Creating Long-Term Prosperity In Low-Income America Through Clean Energy #OpportunityZones
During the final moments of the Obama Administration, an idea was conceived to use financial market forces to improve low-income communities across the US. This idea turned into The Opportunity Act, a part of the Tax Cuts and Jobs Act of 2017, which became law in December of 2017.
As a result of this law, so-called Opportunity Zone financing has come to present tremendous potential in the overall impact investment space — and in the nationwide transition to clean energy in particular.
As with all investments, there is a risk and reward to this story. Much has been written about the potential downside of “O-zone financing” as it is sometimes called — with it’s substantial benefit to gentrifying developers, for example.
At New Energy Nexus, as part of our mission to support diverse entrepreneurs, we’ve decided to make the most of this new form of capital to support local clean energy projects and businesses come up in communities where it may not otherwise.
This series of articles is a transparent effort to explain our thinking and efforts and to get your feedback. Please read, respond and be in touch.
WHAT ARE THE BASICS?
Under the Opportunity Act, a capital gains investor can delay, reduce, and abolish current and future capital gains liability if the gains are invested through the proper structure over a long period of time in designated low-income areas of America.
The intent of this law is to have this new source of long-term capital revitalize these areas with positive attributes: quality, value, resiliency. We acknowledge that the controls are few, and aside from trying to ensure clean energy with local buy-in gets built, we’ve also supported smart conforming legislation by the states and by the IRS as it clarifies the way the law will be implemented.
Regardless, the net result is that the U.S. Treasury anticipates that $200 billion in private capital will be invested through this Opportunity Zone program by 2022!
There are several key opportunities (sorry for the pun!) for clean energy development in Opportunity Zones. Investors can either put money into projects or companies — and they can be doing solar, wind, energy storage, hybrid (e.g solar + storage), electric vehicle charging station infrastructure, electric vehicle fleet leasing, breakthrough heating/cooling technology, lithium mining for batteries, waste water and point-source carbon emissions repurposing technology.
In other words, there’s >$200B hitting the streets in the next couple of years, which could go to low cost financing of clean energy companies and projects in the poorest communities in the US! That’s more than almost all the other clean energy support programs in the country if we work out how to harness it.
However, there are three challenges:
a) few stakeholders are aware that the Opportunity Zone tax incentive can be used in clean energy projects and companies,
b) there is scant quality education materials for Clean Energy Investing in Opportunity Zones that can inform all stakeholders on proper use and benefits of this tax incentive, and
c) there is no simple and low-cost way for entrepreneurs and investors who are ready to bring these solutions to market to create Qualified Opportunity Zone Funds (“QOFs”), a required technical mechanism for compliant transactions.
GETTING INTO THE WEEDS
In order to benefit from the tax incentive, a business or investor must set up a QOF (Qualified Opportunity Zone Fund) through which the capital gains must pass to comply with the law. This set-up takes expertise, time and resources that social entrepreneurs and capital gains investors are often lacking or resistant to paying. In general, entrepreneurs who reside in zone communities are some of the least likely to have the resources (read: lawyers, accountants, financial advisors!) to set up QOFs — but are some of the people most likely to create solutions that will benefit these local communities.
If we can overcome these challenges, Opportunity Zone financing has the potential to be deployed in ways that transform the communities that have not recovered from the Great Recession of 2008, many of which continue to struggle with high poverty and low to negative job growth. An analysis by the Economic Innovation Group (EIG) found that 71% of Opportunity Zones meet the U.S. Department of the Treasury’s definition of “severely distressed”. In the Opportunity Zones, the poverty rate is twice the national average, with household income 40% below the national average. More than one-fifth of Opportunity Zones have poverty rates of 40% or higher, vs. only 5% nation-wide. Thirty-five million people, or 1 in 6, live in Opportunity Zones. From 2011–2015, these communities lost 6% of their net jobs.
A problem is that without making Opportunity Zone financing accessible to social entrepreneurs and impact investment, the initiative has the potential to skew towards real estate investments and more sophisticated developments that will subsidize gentrification in Zone communities. We want to solve for that while supporting clean energy entrepreneurs and investors across the country. As a result we’ve set up EZ OZ.org.
WHY EZ OZ?
EZOZ.org’s not-for-profit mission is accelerating clean energy investing in Opportunity Zones.
EZOZ.org is a program of the 15-year-old 501(c)(3) New Energy Nexus (also recently revamped from the California Clean Energy Fund) based in Oakland, CA and New York.
We will achieve our mission by connecting clean energy entrepreneurs and project developers to capital gains investors, customers and facilities in Opportunity Zones and lowering the investment transaction costs for these impact investors and social entrepreneurs.
With our highly specialized clean energy entrepreneurship tools and Opportunity Zone capacity, EZOZ.org will be able to connect entrepreneurs to new funders, outside of the realm of usual suspects, and provide investors opportunities that would not be accessible to them otherwise.
This is once the platform is fully built out. We will also make the paperwork a lot easier and less expensive than doing it with a professional service company. For now we’re doing it manually!
We are one of the few, if not the only institution we know of, building the bridge between clean energy entrepreneurs and Opportunity-Zone-focused investors to create market-based solutions to benefit Zone communities with win-win-win investments. The many benefits communities into which these investments are made can expect:
● Higher energy resiliency
● Lower cost electricity
● Health benefits from clean energy assets (air and water quality)
● Low environmental and visual impact from electricity and mobility infrastructure
● Potential for job training or job creation in vocations of the next 5 decades (solar, energy storage, EV, etc.)
● Improved low-carbon mobility access through better, electric transit infrastructure
Opportunity Zone communities have the potential to receive a host of indirect benefits, such as jobs, job training, and the above mentioned benefits associated with clean energy. Investments can also boost local existing businesses, who benefit from more construction and ongoing operations in their area. EZOZ.org will grow QOF clean energy investments with awareness, education, and facilitation.
First of all, we have been making clean energy stakeholders (i.e. communities, clean energy entrepreneurs, capital gains investors) AWARE of the new Federal Opportunity Zone tax incentive through individual outreach, outreach to thought leaders to become ambassadors, speaking engagements at dozens of clean energy convenings in 2018 + 2019, social media outreach, sessions with policy makers and community leaders.
Secondly, we EDUCATE those stakeholders on the legislative framework, the practical mechanics, use and benefits and by making curated introductions between stakeholders through White Papers, webinars and conference workshops.
Finally, we FACILITATE low-cost compliant QOFs on behalf of the communities, capital gains investors or the clean energy equity offerers.
We will be posting more on how we facilitate QOFs in a follow up Medium article. Tell us what you want to know and we’ll be sure to reply. Thanks for feedback to create EZ OZ.org for clean energy projects and businesses in low-income America!
