Qualified Opportunity Zone Fund Groundwork and Infrastructure
Successful QOZ-fund investments should spawn other follow-on investments in Qualified Opportunity Zones. The impact needs to be measured and communicated to help kick-start this virtuous circle.
A Qualified Opportunity Zone fund (“QOZ-fund”) will want to lay the foundation for measuring and communicating its impact on the local community. There are many reasons why this is important. (For background information about Qualified Opportunity Funds, see this. Also, for my commentary on how this program creates a new “domestic emerging markets” asset class, see this.) First, QOZ-funds will have at least two stakeholders to address, those living in the Qualified Opportunity Zones where they are investing and the investors in the QOZ-fund. The QOZ program is an impact investment program designed to incentivize investment and grow the economies of low-income communities. It is reasonable to expect investors making such an investment, as well as the people in the Qualified Opportunity Zones, to want information about a fund’s investments.If the impact isn’t there, the program will at best be viewed as a tax break for the rich and at worst as a vehicle for gentrification. (Some advocates are already warning about gentrification from QOZ-fund investments.) However, with proper advanced planning and consideration, these concerns should not arise.Indeed, if properly implemented, every Qualified Opportunity Zone fund investment should have considerable positive economic impact on its local community.Second, because the Qualified Opportunity Zone program was launched with little publicity and few guardrails, it is possible the states could require some impact reporting from QOZ funds. This could become more likely after the QOZ program gets more widespread publicity.As described below, it’s good business to have the information ahead of time, vetted by a third-party fiduciary, before any state or other mandates arise.
QOZ-fund Pre-Investment Groundwork
Once a QOZ-fund has identified a location for investment, it should establish the groundwork for building social capital. First on the list should be building relationships with local community leaders, including:
• Pastors and leaders from other religious groups;
• Coaches from local high school teams;
• Local business reporters;
• Local non-profits;
• Congressmen/women, and;
• State Senators.
Meeting with these leaders will give great insight into the community and allow the QOZ-fund to explain its mission and anticipated impact on the community. The long-term nature of the investment should be communicated as well as the number of jobs likely to be created, and other economic benefits to the community. These meetings should give the QOZ-fund a deep understanding of the community’s history, which is critical from both a social and business perspective. At a minimum, QOZ-funds will need to know:
• What are the biggest employers now;
• What industries/employers where present before;
• How recently were they operating?, and;
• Is there any "muscle memory" in the community for skills that could be used in the new venture?
Understanding the community history and establishing good relationships with community leaders will give the QOZ-fund actionable insights. These will increase the likelihood of business success as well as setting the stage for good stakeholder relations.
QOZ-fund Pre-Investment Infrastructure
In order to efficiently track local impact, QOZ-funds will need to implement some simple processes and do some basic business research. First, QOZ-funds should set up their accounting systems to track local expenditures and local wages paid. This can be done within any accounting software and will facilitate the efficient tracking of local spending, wages, and taxes paid.Second, the supply chain should be examined and local vendors identified for as much of that spend as possible. This is where much of the impact leverage will reside. For instance, a QOZ-fund investment might create five local jobs but use 10 local vendors for construction, maintenance, office supplies, etc. This could support 10 times the jobs indirectly that it does directly.Local banking is also critical. It may also be the best way to signal support of the local community. Balances kept at local banks help directly capitalize the local community. For instance, a $1 million account balance creates $10 million of capital for the local bank to lend.
QOZ-fund Post-Investment Public Relations
QOZ-funds that have laid their groundwork will want to communicate their investment’s impact to all QOZ constituents. Each QOZ-fund should have an email list of investors, community leaders, residents, and other interested parties. This email list should be used to regularly distribute updates about the businesses progress and metrics about the economic impact of the QOZ-fund. These impact metrics could include:
• Local wages paid;
• Number of jobs created;
• Quality of jobs created;
• benefits such as health care and retirement plans;
• Spending with local vendors;
• Local taxes paid, and;
• Average local bank balances.
A QOZ-fund Led Virtuous Circle
Ideally, successful QOZ-fund investments should spawn other follow-on investments in Qualified Opportunity Zones. Spreading the word is an important part of this process. As more businesses are opened in a Qualified Opportunity Zone, it can only benefit the QOZ-fund that was an early investor.In this way, the QOZ-fund helps to break investment inertia and to benefit from it. Bantam provides QOZ-fund investment consulting and impact measurement services. To speak with Qualified Opportunity Zone expert Jack Duval, please click on the button below.
 This assumes a 10 percent reserve requirement.