Can Banks Use Opportunity Zones?

Can Banks Use Opportunity Zones?

Posted by on Aug 11, 2021


Mention the term “opportunity zone,” and what might come to mind are “capital gains,” “investors,” and “tax deferral.” Basically, entities can invest capital gains from the sale of assets into Qualified Opportunity Funds (QOFs) to defer any taxes on those profits. 

Corporations can be set up for this very purpose. But, can banks use opportunity zones? If this question had been asked about five years ago, the answer would have been, “not a chance.” But in recent years, restrictions on what banking institutions can and cannot invest in have been relaxed somewhat. So, the short answer is yes. Nowadays, banks can invest in Qualified Opportunity Zones (QOZs).  

Though banking institutions might have permission to make such investments, not all are going to immediately jump into the QOZ pool.

A Brief History: Speculation, Limits, and Easing

While many causes led to the financial collapse of 2008, one that had a great deal of focus involved reckless speculative investments made by banking institutions. To deal with this, various entities researched ways to help curtail such investments. The upshot was the Volcker Rule, outlined in Section 619 of the Wall Street Reform and Consumer Protection Act of 2010, better known as the Dodd-Frank act.

Named after economist and former Federal Reserve chair Paul Volcker, the Volcker Rule prohibited banks and similar entities from investing in, or sponsoring hedge funds or private equity funds, especially with the use of their own capital.

As time went on, some of the restrictions eased. In the middle of 2020, the five financial regulatory agencies (Office of the Comptroller of the Currency; Federal Reserve Board of Governors; Federal Deposit Insurance Corporation; Securities and Exchange Commission and Commodity Futures Trading) adopted amendments to the Volcker Rule.

This action gave “banking entity or nonbank financial company . . . .” permission to “have certain interest in, or relationship with, a hedge fund or private equity fund . . .” or covered funds. QOFs fall under the category of covered funds. This means national banks and federal savings associations can make tax-advantaged investments in Qualified Opportunity Funds.


Banking Roles and QOZs

According to the Office of the Comptroller of the Currency, banks can use their QOF investments to receive Community Reinvestment Act credit. When it comes to working with QOFs, banking institutions can also take on the following roles:

Brokers. Banks can broker Opportunity Zone transactions by working with community organizations to help attract investors into the mix.

Lenders. While loans aren’t eligible for the opportunity zone tax incentives, commercial real estate loans, construction loans, and bridge loans can be used to help fund ground-up construction and renovation. Under certain situations, such loans could be eligible for Community Reinvestment Act (CRA) consideration.

Fund managers. Banking institutions can be general partners or managing members of a QOF that either manages the institutions’ investments or from other, third-party investors. 


Will Banks Be Interested?

The issue to consider here is that, while banks can now work with Qualified Opportunity Zones, not all will immediately jump in to do so. CPA specialist John Sciaretti with Novogradac & Co. noted that, for one thing, banking strategy might not immediately point in the direction of QOZs, and “ . . . they often don’t typically have the kind of supply of capital gains you would need to implement it,” he told Millionacres.

Jim White with Post Harvest Technologies and the PHT Opportunity Fund also indicated that the size of the institution might influence QOF investments. He explained to Millionacres that smaller and regional banks will more likely invest in local Qualified Opportunity Funds. National banks, however, might target an industry, based on asset class.

Finally, J. Kemper Patton, in a scholarly article issued by the North Carolina Banking Institute/UNC School of Law, pointed out that the “. . . lack of transparency . . . , large scale investment requirements, and limited amount of time (left in the program) all could serve as issues for banks, both large and small.” Furthermore, the sheer amount of regulations involved with QOF investing could make it difficult for banks to participate.

The upshot here is that, while banking institutions can now participate in the Qualified Opportunity Zone program, whether they do so or not remains to be seen. 

There are material risks associated with investing in QOZ properties and real estate securities including liquidity, tenant vacancies, general market conditions and competition, lack of operating history, interest rate risks, the risk of new supply coming to market and softening rental rates, general risks of owning/operating commercial and multifamily properties, short term leases associated with multi-family properties, financing risks, potential adverse tax consequences, general economic risks, development risks, long hold periods, and potential loss of the entire investment principal. Costs associated with the transaction may impact investors’ returns, and may outweigh the tax benefits. Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation. This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice, meeting the particular investment needs of any investor.

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