2018 Lane Reports

Powerful Tax Incentives to Attract Equity Investments in Struggling Communities

The Lane Report, June 2018
Friday, June 1, 2018 10:00 am
by Marc J. Lane

Despite the fiscal challenges and competing policy priorities they face, governments at every level are uniquely positioned to attack all the invidious manifestations of poverty. Similarly, nonprofit organizations, through the programs they manage and the social enterprises they operate, are unrivaled in their capacity to drive positive social change. But traditional businesses and market-driven investors need to be more effectively engaged if marginalized communities are to be systematically lifted out of poverty.

Tucked within the new Tax Cuts and Jobs Act is a bipartisan, yet unheralded initiative to help revitalize neighborhoods and towns across the country that are starved for investment capital.

The Opportunity Zones program will draw private capital into low-income communities by tapping into the massive stockpile of unrealized capital gains wealth, totaling more than $6 trillion by the Federal Reserve’s reckoning. If an investor has incurred a capital gain within the last 180 days and reinvests that gain (not the entire proceeds, just the gain) in one or more “Qualified Opportunity Funds,” the investor can defer the capital gains tax until the investor sells that investment in a Fund or until December 31, 2026, whichever is earlier. So the government is effectively subsidizing these investments.

What's more, an investor who holds an interest in a Fund for at least five years will recognize only 90 percent of the original gain. An investor who holds an interest in a Fund for at least seven years will  recognize only 85 percent of the original gain. And an investor who holds an interest in a Fund for ten years or more can, by election, avoid paying any tax at all on the growth of his investment in the Fund.

The Funds, in turn, will invest in new and expanding businesses, infrastructure and energy projects, commercial real estate, affordable housing, and other needs-driven ventures that spur economic development and job creation in “Qualified Opportunity Zones,” economically distressed communities recently nominated by state governors and certified by the Secretary of the Treasury.

With state and local leadership, the Opportunity Zone program promises to build thriving entrepreneurial ecosystems, fostering disruptive innovation and productivity where they’re needed the most.  

If your organization is interested in learning more about the financial and social returns a proprietary Qualified Opportunity Fund might deliver – or if you, individually or on behalf of your business, want to explore a possible investment in a Qualified Opportunity Fund, please call Marc Lane, in confidence, at 800-372-1040, or email him at mlane@marcjlane.com.


Marc Lane is an attorney, financial adviser and the author of Profitable Socially Responsible Investing? An Institutional Investor’s Guide, published by Euromoney Institutional Investor PLC, and Representing Corporate Officers, Directors, Managers, and Trustees, published by Aspen Publishers, and The Mission-Driven Venture: Business Solutions to the World's Most Vexing Social Problems, published by John Wiley & Sons.

Peterborough's problem was daunting: Sixty percent of prisoners serving short-term sentences historically had gone on to re-offend within a year after their release. But policymakers were confident that a solution was within their reach. They attracted private investment to pay experienced social service agencies to provide intensive, multidisciplinary support to short-term prisoners, preparing them to re-enter society and succeed outside the penal system. - See more at: http://www.chicagobusiness.com/article/20131007/OPINION/131009850/a-new-kind-of-futures-contract-for-illinois#sthash.ThgxeiFt.dpuf

The world's first social impact bond, or SIB, was introduced in 2010 to fund innovative social programs that realistically might reduce recidivism by ex-offenders in Peterborough, England, and, with it, the public costs of housing and feeding repeat offenders. Prudently building on the strengths of that initiative, Illinois Gov. Pat Quinn is rolling out SIBs to help solve some of the state's most vexing social problems.

A SIB isn't a traditional bond where investors are guaranteed a fixed return but a contract among a government agency that agrees to pay for improved social outcomes, a private financing intermediary and private investors. SIBs shift the risk of experimenting with promising but untested intervention strategies from government to private capital markets, with public funds expended only after targeted social benefits have been achieved.

Peterborough's problem was daunting: Sixty percent of prisoners serving short-term sentences historically had gone on to re-offend within a year after their release. But policymakers were confident that a solution was within their reach. They attracted private investment to pay experienced social service agencies to provide intensive, multidisciplinary support to short-term prisoners, preparing them to re-enter society and succeed outside the penal system.

The government decided which goals would be supported, but exactly how those goals would be achieved was left to the private sector. It was the investors, through a bond-issuing organization, who ultimately endorsed the allocation of investment proceeds — how much would be invested in job training, drug rehabilitation and other interventions.

If the Peterborough plan eventually shrinks recidivism rates by 7.5 percent or more, the government will repay the investors' capital and share the taxpayers' savings with them, delivering up to a 13 percent return. If the target isn't hit, the investment will have failed and the government will owe the investors nothing.

Illinois' SIB effort was spearheaded by the state's Task Force on Social Innovation, Entrepreneurship and Enterprise — the governor's think tank on social issues, which I am privileged to chair — with support from Harvard University's John F. Kennedy School of Government, the Rockefeller Foundation and the Aurora-based Dunham Fund. A request for information issued by the Office of Management and Budget on May 13 yielded responses from service providers eager not only to reduce recidivism here but also to create jobs, revitalize communities, improve public health outcomes, curb youth violence, cut high school dropout rates and alleviate poverty.

Now the governor has issued a request for proposals intended to spur better outcomes for Illinois' most at-risk youth — by increasing placement stability and reducing re-arrests for youth in the state's Department of Children and Family Services, and by improving educational achievement and living-wage employment opportunities justice-involved youth most likely to re-offend upon returning to their communities.

Kudos to Mr. Quinn for bringing SIBs to Illinois. May they soon start delivering on their promise.

- See more at: http://www.chicagobusiness.com/article/20131007/OPINION/131009850/a-new-kind-of-futures-contract-for-illinois#sthash.ThgxeiFt.dpuf
The world's first social impact bond, or SIB, was introduced in 2010 to fund innovative social programs that realistically might reduce recidivism by ex-offenders in Peterborough, England, and, with it, the public costs of housing and feeding repeat offenders. Prudently building on the strengths of that initiative, Illinois Gov. Pat Quinn is rolling out SIBs to help solve some of the state's most vexing social problems. - See more at: http://www.chicagobusiness.com/article/20131007/OPINION/131009850/a-new-kind-of-futures-contract-for-illinois#sthash.ThgxeiFt.dpu

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