The Potential Role For CDFIs in the Opportunity Zones of the Investing in Opportunities Act (IIOA)

Opportunity Zones (“Op-Zones”) are likely to bring a material amount of capital investment into low-income communities. The intent is to encourage investment as much as it can. This encouragement is in the statutory structure and language as well as the propagated rules to date: The regulation is light, the penalties are modest and the barriers to entry are minimal.

The general view is that the structure, combined with its short turnaround time, will favor Qualified Opportunity Funds (“QOFs”) involving single asset real estate investments at magnitudes of $50 million or more, where the operating risk is low, the potential for appreciation is high, and the exit strategy is clear. There will also be QOFs with multiple asset real estate investments involving commingled funds (“Co-Funds”) that bring risk diversification and a wider range of size and asset class. These Co-Fund QOFs are likely to carry the same attributes as the single asset QOF, though further clarification of the rules is needed for enthusiastic adoption of this strategy. It is generally thought that the bulk of the market-based investors who engage in Op-Zone investments will minimize credit and term risk, by cashing out of the investment at the earliest point at which they can make the highest return. Thus the bulk of the activity is likely to occur outside of the higher risk, smaller, less profitable and more community oriented projects and investments that the CDFI sector has traditionally pursued.

In the context of these market inclinations, it will be difficult for most CDFIs to perform the role of the owner and manager of the Qualified Opportunity Zone Funds (QOFs). The five primary challenges are (1) the complexity; (2) the need for scale; (3) the difficulty of exit strategies; (4) the unfamiliarity of the investing public with CDFIs as counter-parties for equity risk; and (5) CDFI experience with market equity instrument.

However, there are still roles for CDFIs to play which will facilitate Opportunity Zone investment in their communities, and which could generate revenue for the organization. These roles include: (1) origination of suitable transactions; (2) facilitation of transactions with community leaders and officials; (3) due diligence; (4) provision of senior or subordinated debt to a transaction in order to fill a gap; and/or (5) syndication of the financing portion of the transaction together with provision of expertise in certain financial products. CDFIs should also be attentive to federal rule clarifications aimed at facilitating QOF investment in operating businesses and venture capital investments and the extent to which these can be “twinned” with guarantee and debenture programs at the SBA and USDA in particular.

Although there are impediments to the CDFI performance of the QOF role, and although managing an equity fund on behalf of investors falls outside of the traditional CDFI financial tool kit, there are several ways in which CDFIs can participate in raising and deploying capital