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Revisiting Opportunity Zones: A Call for Reform in Support of Small Business Investment

While the original intent behind Opportunity Zones (OZ) was to stimulate entrepreneurship and channel investments into small businesses in economically disadvantaged areas across the United States, a significant portion of the capital has unfortunately been funneled primarily into real estate ventures. This misalignment raises critical questions about how effectively the program serves its intended purpose.

Insights from Jonathan Goldstein of Advantage Capital

Jonathan Goldstein, who is the managing director at Advantage Capital, joins this crucial discussion to explore several targeted legislative modifications that could finally steer the OZ incentives back toward supporting operating businesses, especially in rural and underserved areas of the country. With his extensive experience in impact investing, Goldstein’s insights could prove invaluable in reorienting the Opportunity Zones program.

Watch the full discussion here.

About The Opportunity Zones Podcast

Hosted by Jimmy Atkinson, the founder of OpportunityZones.com, The Opportunity Zones Podcast features an array of guest interviews with fund managers, advisors, policymakers, tax experts, and other leading authorities in the Opportunity Zones sector. This dynamic platform aims to illuminate the complexities and prospects of OZ investments.

Listen to the Latest Episode

Listen to the latest episode here.

Episode Overview

In this enlightening episode of The Opportunity Zones Podcast, Jimmy Atkinson and Jonathan Goldstein delve deep into potential reforms that align with the foundational mission of the Opportunity Zones initiative—namely, to drive investment in operating businesses located within underserved areas, including rural regions. Their discussion gains urgency in light of Congress’s ongoing legislative reform efforts; notably, the House has already passed a reconciliation bill integrating OZ 2.0 provisions, while the Senate gears up to draft its own legislation.

Advantage Capital: Pioneering Impact Investment

Jonathan provides a compelling overview of Advantage Capital, a trailblazer in impact investing for over three decades. This forward-thinking firm specializes in directing capital to small and mid-sized businesses that frequently find it challenging to secure financing through traditional means. Since its inception, Advantage Capital has facilitated investments exceeding $4.5 billion across more than 1,000 businesses, generating over 77,000 jobs with average salaries surpassing $59,000. This remarkable achievement has delivered substantial economic benefits to distressed areas.

Notably, the firm has invested nearly $900 million specifically in rural communities, creating over 17,000 jobs and attracting approximately $1.3 billion in additional private capital. Their investment strategy effectively blends public-private incentives, incorporating not just Opportunity Zones, but also New Markets Tax Credits and various state-specific programs to direct capital where it is most critically needed.

The Underperformance of Opportunity Zones in Rural Areas

Despite the intention for Opportunity Zones to serve both urban and rural communities, only a mere 8% of OZ capital has successfully reached rural tracts, which constitute roughly 23% of all designated zones. This stark disparity highlights significant systemic barriers within OZ legislation that disproportionately inhibit rural and small-town businesses, especially those lacking a real estate development focus.

Jonathan emphasizes the sentiments expressed at the Opportunity Zone Policy Summit held in Washington, D.C. During the event, which was hosted by Sen. Tim Scott’s Great Opportunity Policy Inc., there was a palpable bipartisan support advocating for reforms aimed at increasing small business investments. Key figures also included HUD Secretary Scott Turner and representatives from Secretary Bessent’s team, all endorsing efforts to make Opportunity Zones more inclusive of business investments.

Addressing the Existing Flaws

Jonathan identifies two major technical shortcomings in the current Opportunity Zone framework that effectively exclude most operational businesses from obtaining OZ equity:

1. Interim Gains and Reinvestment Penalties

Existing legislation imposes challenges on business investments—particularly in sectors like venture capital, manufacturing, or services—that require shorter holding periods and liquidity events. Under the current law, if an OZ fund exits an investment prematurely, investors must recognize capital gains on the sale, eliminating the 10-year tax-free growth incentive unless the entire fund is liquidated.

According to Jonathan, this structure disincentivizes capital recycling, jeopardizing the economics of portfolio investments. He advocates for a legislative remedy that allows funds to reinvest proceeds from interim exits without resetting the 10-year timeline, thus preserving the full OZ benefits for long-term investors.

2. The "Good Assets" Test

To qualify as an OZ business, a minimum of 70% of a company’s tangible assets must adhere to rigorous criteria, such as being acquired post-2017, substantially improved, and actively used within the designated zone. Unfortunately, many existing small businesses—particularly those already established in these communities—fail this test due to legacy assets or prior ownership structures.

Jonathan illustrates this issue with the example of a rural manufacturer that would need to triple its asset base merely to meet compliance, simply because its equipment was purchased before the Opportunity Zone program’s initiation. He proposes the elimination of this arbitrary test, advocating for a more reasonable standard: that capital must genuinely flow into the business rather than be misallocated for affiliate buyouts or windfalls for owners.

Immediate Practical Solutions, Not Expansion

Importantly, Jonathan emphasizes that these proposals are not predicated on expanding Opportunity Zones but rather on revitalizing the existing framework to fulfill its original purpose. Advantage Capital is not seeking new loopholes or speculative perks; instead, they are advocating for straightforward modifications—namely, interim gain relief and the removal of the asset test—that could unlock thousands of business investments already aligned with the intent of the program.

He further articulates that these changes can be enacted with minimal financial burden and without complicating IRS enforcement—an appealing proposition for lawmakers aiming for bipartisan victories in a tightly contested political climate.

The Urgency of Now

The time to act is critical. With the House bill already passed, the Senate is poised to craft its own OZ 2.0 provisions. Jonathan urges stakeholders—including fund managers, Community Development Financial Institutions (CDFIs), and mission-driven investors—to take proactive measures by engaging with legislators to advocate for these essential reforms.

These moderate changes could reposition Opportunity Zones as more than just a vehicle for real estate; they could evolve into a national engine for entrepreneurship, manufacturing, and the creation of middle-class jobs within communities that have suffered from persistent underinvestment.

Leveraging AI legalese decoder for Clarity

In navigating the complexities of Opportunity Zone legislation, stakeholders can greatly benefit from tools like AI legalese decoder. This innovative platform demystifies legal jargon, making it easier for fund managers, community leaders, and investors to understand the implications of proposed reforms. By providing accessible clarity on legislative documents and insights into the policy landscape, AI legalese decoder empowers stakeholders to engage more effectively with legislators and advocate for meaningful changes in the Opportunity Zones framework.

By leveraging such tools, stakeholders can better articulate their needs and drive forward the conversation about reforming Opportunity Zones to support sustainable investment in the communities that need it most.

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