New Opportunity Zone program could help banks meet CRA requirements

SEEKING INVESTMENT: Inclusion in the nationwide Opportunity Zone program could mean an influx of new investment and development for regions of the state deemed low-income census tracts. Each of the 25 Rhode Island tracts, the maximum nominations allowed by each state, has a greater-than-27 percent poverty rate. Investors in the program – who could fund everything from startups and business expansions to real estate deals – will be eligible for tax benefits. / SOURCE: R.I. COMMERCE CORP.
SEEKING INVESTMENT: Inclusion in the nationwide Opportunity Zone program could mean an influx of new investment and development for regions of the state deemed low-income census tracts. Each of the 25 Rhode Island tracts, the maximum nominations allowed by each state, has a greater-than-27 percent poverty rate. Investors in the program – who could fund everything from startups and business expansions to real estate deals – will be eligible for tax benefits. / SOURCE: R.I. COMMERCE CORP.

Included in the 2017 $1.5 trillion federal tax overhaul heralded by President Donald Trump and passed by Congressional Republicans was the Opportunity Zone program.

Encouraging investment in and economic development of low-income census tracts across the nation, the new initiative may also provide banks with a different method through which to meet the requirements of a second federal program, the Community Reinvestment Act.

Enacted in October 1977, the Community Reinvestment Act was designed to curtail discriminatory investment practices by banks against low-income neighborhoods, commonly referred to as redlining. As a result, the Community Reinvestment Act requires the banking and finance sector to comply with a set of regulations that encourage such institutions to become more financially involved within their local communities.

Credit unions are not included among those institutions that must comply with the 41-year-old Community Reinvestment Act.

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One local law firm, Locke Lord LLC, with an office in Providence, feels this is a smart-move translation of the Opportunity Zone program for the banking and finance sector. For the benefit of its clients, the firm is organizing a seminar, planned for mid- to late January, to introduce the details of the Opportunity Zone program and, among other subjects, the possibility of tax benefits on such investments that also meet Community Reinvestment Act requirements.

With possibilities of increased employment, a rise in salaries and increased statewide economic development, Christopher D. Graham, office managing partner at Locke Lord in Providence, said the firm was “very interested” in what he called a “multifaceted opportunity.”

While the 25 low-income tracts nominated by the Rhode Island state government for inclusion in the nationwide initiative were approved in May, the latest regulations detailing the workings of the Opportunity Zone program were released in late October.

While many local banks are supportive of the idea to utilize Opportunity Zone projects to meet their Community Reinvestment Act requirements, given the recency of the materials’ publication they say it is too early to comment on formal plans to do so.

Patricia Octeau, executive director of the Rhode Island Bankers Association, is one such banking finance sector leader.

In an emailed statement from late October, she said: “With the IRS publishing regulations for Opportunity Zones only last week, the banking industry is in the process of analyzing the regulations and evaluating how best to participate in the [Opportunity Zone] program.”

Similarly, BayCoast Bank’s Chief Operating Officer James Wallace is also “reviewing the feasibility of selling marketable equity securities and investing these funds in an Opportunity Zone fund.”

A proponent of the utilization of the Opportunity Zone program as a method to meet Community Reinvestment Act requirements, Wallace said the benefits were “two-fold.”

Explaining that banks would simultaneously see tax benefits from participation in Opportunity Zone projects while choosing to “support projects that would develop a long-term investment for the betterment of the local community,” he called the idea a “win-win” for the banking and finance sector.

Previous Community Reinvestment Act projects, explained Wallace, did not allow for a return on investment as laid out within the Opportunity Zone program.

In fact, Wallace added, “A lot of times, when we see a [Community Reinvestment Act] investment, we’re typically going to lose money. Here, [that’s not the case].”

Enthused by the possibility of a return on local economic-development investment, Wallace admitted, “This is brand-new and I’m not sure everyone is aware of it.” Regarding implementation moving forward, he added, BayCoast hasn’t fully fleshed out its participation yet, but he expects other local banks will be similar proponents of the idea.

The timeliness of this venture is why Locke Lord is acting now.

Reacting to activity witnessed among Locke Lord officers in other states, Karen Grande, a partner at Locke Lord in Providence, said the local office “is trying to kick things into higher gear.”

To date, Locke Lord has aided in the investment of Opportunity Zone projects for clients in multiple states, including New Jersey, Missouri, Texas and California.

Advocating for local adoption, Grande said, “Banks and financial institutions are always looking for ways to earn reinvestment credits and this is a good way to do it.”

However, Todd Cooper, a Locke Lord public finance and tax group partner out of the Boston office, warned against jumping in too quickly.

Yes, investment in Opportunity Zone projects can help meet Community Reinvestment Act requirements, but “you don’t want to reduce your tax burden by making a bad investment,” he said.

Ensure the projects in which investment is considered are “viable,” he added. For example, one project a Locke Lord client was advised to take on features diversion of certain materials from a rural landfill in southern Ohio.

Emily Gowdey-Backus is a staff writer for PBN. You can follow her on Twitter @FlashGowdey or contact her via email, Gowdey-backus@PBN.com.