Community Developments - Investments Strengthening Communities With Opportunity Zone Investments - City of Fort Myers
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Community Developments
January 2021 Investments
Strengthening Communities With
Opportunity Zone Investments
Strengthening Communities With Opportunity Zone Investments A Look Inside … National banks and federal savings associations (collectively, banks) can help economically distressed communities, such as those suffering negative effects of the COVID-19 pandemic, by investing in low- and moderate-income (LMI) areas in designated opportunity zones. This edition of the Office of the Comptroller of the Currency’s (OCC) Community Developments Investments explains how banks can support distressed communities and receive Community Reinvestment Act (CRA) credit by making investments in tax-advantaged qualified opportunity funds (QOF) part of their community development strategies. Leveraging Qualified Opportunity Funds in Bank Community Development Strategies This article highlights tax, legal, and regulatory issues for banks to consider when investing in QOFs. Opportunity Zone Measures of Distress Opportunity zone communities often experience economic distress on a variety of measures including a persistently high poverty rate, high unemployment, high housing vacancy rates, low home values, and many others. PNC Bank: Strengthening Communities Through Strategic Opportunity Zone Investments PNC Bank explains how its CRA-defined community development mission guides project selection for the QOFs that the bank has sponsored, including those used to build workforce housing and a community health center. The structure of these deals offers a helpful case study for QOF financing for projects. Measuring the Impact of Qualified Opportunity Fund Investments Some banks and other sponsors of QOFs are using the Opportunity Zones Reporting Framework developed by the U.S. Impact Investing Alliance, the Beeck Center for Social Impact and Innovation at Georgetown University, and the Federal Reserve Bank of New York to evaluate the social and economic impacts of their investments in QOFs. Woodforest CEI-Boulos Opportunity Fund Woodforest National Bank has partnered with CEI-Boulos Capital Management to develop a QOF to invest in high-impact commercial real estate projects in opportunity zones in the bank’s 17-state CRA assessment area. All projects are measured against the Opportunity Zone Reporting Framework. Intermediary-Sponsored Opportunity Funds Seek to Deliver Community Impact for Investors Banks do not have to sponsor their own QOFs. They can invest in third-party funds sponsored by intermediaries such as Local Initiatives Support Corporation (LISC) and Enterprise Community Partners, which seek to deliver measurable returns to banks and other investors interested in making sustainable positive economic impacts with community projects in opportunity zones. January 2021 1
A Look Inside …
Barry Wides, Deputy Comptroller for Community Affairs, OCC
A
s the nation works to
recover from the pandemic’s
economic disruptions,
national banks and federal savings
associations (collectively, banks)
can help by rebuilding hard-hit,
low- and moderate-income (LMI)
and economically disadvantaged
communities in designated
opportunity zones across the United
States.
Banks investing in the nation’s
8,764
2 Community Developments Investments
included QOFs in their community including workforce housing in opportunities available to banks by development strategies. While both two cities and the revitalization of working with LISC and Enterprise banks created and sponsored their the historic St. James Hotel Community Partners are discussed own QOFs, each bank’s selection of overlooking the Edmund Pettus in the article titled “Intermediary- fund investment projects is guided by Bridge in Selma, Ala. Sponsored Opportunity Funds Seek its own community-impact mission. Banks that do not want to to Deliver Community Impact for PNC Bank invested its capital gains sponsor their own QOFs have an Investors.” in its own QOFs to fulfill the bank’s alternative way to support distressed To learn more about investing in community development mission. communities in opportunity zones. QOFs and the OCC’s new CRA An article describes opportunity zone They can invest in third-party funds rule, bankers may contact the OCC’s projects where the bank financed created by intermediaries such as District Community Affairs Officers workforce housing and a community Local Initiatives Support Corporation (DCAO) assigned to their banks’ health center. (LISC) and Enterprise Community OCC district. Woodforest National Bank’s Partners. Intermediaries seek to We look forward to hearing how your opportunity fund, created in maximize measurable economic bank chooses to support opportunity partnership with a community improvements in opportunity zones zone investments and about your development financial institution, by carefully identifying projects efforts to help revitalize communities finances projects across the Texas- and tracking and measuring the across the nation that have been hard- based bank’s 17-state footprint, projects’ progress for investors. The hit by the global pandemic. January 2021 3
Leveraging Qualified Opportunity Funds in Bank
Community Development Strategies
David Black, Community Development Expert, OCC
N
ational banks and federal
savings associations
(collectively, banks) can
make tax-advantaged investments
in opportunity zones to benefit
low- and moderate-income (LMI)
communities. In addition, banks
investing in qualified opportunity
funds (QOF) may achieve their
community development goals and,
in doing so, receive Community
Reinvestment Act (CRA) credit.
Banks can take various roles—as
investors, lenders, brokers, and fund
managers.
What Is an Opportunity
Zone? Jefferson-Werner, LLC
An opportunity zone is an Brinker Lofts in Bethlehem, Pa., shown in 2019, is the adaptive reuse of the
economically distressed area Lehigh Valley Cold Storage building, and included 31 market-rate residential units
designated by the U.S. Department and first-floor retail space. The project received financing from a PNC-sponsored
QOF.
of the Treasury to attract private
investment from QOFs. A QOF is
an investment vehicle that is set up Investors that have capital gains Opportunity zones were established
as either a partnership or corporation and invest new capital in QOFs in tax legislation enacted in
for investing in eligible property in are eligible to receive tax benefits, December 2017.4 Requirements and
an opportunity zone. Monies invested including deferment and potential guidance for this tax incentive are
in QOFs can help spur economic partial forgiveness of their initial available through regulations and
development and create jobs in gain. Investors may receive possible other documents published by the
these distressed areas. There are exemption of gains from their QOF Treasury Department and the Internal
about 8,700 economically diverse investment, depending on the length Revenue Service (IRS).5
opportunity zones,2 covering 12 of time that the funds are invested in The opportunity zone tax incentive
percent of all census tracts in the the QOF. To receive the tax benefits, is designed to stimulate the flow of
United States. Qualified opportunity the QOF must comply with a number private sector capital into long-term
zones are in all 50 states, the District of requirements, including making equity investments in real estate,
of Columbia, and five U.S.territories. timely, qualified investments in infrastructure, operating businesses,
opportunity zones.3 and start-ups in designated
communities.
2 Refer to Opportunity Zones Resources for a list of designated qualified opportunity zones. Also refer to Internal Revenue Notice 2018-48.
3 For more information on how opportunity zones work, refer to the Treasury Department’s Community Development Financial Institutions Fund’s Opportunity
Zones Resources.
4 Section 13823 of Pub. L. 115-97.
5 For example, refer to Opportunity Zones Frequently Asked Questions.
4 Community Developments Investments
The opportunity zone tax incentive investments. The resulting framework Lending in Opportunity Zone
is designed to complement existing recommends that investors and QOF Transactions
community development tools managers integrate the needs of Opportunity zones may create
and debt financing products and local communities into the formation new lending prospects for banks,
to be flexible enough to meet the and implementation of the QOFs.9 including prospects for commercial
diverse needs of a wide range of Community engagement could be real estate loans, construction
communities. helpful when developing a QOF’s loans, and bridge loans. Although
State and local governments management strategy. these loans are not eligible for the
have organized efforts to attract opportunity zone tax incentives, they
opportunity zone investments
How Can Banks Participate
can potentially be profitable lending
that will support local economic in Opportunity Zone opportunities for banks.
development strategies. These efforts Transactions? Due to their CRA responsibilities,
include developing community Banks can participate in opportunity
banks have traditionally been active
prospectuses;6 offering businesses zone transactions in a number of
lenders in economically distressed
additional incentives such as state ways.
areas well before the opportunity
tax credits, job training programs, zone designation. Loans in
small business loans, and affordable
Brokering Opportunity Zone
Transactions opportunity zone transactions may be
housing incentives;7 and facilitating eligible for CRA consideration.
QOF investments to meet community Opportunity zone transactions can
priorities, such as affordable housing bring investors into economically Managing Qualified
and renewable energy.8 Banks have distressed areas, and those investors Opportunity Funds
participated in these organizing may be new to community
A bank may be the general partner
efforts, contributing important development finance. The capital
or managing member of a QOF that
leadership and resources that bring that finances a community
manages investments from the bank
parties together to form constructive, development project often involves
itself or from third-party investors.
transformational strategies. numerous public and private entities.
Community-oriented development, To form a QOF, an eligible
The U.S. Impact Investing Alliance,
such as affordable housing or corporation or partnership self-
the Beeck Center for Social Impact
community facilities, often involves certifies by filing Form 8996,
and Innovation at Georgetown
subsidies or concessionary financing. Qualified Opportunity Fund, with its
University, and the Federal Reserve
Banks have experience in these federal income tax return.
Bank of New York, after consultation
with a wide range of industry leaders, types of transactions, knowledge of The QOF plays several
developed an approach to manage local projects and businesses, and important roles in opportunity
and measure the economic and social connections to local partners, which zone transactions, including
outcomes of opportunity zone may help bring critical projects to communicating with investors,
fruition. identifying qualifying projects in an
opportunity zone, structuring
6 For example, refer to Opportunity Zone Investment Prospectus Guide.
7 Refer to examples in Maryland and Colorado.
8 Refer to California Opportunity Zone Partnership.
9 The Opportunity Zones Reporting Framework includes five guiding principles:
• Community engagement: QOF investors should request that fund managers integrate the needs of local communities into the formation and implementation of
the 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 and
allowing 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 2021 5transactions, and complying with a 10 percent exclusion of the 50 percent of the gross income of
all applicable opportunity zone deferred gain, decreasing the the QOZB must be derived from the
regulations. investor’s tax liability upon sale active conduct of a trade or business
of the investment or when in qualified opportunity zones.15
Banks with experience in complex
the deferral expires in 2026.
tax transactions and community The QOZB may not operate or lease
If the investment is held for
revitalization strategies may see more than seven years, the more than de minimis property to any
managing a QOF as an extension of exclusion increases to 15 private or commercial golf course,
existing activities. Banks managing percent.12 country club, massage parlor, hot
QOFs should understand and manage 3. Exclusion of further gains: tub facility, suntan facility, racetrack
the risks inherent in fulfilling these QOF investors can permanently or other facility used for gambling,
roles. A bank considering whether to exclude from taxation any or any store the principal business
undertake the management of a QOF capital gains that accrue after of which is the sale of alcoholic
should contact its supervisory office their investment in a QOF, if beverages for consumption off
to understand any regulatory issues the investment is held for at premises.16
related to these activities. least 10 years. After 10 years,
A qualified opportunity zone
the investor is eligible for an
Investing in Qualified increase in the tax basis of the business property is tangible property
Opportunity Funds QOF investment equal to its fair used in the trade or business of a
market value on the date that QOF or QOZB. The property must
A bank with a capital gain may have been acquired by purchase from
the QOF investment is sold or
choose to invest that gain in a QOF. an unrelated party after December 31,
exchanged.13
By investing in a QOF, which then 2017. In addition, either the original
invests in qualified opportunity zone A QOF must hold at least 90
use of the property originates with
property, an investor can receive up percent of its assets in a qualified
the QOF or the QOF substantially
to three tax benefits:10 opportunity zone property. Those
rehabilitates the property during
QOF investments can be invested
1. Tax deferment: Investors can a 30-month holding period after
directly into a qualified opportunity
defer tax on any prior capital acquisition.17 Additional restrictions,
gains invested in a QOF until zone business property or indirectly
which are discussed in the IRS
the earlier of the date on which by investing in a stock or partnership
opportunity zone regulations, apply.18
the investment in a QOF is sold interest in an opportunity zone
or exchanged, or December 31, business.14 Public Welfare Investment
2026.11 The capital gains must A qualified opportunity zone Authority
be invested in a QOF within business (QOZB) is a trade or National banks, under conditions
180 days of realization. business in which substantially all described in this section of this article,
2. Partial tax forgiveness: If the the tangible property owned by the
QOF investment is held for may make investments in QOFs under
business is qualified opportunity the public welfare investment
longer than five years, there is
zone business property. At least
10 Refer to Opportunity Zones Frequently Asked Questions.
11 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 they
don’t want to liquidate their investment in the QOF at that time.
12 The 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 in
basis 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 hold
expires, as it will no longer be possible to achieve a five-year hold before the end of 2026.
13 No gain is recognized on disposition of the investment, provided the disposition occurs on or before December 31, 2047.
14 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 in
qualified opportunity zone property (other than another qualified opportunity fund).
15 The 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).
16 Refer to 26 CFR 1.1400Z2(d)-1(d)(4).
17 Additions 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).
18 Refer to section 1400Z of Pub. L. 115-97 and Final Regulations 1400Z-2.
6 Community Developments Investments(PWI) authority. The investment is Federal savings associations (FSA) to the Volcker rule clarified that a
generally permissible if it is “designed may invest in a QOF under several covered fund does not include an
primarily to promote the public investment authorities, including issuer that is a QOF, as defined in
welfare, including the welfare of low- • community development-related 26 USC 1400Z–2(d).24
and moderate-income communities equity investments in real estate
or families (such as by providing pursuant to section 5(c)(3)(A) of
CRA Consideration
housing, services, or jobs).”19 Under the CRA regulation in effect
the Home Owners’ Loan Act;
for OCC-supervised banks until
The PWI regulations require a • investments in service corporations
October 1, 2020, loans, investments,
qualified community development for community development
or services in an opportunity
investment to primarily benefit pursuant to 12 CFR 5.59; and
zone transaction were eligible
low- and moderate-income (LMI) • de minimis investments in the
for CRA consideration if they
individuals, LMI areas,20 or other aggregate up to 1 percent of the
met the definition of community
areas targeted by a governmental FSA’s total capital or $250,000
development.25
entity for redevelopment. In in community development
addition, an investment would investments of the type permitted Under the CRA rules for OCC-
be eligible as a PWI if it would for a national bank under 12 CFR supervised banks that took effect
receive consideration as a qualified 24, pursuant to 12 CFR 160.36. on October 1, 2020,26 a community
community development investment For more information on the FSA development loan, community
under the CRA regulations.21 A PWI authorities, including permitted development investment, or
PWI must not expose the bank to activities, consult the FSA section community development service
unlimited liability, and a bank’s on the OCC’s Public Welfare that helps meet the credit needs of a
aggregate PWIs must not exceed 15 Investment Resource Directory. bank’s entire community, including
percent of its capital and surplus.22 A LMI communities, is a qualifying
bank’s opportunity zone investment Volcker Rule activity if it meets the criteria in 12
may not automatically qualify as Section 13 of the Bank Holding CFR 25.04.27 These criteria include
a PWI and may require the OCC’s Company Act, also known as the activities that finance qualified
prior approval, including if there Volcker rule, generally prohibits opportunity funds, as defined in 26
is uncertainty as to whether the any banking entity from acquiring USC 1400Z-2(d)(1), that benefit
investment meets the regulations’ or retaining an ownership interest LMI-qualified opportunity zones, as
criteria.23 in, sponsoring, or having certain defined in 26 USC 1400Z-1(a).28
relationships with a hedge fund or For more information, contact David
private equity fund (covered fund). In Black at David.Black@occ.treas.gov.
July 2020, amendments
19 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.
20 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 an
area qualifies under the opportunity zone provisions. Under the opportunity zone regulations, for a census tract to be designated a “low-income” qualified opportunity
zone 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 for
census tracts within non-metropolitan areas, or (b) no more than 80 percent of the greater statewide median family income or the overall metropolitan median family
income for census tracts within metropolitan areas. The PWI definitions of low-income and moderate-income follow the same definitions as the CRA. Banks seeking
to qualify a QOF investment for PWI should use the definitions at 12 CFR 24.2(f).
21 Refer to 12 CFR 24.3.
22 Refer to 12 CFR 24.4.
23 The prior approval process for PWIs is outlined in 12 CFR 24.5 (national banks).
24 Refer to OCC Bulletin 2020-71, “Volcker Rule Covered Funds: Final Rule.”
25 12 CFR 25, Appendix C, and 12 CFR 25.12(g) (national banks); 12 CFR 25, Appendix C, and 12 CFR 195.12(g) (FSAs).
26 Refer to “Community Reinvestment Act Regulations, Final Rule,” 85 Fed. Reg. No. 109, pp. 34734–34834.
27 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 CFR
25 to savings associations and removing the current 12 CFR 195.
28 Refer to “Community Reinvestment Act Regulations, Final Rule,” 85 Fed. Reg. No. 109, p. 34796. Also see the CRA Illustrative List.
January 2021 7Opportunity Zone Measures of Distress
T
he goal of the federal in opportunity zones are not working, Limited economic mobility:
opportunity zone tax incentive compared with 22 percent across the Economic mobility for children from
is to increase investment in United States. poor backgrounds is measurably
economically distressed communities High housing vacancy rates: The worse in opportunity zones than
across the nation. By many measures average opportunity zone housing outside these zones. Only 7.3 percent
of socioeconomic well-being, vacancy rate is 13 percent compared of children born to poor parents in
opportunity zones are, on the whole, with 8 percent nationally. the average opportunity zone were
among the highest-need communities able to climb into the top fifth of the
Older housing stock: The housing income distribution upon adulthood,
in the United States. stock in opportunity zones is much lower than the 13.2 percent average
High poverty rate: Opportunity older than that of non-opportunity for poor children outside of
zones have an average poverty rate zone areas; in the typical zone, the opportunity zones.
of 27.7 percent compared with the median residence was built 50 years
ago—more than 10 years before the High prevalence of brownfield
national poverty rate of 14.1 percent.
median residence nationwide. sites: Opportunity zones, which
Persistent poverty: Even though represent only 10.7 percent of
opportunity zones only cover one- Low home values: The median all U.S. census tracts, contain
quarter of the country’s low-income home is worth less than $100,000 in nearly one-third (32 percent) of
census tracts, they cover 38 percent 43 percent of opportunity zones. In the country’s brownfield sites,
of all U.S. census tracts that have 46.5 percent of opportunity zones, which are properties that have
been persistently poor (with a poverty the median value of homes surveyed been contaminated by prior (often
rate of at least 20 percent) since at between 2014 and 2018 was lower industrial) use and typically stand
least 1980. Opportunity zones cover than that surveyed between 2006 and vacant for years or decades. The
49 percent—essentially half—of the 2010. country’s opportunity zones contain
country’s pockets of concentrated Low homeownership rate: over 14,700 known brownfield sites.
persistent poverty, meaning census Homeownership rates are lower in Source: Economic Innovation Group
tracts in which at least 40 percent of opportunity zones than the national
the population has lived in poverty average, and 46 percent of the
since at least 1980. opportunity zone population owns
High unemployment: Thirty-one a home, compared with 64 percent
percent of prime age adults residing nationwide.
8 Community Developments InvestmentsPNC Bank: Strengthening Communities Through
Strategic Opportunity Zone Investments
Cathy Niederberger, Executive Vice President of Community Development Banking, PNC Bank
P
NC Bank, N.A. (PNC) works of realized capital
to make communities stronger gains. Opportunity
and more prosperous as part zones are primarily
of our culture as a community- in low-income
focused “Main Street” bank. Those census tracts
of us working with lower-income designated by each
communities understand that state’s governor
truly transformative development that can benefit
opportunities don’t come around very from private
often but, project by project, these investment spurred PNC Bank
opportunities accumulate to maintain by these tax Architect’s rendering of the East York Street development,
a new 56-unit building with ground-floor retail and transit-
and strengthen disadvantaged incentives.
centered workforce housing in the East Kensington
communities across the country. Investors, like neighborhood of Philadelphia.
Part of PNC’s aim to do right by its PNC, reinvest
realized capital gains into QOFs, debt service coverage to meet the
customers and communities involves
which in turn are used to help finance opportunity zone program timelines.
us exploring new programs and
avenues, particularly in communities projects located in the opportunity Another PNC consideration was
that need them most. PNC recognizes zones. The investments into QOFs determining the purpose of the QOF
that new financing options have enable investors to temporarily delay and subsequent project investments.
the potential to be game changers and potentially eliminate a percentage From a programmatic perspective,
for low-income communities. For of the taxes on realized capital gains, opportunity zones generally are
example, the low-income housing tax with the amount varying based on the intended to benefit distressed
credit (LIHTC) was first introduced length of the investment. Investment communities. Current regulations
in 1986. Today, LIHTCs have terms in QOFs vary from five to 10 do not, however, provide specific
become a pillar of the affordable years, and the longer the investment requirements on projects a QOF
housing industry. The new markets in the opportunity zone, the greater might finance. The lack of specific
tax credit, introduced in 2000, has the tax incentive. requirements means it might be
since demonstrated many successes In 2018, after the TCJA became law, possible for a developer to seek
in stimulating economic development PNC explored how it might take financing from a QOF for a project
in lower-income areas. advantage of this new tax benefit that is inconsistent with a local
opportunity. One of the bank’s initial community’s wishes or a municipal
At the end of 2017, a new tool was
considerations was the program’s plan for that site.
added to the community development
toolbox with the introduction of timeline imposed for an investment To address this issue, PNC imposed
opportunity zones and qualified in a QOF after the investor realizes its own criteria when selecting which
opportunity funds (QOF). a capital gain. (The incentive QOFs to invest in and used the
requires that capital gains must be Community Reinvestment Act (CRA)
Congress created opportunity zones
reinvested in a QOF within 180 as the guide. PNC decided to invest
with the Tax Cuts and Jobs Act
days of realization.) PNC scoured in QOFs that are consistent with
(TCJA) of 2017 to help reduce
its existing real estate development the PNC Community Development
economic inequality by stimulating
pipeline to see which properties were Banking team’s mission to support
the economy in low-income and
in opportunity zones and how we community development, as defined
economically disadvantaged
could resolve timing delays caused in the CRA.
communities through the investment
by appraisal gaps or insufficient
January 2021 9Specifically, that includes affordable While details vary
housing for low- or moderate- by project, PNC
income (LMI) individuals; QOFs generally
community services targeted to invest 70 percent
LMI populations; activities that of the stabilized
promote economic development by fair market value
financing small businesses or farms; as equity and 20
and neighborhood revitalization percent of the
or stabilization activities. PNC’s stabilized fair
investments in QOFs generally market value as
cover the same footprint as PNC’s fully amortizing
Community Development Banking debt. The project PNC Bank
portfolio, which includes 20 states developer Architect’s rendering of Chicago’s Ogden Commons, which
and the District of Columbia. contributes received an investment through a PNC-sponsored qualified
opportunity fund. Phase 1 of this development is anchored
Another PNC consideration was how the balance as by a Sinai Health System federally qualified health care
to structure its investments in QOFs. equity. Consistent facility.
PNC decided to form QOFs as closed with investing
funds, which means the bank is the in low-income space and over 350 mixed-income
single investor, and the funds do communities, other funders often join housing units. Ogden Commons is a
not permit outside investors. At the a project to help cover any remaining partnership between PNC, the Habitat
project level, the funds would allow funds above and beyond the project’s Company, the city of Chicago, the
third-party investors to invest as appraised value. A third-party Philipsborn family, and the Chicago
silent investors along with the bank. investor can rely on PNC’s extensive Housing Authority.
In many projects, this extra support due diligence to benefit from a Phase 1 is under way. Leveraging a
is necessary to help make the funds’ financially stable and worthwhile PNC opportunity zone investment and
projects financially feasible. project. loan, this three-story building with
PNC’s QOFs are experiencing The following are two examples of 50,000 square feet of commercial and
high demand from other investors PNC’s opportunity zone projects retail space will be the new home
interested in investing in opportunity that are making a difference in local of Sinai Health System’s federally
zones. Due to the timeline constraints communities in our footprint. qualified health center affiliate, which
associated with maximizing the Ogden Commons in Chicago: After will occupy 66 percent of the space.
opportunity zone tax benefits more than a decade, Chicago’s North It is noteworthy that more than 70
and the long timeline for getting Lawndale community is getting a percent of Sinai’s patients are low-
projects ready for financing, PNC’s new, major mixed-use development, income clients who rely on Medicaid.
opportunity funds invest in projects one that will bring much-needed Ethnic minorities comprise more than
that are already fairly advanced in jobs, retail space, state-of-the-art 80 percent of the neighborhood’s
their planning and development. health services, and eventually population. The project will create
These projects are located within hundreds of new residential units more than 110 permanent jobs
PNC’s retail footprint, have total to a historically African American and create a home for two African
development costs ranging from $5 and underserved West Side American-owned restaurants (Steak ’n
million to $20 million, and have a neighborhood. Ogden Commons will Shake and Ja’ Grill).
shorter horizon for getting to the transform 10 acres of vacant land The project’s total development cost
closing table. By offering lower-cost, on a site once occupied by the now- of $21.5 million will be funded by
long-term financing, PNC qualified demolished Ogden Courts, one of the a 76 percent equity investment from
opportunity funds can turn a project city’s more troubled public housing PNC through the PNC Opportunity
with a financing gap into a project developments. When complete in Zone Fund, 11 percent equity from
that is a viable deal. 2026, the entire project will provide the Habitat Company, 9 percent from
120,000 square feet of commercial the Chicago Housing Authority, and
10 Community Developments Investments4 percent from third-party equity effective transportation for residents affordable housing. The hope is that
investors. PNC also provided a $3 to and from Center City. stricter program guidance will be
million construction/term loan and The project’s total development issued that balances the needs of the
bridged a $2.5 million grant from cost of $12.8 million will be funded residents with the need to advance
the city, with the Chicago Housing through a 62 percent investment from greater economic opportunity for all.
Authority contributing the land. the PNC Opportunity Zone Fund; a Another observation is that there is
2120 East York Street in 20 percent long-term loan from PNC; great variance in the marketing and
Philadelphia: This project is and 18 percent developer equity from knowledge sophistication among
located in the East Kensington several sources. The opportunity opportunity zone leaders. In some
neighborhood in the River Wards zone structure provides significant places, such as Erie, Pa., and across
section of Philadelphia. Like many cash flow savings that make the deal Alabama, there is a collective effort
industrial sections of older cities, feasible, while the opportunity zone for opportunity zone leaders to
this neighborhood has had a few tax benefits have attracted a silent market the region in a way that will
different lives. In its heyday, the investor to contribute alongside PNC, attract the right blend of resources
area was bustling with nautical strengthening the financial aspects of and private investors and engage
industries such as ship builders and the project. in redevelopment efforts that are
commercial fishing. It transitioned As an early investor in QOFs, consistent with community plans.
to iron and steel manufacturing, PNC approaches its investments In other places, there is little to
then textiles. Neighborhood decline in opportunity zones with real-life no evidence that communities
began in the 1950s when the large experience. Initially, as we attended recognize the time-sensitive nature
industrial buildings gradually forums to learn more about this of the opportunity zone program
emptied, jobs went elsewhere, and new program and funding resource, and opportunities for attracting
residents struggled to find new reactions to the program felt like new investment for redevelopment.
work. This decline continued for the tale of two cities. Many private Perhaps the time period for the
many years. Today, East Kensington developers wanted to learn how the opportunity zone tax incentive
is experiencing significant program would help to maximize should be extended. Doing so would
redevelopment and a resurgence in their tax savings, while community allow for substantial, thoughtful,
population and vibrancy. developers were looking for truly transformative neighborhood
Philadelphia’s Master Plan calls for investors to help revitalize their revitalization to come to life with
more transit-oriented housing in the communities in a way that responded the help of private investors who
East Kensington neighborhood. The to neighborhood needs. With time, appreciate the personal satisfaction,
PNC Opportunity Zone Fund will we are hopeful that these two groups as well as the financial return, that
finance a development consisting may combine their interests into comes with responsible investing in
of 56 apartments for workers with projects that PNC can support. low-income communities.
moderate or middle incomes. PNC has observed that not all For more information, contact
Consistent with the city’s plan, the proposed opportunity zone projects Cathy Niederberger at Cathy.
developers will build a mixed-use meet its funding standards. Some Niederberger@pnc.com.
project with commercial space on projects that we have reviewed, for
the ground level and workforce example, did not satisfy the bank’s
housing on the upper levels. In this Disclaimer: Articles by non-OCC
requirement for QOFs to have a
project, workforce housing units will authors represent the authors’ own
community development purpose,
be available to persons earning 80 views and not necessarily the views
while others had projects that were
to 100 percent of the area median of the OCC.
early in the planning stages and
income and who are paying no more not far enough along to meet the
than 30 percent of their income for program’s timeline. And while
housing. The project is located within PNC maintains a varied pipeline,
the city’s multimodal transportation I’m happy to see that the proposed
system for providing easy and cost- transactions are mostly, if not all,
January 2021 11Measuring the Impact of Qualified Opportunity
Fund Investments
Letty Ann Shapiro, Community Development Expert, OCC
B
anks can view opportunity investors, researchers, policymakers, The framework recommends
zone investing in two and other stakeholders. The goal collecting, tracking, and reporting
ways—as an attractive was to craft strategies for ensuring on basic transaction-level data,
tax-advantaged investment and as that opportunity zone investments which enables measurement of the
a new community development result in long-term, meaningful, and economic and social impacts of QOF
tool to make a positive social and inclusive community and economic activities. Transaction-level data
economic impact in communities development. This work resulted in include the size and location of the
they serve. With careful planning and the formation in June 2019 of the investment property; identification of
implementation, banks may ensure Opportunity Zones Investor Council. commercial tenants; and the type of
both views come true. The council’s 15 original members qualifying property.
included investors, developers, and In addition, the reporting framework
To ensure positive, long-term
fund managers who debated ways recommends that projects collect the
economic and social impacts and
to positively affect the nation’s following data:
avoid unintended consequences,
opportunity zones; cross-pollinate
banks such as Woodforest National • Net new jobs created.
best practices; and develop new
Bank, and other investors, adopted • Net new employees hired and
models for community investment.
the Guiding Principles and Reporting maintained.
Framework for Opportunity Zones The framework’s five guiding • New entrepreneurs (including
(OZFramework) with the goal principles for qualified opportunity whether they are women-owned
of maximizing the social impact funds are as follows: or minority-owned enterprises and
and economic returns from their • Community engagement: first-time businesses).
investments in qualified opportunity Integrate the needs of local • Housing units built or renovated,
funds. communities, including low- including those identified as
The Beeck Center for Social Impact income and underserved affordable housing.
and Innovation at Georgetown communities, into the formation Adopting the OZFramework can
University developed these guiding and implementation of how the help banks, and other investors in
principles and reporting framework capital will be used and the types qualified opportunity funds, measure
for opportunity zone investing of projects funded. the impact that fund-financed projects
in partnership with U.S. Impact • Equity: Seek to generate equitable are having on their communities.
Investing Alliance and the Federal community benefits, leverage other
available incentives, and aim for For more information, contact Letty
Reserve Bank of New York. The
the funds’ responsible exits from Ann Shapiro at LettyAnn.Shapiro@
partnership began in 2018 and
the communities. occ.treas.gov.
released the framework in February
2019. The framework is designed to • Transparency: Engage in practices
help banks and other investors ensure that are transparent, accountable,
that their opportunity zone capital fair, and clear.
addresses the economic barriers • Measurement: Monitor, measure,
facing low-income and underserved and track progress against expected
communities. impact objectives.
• Outcomes: Apply and track
To develop the OZFramework, the
both quantitative and qualitative
partners convened training and work
metrics to assess real changes in
sessions with over 50 organizations
communities over time.
representing community development
12 Community Developments InvestmentsWoodforest CEI-Boulos Opportunity Fund
T
he $20 million Woodforest
CEI-Boulos Opportunity Fund
is a collaboration between
Woodforest National Bank and CEI-
Boulos Capital Management LLC.
The fund invests in high-impact
commercial real estate projects located
in opportunity zones throughout
Woodforest’s 17-state footprint.
Many of the fund’s portfolio
investments represent collaborations
between various entities (local
developers, nonprofit organizations, Rhaglan Hospitality
local and state government, The historic St. James Hotel, which is undergoing renovation, sits on the
riverfront near the historic Edmund Pettus Bridge in Selma, Ala., in 2020.
philanthropic institutions, banks,
community development financial
New York (see “Measuring the support Selma’s growing civil rights
institutions, community-based
Impact of Qualified Opportunity tourism industry and provide new
organizations, and private
Fund Investments”). jobs for the city’s residents. The hotel
investors) that share a common
One of the fund’s investments is is a block from historic Edmund
vision for their community. All
financing the restoration of the Pettus Bridge, one of the most well-
projects are measured against
historic St. James Hotel in Selma, known landmarks of the civil rights
the Opportunity Zone Reporting
Ala. The project will convert a movement, and near the National
Framework, developed by the U.S.
neglected asset that is central to this Voting Rights Museum and Institute
Impact Investing Alliance, the Beeck
rural community’s rich history into a and other attractions. The long vacant
Center at Georgetown University,
Hilton-branded hotel. The hotel will downtown hotel is expected to open
and the Federal Reserve Bank of
in fall 2020.
January 2021 13Intermediary-Sponsored Opportunity Funds
Seek to Deliver Community Impact for Investors
Letty Ann Shapiro, Community Development Expert, OCC
N
ational banks and federal and people. By
savings associations working with
(collectively, banks) may government,
benefit when investing in opportunity foundations,
zones by working with intermediaries and for-profit
to identify the right opportunity companies that
zone investment, choose a qualified have resources
opportunity fund (QOF), and engage and capital and
in proper project management. with residents and
local institutions
Local Initiatives Support Corporation
who understand
(LISC) and Enterprise Community
local needs, LISC
Partners (Enterprise) want to help
helps to form LISC
banks make the right choices. For Washington, D.C., Mayor Muriel Bowser (in red scarf), and
partnerships with
more than 35 years, each has worked other local leaders at the 2019 groundbreaking ceremony
stakeholders that
with banks on community and for LISC’s MLK Gateway project in the Anacostia
encourage LMI community.
economic development initiatives in
communities to
low- and moderate-income (LMI)
grow and prosper. Over the years, funds total $2.3 billion and cover 924
communities.
LISC has focused its financing and designated opportunity zones across
LISC and Enterprise seek to expertise in a variety of community the country.
deliver measurable returns to banks development activities, such as George Ashton III, Managing
and other investors interested in affordable housing development, Director of Strategic Investments at
making significant, sustainable, and creative placemaking, education, LISC, describes LISC’s approach
measurable impacts with opportunity small business finance, charter to opportunity zones as helping
zone investments in distressed schools, and food- and health- to address two typical challenges
and LMI communities. In their related projects that improve the in underserved communities:
separate ways, LISC and Enterprise quality of life for residents in LMI (1) minimizing gentrification
are demonstrating how to work communities. and displacement by entering
with communities, investors, and
Through its 35 local offices, communities early and ahead of for-
stakeholders in structuring QOFs that
rural teams, and national affiliate profit developers; and (2) structuring
achieve the highest impact for these
companies, LISC has invested financing that is adequate to support
communities.
over $20 billion in grants, loans, short- and long-term economic
Local Initiatives Support and equity in community projects growth and opportunity. In addition,
since 1979.29 These funds have LISC focuses on projects that have
Corporation
leveraged $64.8 billion in community multiple uses, for example, mixed-
The Ford Foundation formed LISC
development capital investments use buildings that provide both
in 1979 as an intermediary nonprofit
to create nearly 420,000 affordable affordable housing and space for
organization. The mission was to
homes and apartments and 70 million small retail businesses. LISC has
connect public and private resources
square feet of commercial, retail, and developed a four-pronged strategy for
with underinvested communities
community space. LISC’s existing its work in opportunity zones.
29 The national affiliate companies are New Market Support Corp., National Equity Fund, and Immito. New Market Support Corp. facilitates investments in new
markets tax credit projects, and National Equity Fund facilitates investments in low-income housing tax credits. Immito is a new small business lender launched by
LISC in 2018 to encourage economic development and community development. Immito is a licensed and approved nonbank Small Business Administration lender.
14 Community Developments InvestmentsFirst, LISC serves as an initial impact MLK Gateway
investor and supports other impact I, a $23 million,
investors by raising, deploying, and 34,000-square-
managing investor equity. LISC foot commercial
has aligned itself with QOF equity development
investors that are not just looking with space for
for measurable returns but additional a coffee shop, a
deep, sustainable impact. training academy,
Second, LISC works with socially and potentially a
motivated project developers to bank, grocery, and
identify and manage projects that restaurant. HSBC
have short- and long-term benefits Bank worked with
to residents of opportunity zone LISC to support a
communities. As Mr. Ashton pre-development
explains, “developers are where the loan, and the
magic happens.” LISC’s qualified project includes
LISC
opportunity funds finance projects PNC Bank as a
Construction site for LISC’s MLK Gateway project in the
at the intersection of community senior lender and Anacostia community in Washington, D.C.
development and private equity, an investor in
with experienced developers who the project’s new opportunity zones. The consortium
want to build projects that provide market tax credits. City First Bank comprises banks, including First
affordable housing, services, and of D.C. also will be a lender for the Financial Bank, Old National Bank,
permanent jobs for residents. A bank project. PNC Bank, and Regions Bank,
may consider participating with LISC Third, LISC brings together state agencies, and other corporate
by using its capital gain proceeds organizations and stakeholders partners. Along with LISC, the Fifth
to make an equity investment in a who are committed to community Third Foundation has provided a
LISC-sponsored QOF. A bank may revitalization and shared prosperity grant to support the consortium’s
also consider providing a loan to a for residents of LMI communities. development. The consortium hosts
local developer of a specific LISC LISC brings together community an online portal to aid in matching
opportunity zone project. development corporations and opportunity zone projects in need of
One of LISC’s first QOF partnerships institutions, local and state funding to potential investors. The
is the eMpower Anacostia Fund governments, community residents targeted outcomes of these projects
(EAF), the first fund exclusively and leaders, and other organizations are to support jobs, transform
targeting Washington, D.C.’s historic to develop strategies. The resulting places, support businesses, and drive
Anacostia neighborhood. EAF is strategies identify resources, needs, innovation.
encouraging positive social impact and opportunities in the community. The fourth prong pertains to
by developing inclusive, mixed- These meetings enable LISC to knowledge sharing with the broader
income neighborhoods. LISC will design projects that are consistent community. Qualified opportunity
be tracking the success of workforce with the community’s needs, funds managed by LISC will collect
tenants through savings account strengths, and understanding of social data on the social impact of the
growth, reduction in debt-to-income impact. projects for investors and include
ratios, and overall long-term financial For example, LISC created and tools for measuring change. LISC’s
stability. In addition, LISC will convened the Opportunity Investment six-step playbook offers guidance
be providing leasing preferences Consortium of Indiana, which for opportunity zone stakeholders
to female, minority, veteran, and was launched in November 2018. seeking to make inclusive, equitable
immigrant-owned businesses that The consortium was established community development investments
will occupy the street-level retail to help implement impactful real in qualified opportunity funds.
space. EAF’s initial project is the estate transactions in Indiana’s 156
January 2021 15Enterprise Community
Partners
Enterprise has been bringing together
expertise, private and public sector
partners, policy leadership, and
investments for more than 35 years.
Its mission is to create opportunities
for LMI individuals through
affordable housing in diverse,
thriving communities. Enterprise
has deep roots working with private
developers and has developed strong
relationships with investment fund
managers and potential financial whatnowatlanta.com
partners, including banks, community Architect’s rendering of the affordable housing units planned for Parkside at
development financial institutions, Quarry Yards in Atlanta. The development, planned by Enterprise Community
Partners, with opportunity zone fund financing, will have access to the Bankhead
philanthropic organizations, and Marta rapid transit station, the Proctor Creek Greenway Trail, as well as the
local government agencies. Since Atlanta BeltLine’s Westside Trail.
1982, Enterprise has created almost
585,000 homes and spent $43.6 capital strategically to structure Enterprise recognizes that not all
billion on community development financing that is appropriate for opportunity zone projects are alike.
projects and program development. real estate transactions in LMI As Will Lambe, Director of Capital
Enterprise is actively involved in communities, which may involve Solutions at Enterprise, puts it,
opportunity zone financing and multiple funding sources due to the “If you’ve seen one opportunity
development with two qualified need for deeper subsidies. Enterprise zone project, you’ve seen one
opportunity funds (QOF). The first is encourages banks to support opportunity zone project.” Mr.
the Enterprise Opportunity Fund, an opportunity zones, both as investors Lambe understands the potential for
internal proprietary fund. The second in QOFs as well as providing loans unintended consequences if QOF
is an external fund called Rivermont to specific projects. For projects that managers have a sole focus on profit.
Enterprise Emergent Communities are especially challenging, such as He believes that QOFs should help
Fund. As impact investing vehicles, housing that is affordable for persons to address community needs, such as
these funds are expected to generate earning less than 80 percent of by increasing housing affordability,
both responsible returns for investors area median income, the Enterprise improving community resilience
and equitable and inclusive economic Opportunity Fund may use low-cost by providing needed services,
growth that can create economic financing provided by government and improving economic mobility
mobility for LMI communities. As programs, such as 4 percent tax credit with mixed-use developments.
sponsor of the fund, Enterprise’s bonds. Enterprise advises that a bank Enterprise implements its philosophy
role is to identify community seeking Community Reinvestment through the design and operation
development projects, including a Act (CRA) credit for its qualified of its QOFs, which have a double
pipeline of investment-ready projects opportunity fund investment should bottom line of both providing a tax
in designated opportunity zones, and carefully consider a fund’s strategy reduction incentive for investors
manage the QOF’s assets. for selecting projects to ensure they and providing positive economic
meet the CRA qualifying activity and social outcomes for underserved
Banks are typical investors in
criteria and the bank’s geography- communities.
the Enterprise Opportunity Fund.
based goals, if applicable. The For example, the goal of the
Generally, the fund seeks to deliver
strategy is typically described Emergent Communities Fund
returns consistent with the project’s
in a fund’s legal documents and is to spur economic growth by
risk. Enterprise uses the fund’s
prospectus. revitalizing emerging communities
16 Community Developments Investmentsand supporting local entrepreneurs. to include retail space, a hotel, and Enterprise was invited to participate
The Emergent Communities Fund expansive green space, all within on the Opportunity Zone Investor
identifies projects and offers walking distance of the public rapid Council, a group of fund managers,
financing for main street projects transit line. Further expanding the investors, and developers working
across small cities and towns in emerging community will be the in opportunity zones across the
the Southeast United States, with newly announced Microsoft Atlanta country. The Opportunity Zone
initial targets in North Carolina and campus, which is planned across the Investor Council aims to think, act,
Virginia. The Emergent Communities street from the Parkside at Quarry and collaborate in new ways with
Fund plans to finance mixed-income Yards complex and is expected to the assistance of tools, experts,
projects with a secondary component, bring 1,500 jobs to the neighborhood. and the collaborative thinking
such as retail space, a health facility, Enterprise believes that QOFs supported by the Beeck Center
or food provider located in an should establish parameters for and the OZFramework. The goal
underserved or distressed community. assessing how funded projects will is to provide meaningful public
The Emergent Communities Fund achieve positive social impact. The transparency and accountability
may also finance the development of Beeck Center for Social Impact based on proactive partnerships
workforce housing that is affordable and Innovation at Georgetown between communities and investors.
to teachers, nurses, firefighters, and University, the U.S. Impact Investing Enterprise has included the
similar professionals who earn 80 to Alliance, and the Federal Reserve OZFramework in each of its
120 percent of area median income. Bank of New York worked together opportunity zone funds and will
“The space for financing alternatives and developed the Opportunity report data based on the Beeck
and tools to address the community Zones Reporting Framework, which Center’s framework. Enterprise hopes
and economic development needs in provides core community and that its use of the OZFramework
connection with opportunity zones is economic development principles will encourage other QOF managers
still developing,” according to Sarah for measuring an opportunity zone to replicate the process as well as
Brundage, Senior Director of Public project’s outcome.30 influence potential investors. Ideally,
Policy at Enterprise. data collected on opportunity zones
Specifically, the framework includes
One of the first investments by a mission statement and an overview will help demonstrate, through
the Emergent Communities Fund of objectives the QOF seeks to industry-wide impact assessments of
was made in the summer of 2020. achieve, including opportunity zone fund investments,
Enterprise was able to bring a that disinvested communities can
combination of QOF investments • expected outcomes of projects benefit from this source of capital in
and low-income housing tax credits undertaken by the fund, such as well-planned projects and create a
to the Parkside at Quarry Yards, a jobs created, and descriptions of win-win for all stakeholders.
182-unit affordable rental project the data gathering and assessment
tools that the fund will use. Visit the LISC and Enterprise
in Atlanta. The development will websites for more information on
feature computer and community • data analysis, which will
demonstrate how a fund’s their work in opportunity zones.
rooms, an exercise room, a wellness
center, and outdoor playground and projects have helped to address For more information, contact Letty
picnic area. The development is part local community and economic Ann Shapiro at LettyAnn.Shapiro@
of a multiphase master plan development needs. occ.treas.gov.
30 Refer to the article titled “Measuring the Impact of Opportunity Zone Investments” in this edition of Community Developments Investments.
January 2021 17You can also read
