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Opportunity Zones Are a Great Investment. But They Need Verifiable Oversight

The best way to protect Opportunity Zone investors’ funds, their tax benefits, and their loyalty is through verifiable oversight.

The City of Miami recently received great news: two affordable housing projects are in the works and both are located in Opportunity Zones.

Since its inception in 2018, the Opportunity Zone initiative has continued to do the good it’s intended to do. Miami’s latest OZ news is just one of many examples that show the social impact and progress the initiative is making across the country.

As it happens, Opportunity Zones are needed more than ever, especially since they will play a major role in the country’s economic revival in the wake of COVID-19. The presidential election in November is also coming up and the bi-partisan-approved OZs will be part of both parties’ discussions and talking points.

In fact, while this initiative is a tremendous investment opportunity for investors to defer and reduce capital gains taxes, the biggest benefit is the economic and social impact each project will bring to distressed neighborhoods. Now, investors and fund managers just have to show it.

What young investors should do to wisely make a difference

“The future looks even brighter for impact investing when you consider that 95 percent of millennials are interested in impact investing and that by 2025, millennials are expected to make up about 75 percent of the American workforce,” according to CoPeace, an impact investing holding company. CoPeace also reported that environmental, social and governance (ESG) assets have grown 274 percent since 2012, and that investments that take into consideration ESG factors now stand at $12 trillion as of 2018.

It is understandable why investors want to align their personal values with their investments, but they should do so wisely and with as much protection as possible.

From the start, new fund managers should implement audit best practices. Not only will this save time during regulatory inquiries, but solid auditing can strengthen marketability with potential investors. The OZ initiative has many stakeholders and is tax-centric, which could lead to more complex tracking and reporting requirements than with traditional funds. All material information must be made accessible to all relevant stakeholders—with verifiable audit trails—as and when needed.

Investors naturally want to know where their money is, what it’s doing, and when it is being invested into a qualified Opportunity Zone property or business. They also want to be confident that the fund is complying with relevant milestones. The best way to protect their funds, their tax benefits, and their loyalty is through verifiable oversight—preferably via a user-friendly portal.

Measuring social impact dollar by dollar and in real time

Currently, there are no requirements embedded in the law to track or report on social impact. NES Financial, a JTC Company, has been vocal about why impact reporting is key for the future of Opportunity Zones.

There is a huge push by Sen. Tim Scott to establish reporting requirements for the Opportunity Zones initiative. This type of reporting is an important step for OZs to ultimately be recognized as having been successful.

According to Howard W. Buffett, president of Global Impact, from a “moral perspective, tracking impact is the right thing to do because of the potential benefits to project management that may further improve community conditions. However, there are also clear business incentives to take impact measurement and management seriously at the project level, at the fund level, and even at the investor portfolio level.”

Buffett, who is also a professor at Columbia University, recognized the need for a customizable reporting tool that would effectively measure the quality and quantity of impact delivered by a project on a per dollar basis. As such, he developed Impact Rate of Return, or iRR, as an innovative approach to performance measurement and management. iRR, whose formula is modeled after the calculation for net present value, enables organizations to calculate how efficient their financial allocations are at accomplishing social impact in Opportunity Zones.

Impact reporting is fundamental to the success of OZs. When paired with an online, user-friendly portal, investors and fund managers alike can track impact in real-time across multiple projects, while ensuring the protection of their capital.

This is a critical moment for Opportunity Zones. Securing this vital initiative’s ongoing success, however, will require investor-friendly online platforms and comprehensive impact measurement.

Reid Thomas serves as chief revenue officer and managing director for the U.S. division of JTC Group, where he is responsible for the management and strategic direction of the organization, including NES Financial’s technology-enabled EB-5, 1031, private equity, and Opportunity Zone fund administration.

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