The chairman of the Senate Finance Committee recently launched an investigation into the Opportunity Zone (OZ) program, publicly questioning whether the years-long federal tax incentive has been benefitting only rich developers and not America’s low-income communities.

Sen. Ron Wyden (D-Oregon) announced his intentions Thursday, along with a statement that he has “long been concerned that the Opportunity Zone program may permit wealthy investors another opportunity to avoid billions of dollars in taxes.”

Wyden also questioned the accountability of the OZ incentive and whether the law ensures that taxpayers “are not simply subsidizing high-end real estate investments by billionaires without demonstrating the benefit they are providing to low income-communities they claim to help.”

Who Wyden’s investigation is targeting in the Opportunity Zone industry

The OZ program — a key component of President Trump’s signature Tax Cuts and Jobs Act of 2017 and bipartisan approved — was promoted as encouraging business opportunity in under-served areas throughout the United States in exchange for federal tax benefits.

Wyden’s investigation has initially targeted several key players in the OZ industry: SkyBridge Capital, Baker Tilly US, Cresset Partners, Hatteras Sky, PTM Partners, Related Group and Shopoff Realty Investments.

In letters sent to high-ranking executives at those firms, Wyden asks for a plethora of information about their business activity, including: their OZ projects, job creation numbers, investment amounts, what tax benefits they expect to receive, whether the projects were going to happen even before the 2017 OZ law was enacted, and to which public officials the firms advocated for their OZ projects.

Wyden’s letters gives a Feb. 3 deadline.

Wyden’s letters also list several luxury projects that he points out are being unduly subsidized by taxpayers, such as a marina for a “superyacht,” luxury waterfront apartment towers and a 35-story tower in Oregon with a Ritz-Carlton hotel.

Wyden’s investigation comes after he has proposed changes to the OZ program, which would include publicly available statements to the IRS and prohibiting the development of casinos, luxury apartments and stadiums.

“According to public reports, it appears that the Opportunity Zone program is already helping subsidize luxury real estate development by wealthy developers, and in many cases will allow these investors to realize the gains on their investments completely tax-free,” Wyden said in a statement.

Reactions from Opportunity Zone professionals to Sen. Wyden’s investigation

Professionals within the OZ industry — who include developers, fund managers and attorneys — have varied reactions to Wyden’s investigation and concerns.

Steven Meier, partner at Chicago-based Seyfarth Shaw, noted how the OZ program was “among the most bipartisan elements” of Trump’s 2017 law.

Nevertheless, he added that the Senate Finance Committee “has every right to evaluate the performance of the Opportunity Zone Program in meeting the various public policy objectives it was intended to satisfy.”

However, Meier said, “The same scrutiny should be applied to all tax legislation that is designed to incentivize specific economic behaviors. It would be unfortunate and ultimately detrimental, however, if this evaluation became a ‘show trial’ of Opportunity Zone investment programs that satisfy every legal and regulatory requirement that Congress and the Department of Treasury has imposed on the program, but that have the misfortune of offending the tastes of certain elected officials.”

María de los A. Rivera, a Puerto Rico-based partner with the tax division of Grant Thornton, commented that, “Political aspects aside, I understand that the more information is gathered, the more transparency we have, the more the investment will prove beneficial to the designated Opportunity Zones. It has been four years since the approval of the benefits, and we do not have much information and data, yet. Maybe it is too early for that.”

Opportunity Zone professionals points out positive impact of the program in distressed areas

Matthew E. Rappaport, an attorney at New York-based Falcon Rappaport & Berkman PLLC, said the "Opportunity Zone world is way too diverse at this point (over three years after the proverbial boat left the water) to say whether Sen. Wyden is categorically correct or incorrect."

Rappaport added that he feels Wyden subpoenaed the wrong agencies.

"I am familiar with half the subpoena recipients, and of those half, my judgment is that all of them — without exception — are complying with the letter and spirit of the program," he said.

"And Senator Wyden has chosen a small cross-section of larger players to probe. But if Senator Wyden and his staff are seeking to prove their suspicions by cherry-picking evidence, I’m sure they can find some data to view through a suitable lens to drive their points home. That’s how politics can work in this country."

Rappaport said he doesn't predict the investigation having any significant effect.

"Unless Senator Wyden finds something shocking, I don’t see this investigation translating into action," he said, adding that "Congress has long spoken of putting more reporting requirements and guardrails into the program, and I see those happening at some point down the road. I don’t foresee any of these measures impacting investor behavior."

Clint Edgington of Nest Opportunity Fund in Dublin, Ohio, said Sen. Wyden “cherry-picking” certain high-end real estate projects “doesn’t mean we should throw out the baby with the bathwater.”

Edgington said any insistence that the OZ program benefits wealthy investors without also helping distressed communities “belies the many Opportunity Zone funds working within the spirit of the law.”

He noted Nest’s own purchases as an example: 40 residential properties in low-income neighborhoods, nearly all of which were previously vacant and are now considered affordable by local standards.

“The funds I see in our local neighborhoods are making good housing in these lower-income neighborhoods, housing that’s truly needed,” Edgington said. “With more housing comes lower rents or increased pressure on other landlords in the area to provide better services to their tenants.

“Does [the OZ program] provide a tax benefit to the wealthy? Yes. Is it mostly wealthy investors in the program? Of course. They have the money. Would [Nest] have been able to raise $10 million and invest it in these communities without it? Certainly not.”


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