement requirement and allow business-level investments to count towards the substantial improvement test. The goal is to ensure investment in businesses, not just their tangible assets. An investment that allows a business to hire should be counted similarly to investments in new equipment.
3. Provide greater clarity for the “facts and circumstances” methodology for the 50 percent gross income test to help businesses, like life sciences, which depend on highly specialized contract research and manufacturing. 
4. Offer greater flexibility for the 31-month working capital safe harbor and new rounds of investment. For sectors like life sciences and advanced manufacturing, adding additional time to the 31-month period would encourage investment in those businesses. Allowing for infusions of additional growth capital without restarting the ten-year clock could also better suit the lifecycles of IP-intensive businesses.

This practitioner guide was produced through the collaboration of Drexel's Nowak Metro Finance Lab, Ben Franklin Technology Partners and Accelerator for America.