Opportunity Zones Might be Major Boost for Clean Energy Development
By: Julia Parzen & Graham Richard
Originally posted on Greenbiz Wednesday, August 14, 2019
When Darren Walker, president of the Ford Foundation, a $13 billion foundation guided by a vision for social justice, and Steve Mnuchin, President Donald Trump’s treasury secretary, agree that the Opportunity Zones program is the biggest economic development opportunity in 50 years, it’s worth taking a closer look.
A provision of the Tax Cuts and Jobs Act of 2017, the Opportunity Zones (OZone) program seeks to spur investment of patient capital in low- and moderate-income communities across the United States. The program allows investors to delay or avoid paying capital gains taxes if they invest in Qualified Opportunity Funds that then invest within Census tracts designated as Opportunity Zones.
Market watchers are predicting $200 to $300 billion in investment in the nation’s 8,700-plus OZones. And federal rules have made it clear that green economy projects — such as local power generation, microgrids, EV charging stations and energy storage — are eligible for OZone investment.
The OZone program is a good fit for clean energy and sustainable development. First, the tax benefits — capital gain tax deferral, partial forgiveness of tax on capital gains and forgiveness of additional gains on investments in OZones — make it easier to include sustainability features because the projects can deliver higher returns and be structured with simpler capital stacks. The higher return on Opportunity Fund investments, for example, could allow sponsors of clean energy projects to add features to projects or partner with energy customers that are considered more risky, as proposed by Jon Bonanno, CXO of New Energy Nexus. New Energy Nexus provides assistance to global energy entrepreneurs.
Already, OZone projects are being completed with simpler capital stacks that lower costs. For example, about 80 percent of the Tappan workforce housing project in Cleveland is funded by an Opportunity Fund. Funding so much from a single source is new for development projects in Cleveland, according to Josh Rosen of Sustainable Community Associates. JD Supra, the online platform for legal content, has reported that sponsors of renewable energy projects may be able to rely on Opportunity Fund investors enough to not need traditional renewable tax credit investors. Opportunity Fund capital not only could reduce transaction costs, but also expand the investor base for clean energy projects.
Second, the program allows for more comprehensive and holistic projects. In fact, the lack of restrictions on investments in the Opportunity Zone program creates an opportunity for integrated, interdisciplinary development plans. With the clarifications in the federal rules for OZones making it clear that clean economy projects are eligible, every project can be a clean energy and a clean jobs-producing project.
Third, the program allows for a deeper commitment to neighborhood success than many past economic development incentives. That’s why Bo Menkiti of the Menkiti Group has teamed up with Local Initiatives Support Corporation (LISC) to pursue OZone funding for its Neighborhood Investment Model, which includes LEED buildings. Because OZone investors must keep their capital invested for a full decade to realize the maximum tax benefits, they have a stake in a neighborhood's long-term success. In this way, the OZone program creates space to combine clean energy projects with initiatives to train local workers and nurture new local clean economy businesses.
This last point is key. Many community-centered and impact investors are concerned that the Opportunity Zone program will spur gentrification and displacement, and that current residents will not benefit from neighborhood improvements. Indeed, the program currently lacks requirements to report on or achieve benefits for those now living in OZones. But if structured with purpose, investments can produce significant benefits for current Opportunity Zone residents.
For example, clean economy projects can be designed to lower local energy costs, provide job training for the relatively high-paying jobs in the solar sector, nurture new businesses for people of color and increase community resilience through local power production, microgrids, EV charging, batteries and broadband. Chart House Energy Opportunity Fund in Michigan and Norfolk Solar Qualified Opportunity Fund both have as part of their design a commitment to hiring local residents and providing them with job training.
The urgency to address climate change, shift to renewable energy, and deepen community resilience is resonating with investors in Opportunity Funds, according to Julia Shin, VP at Enterprise. Enterprise is exploring creation of a Sustainability Opportunity Fund to meet demand from impact investors. There will be a high level of demand for renewable energy projects from investors, according to Chris LeWand, of the global business advisory firm FTI Consulting. Both Bonanno and Cody Evans of Homecoming Capital have seen this demand in action. They agree that more capital gains investors are seeking clean energy projects than clean energy projects in OZones ready for investment.
Clean energy and resilience projects also are attractive to investors because they can enhance project value. For example, Arctaris Impact Fund included a solar field in its Opportunity Zone-based industrial park project in Flint, Michigan, because the savings on electricity and rent will attract businesses to the park. Arctaris Impact Fund intends to raise $750 million for projects in OZones. Thirty percent will be for investments in alternative energy, broadband and real estate infrastructure projects.
Decennial Opportunity Fund, hoping to make $1 billion in Opportunity Zone investments, is including clean energy in all its projects both because of the value it adds and the potential to reduce the cost of capital by unlocking tax credits and PACE financing. For example, Decennial Opportunity Fund plans to invest in a 100 percent net zero redevelopment on the former Michael Reese Hospital site in Chicago, a brownfield site that has been shuttered for 10 years.
The clean economy opportunity could all come together in Puerto Rico, where 95% of the island is a designated Opportunity Zone. Puerto Rico’s government plans to use the OZone program to rebuild from the devastating hurricanes of 2017 while enhancing resilience and advancing a clean economy. The Global Resilience Institute of Northeastern University, which has developed a decision-support system to guide the prioritization of resilience investment needs, is working in selected communities in Puerto Rico to leverage OZones to advance community and infrastructure resilience. It also is advocating for the deployment of $120 billion of federal disaster recovery and other federal funds in OZones.
It is unclear whether the Opportunity Zone program will deliver on its larger promise of jobs and development for current residents in low-income communities. But the program does offer a significant opportunity to accelerate clean energy and sustainability projects in struggling communities across the U.S. and in ways that produce local economic development benefits. Today, key players are gathering. New interest, innovation, and leadership are catalyzing a growing pipeline of deals. Leveraged successfully, the Opportunity Zone program could produce gains for communities, investors and the planet.
Parzen and Richard recently co-authored a report, "Tapping the Opportunity Zone Program to Accelerate an Equitable Clean Economy (PDF)," from which this article is adapted.