Clean energy advocates are working to raise awareness about a
“giant money firehose” made available to the industry starting
The glut of cash, tied to a portion of the federal Tax Cuts and
Jobs Act of 2017, stems from an incentive framework called
Opportunity Zones. The sleeper provision offers tax benefits to
equity investors that put money into over 8,700 designated
“economically-distressed” opportunity areas. It’s designed to
encourage investment in low-income communities that haven’t seen
equal attention from investors.
holds several tax benefits, but it’s basically a capital gains
shield. Equity investors can defer taxes on gains put into an
“Opportunity Fund,” the investment vehicles organized to invest
in the zones, until December 2026. If investors hold their
investments for five to seven years, they can increase their basis
on the investment by 10 and 15 percent, respectively. If investors
hold their investments for at least a decade, they also don’t
have to pay out taxes on capital gains made from investments in
The law is purposely flexible and scalable, with no cap on the
money that can be deployed and few restrictions on the sectors that
can take advantage, according to the Economic Innovation Group
(EIG), a research and advocacy organization that helped design the
legislation that modeled the Opportunity Zone provision in the tax
testimony to Congress, EIG president and CEO John Lettieri said
“this incentive has the potential to unlock an entirely new
category of investors and create an important new asset class of
An EIG analysis estimated $6.1 trillion in unrealized capital
gains was floating around in 2017. That’s such a huge lump of
money that even if just a portion of it went to Opportunity Zones,
EIG said it’d already be the largest economic development
initiative in the U.S. And, according to several watching the
space, there’s big potential for the clean energy industry to
“Industry folks should be jumping all over this,” said Jon
Bonanno, CXO at the non-profit California Clean Energy Fund.
“It’s a giant money firehose, and we want to point it at the
things we want.”
So far, much of the attention for Opportunity Zones has focused
on the real estate industry. But because renewables projects are
also long-term, place-based investments, advocates say clean energy
is a natural fit. Wind and solar also don’t have the same
gentrification and displacement implications tied to real estate
development in low-income communities, one of the biggest concerns
about the program.
The potential financial benefits are so great, Bonanno called it
a “watershed moment” for the clean energy industry.
“This is really an incredible mechanism,” said Bonanno.
“It creates such compelling returns that we will see these assets
going mainstream because of it.”
“Almost as Simple as Looking at a Map”
According to those working on Opportunity Zones, if a developer
locates a project in one of the thousands of zones located
throughout the U.S. and U.S. territories, it can be eligible for
funds from a certified fund. That money would come into the project
timeline at the same time equity usually does.
“For developers, it should actually be fairly straightforward
and almost as simple as looking at a map,” said Cody
Evans, an MBA and MS student at Stanford University, who has been
researching Opportunity Zones with professor Dr. Rebecca
Lester. “From the developer’s perspective, it wouldn’t
necessarily look any different than any source of funding, it would
just likely come at a lower cost of capital.”
Evans added that developers also have to pass two tests to
qualify property for the incentive. Projects have to add
“substantial improvement,” increasing the basis of the property
compared to pre-investment. Projects also have to derive 50 percent
of gross income from active business in the zone.
For wind and solar developments, those qualifications should be
pretty easy to meet. But so far, Evans said, “there’s a lot
more runway for the industry to wake up to this tool and take
advantage of it.”
Gregory Rosen, founder and principal at High Noon Advisors, said
any opportunity that lowers the average weighted cost of capital
for renewables deserves a second. But he said recruiting investors
will likely fall on the industry.
“Part of it is up to the industry to be proactive in educating
folks,” said Rosen. “The jury is still out on how many
[Qualified Opportunity Zone] investors are there that are
interested in investing in solar.”
According to a
list compiled by accounting and consulting firm Novogradac
& Company, out of 49 funds that have registered to join the
firm’s Opportunity Zone Listing, only three mention solar as an
investment focus. After a call for letters of inquiry from fund
managers working on Opportunity Zone projects, the Rockefeller
Foundation — working with the Kresge Foundation — said only one
of the 141 responses it
received had a clean energy focus. Even that had a real estate
bent, focusing on “energy efficient property
Bonanno called the lack of attention for renewables
“The renewable energy business needs to get their act together
and focus on this,” he said.
Despite the delay, those watching the funding expect 2019 to be
a “boom year,” said Abraham Reshtick, a business and tax
attorney at Mintz. That’s in part because investing this year
allows investors to realize the most benefits with the timeline of
the incentive. The incentive can also be paired with soon-declining
investment tax credit and production tax credit benefits.
At the same time, Reshtick added, “There needs to be the right
“It’s the next few months that will give us the best
indication as to whether this is an attractive enough program,”
“Our Collective Responsibility”
Even as advocates urge the renewables industry to leverage the
funding, though, they also caution that regulations for Opportunity
Zones are yet to be finalized.
The Internal Revenue Service (IRS) released
an initial batch of proposed guidance in October, offering some
clarity on particulars of the law. But the IRS cancelled a January
10 public hearing on those regulations due to the government
shutdown. It’s anyone’s guess when that meeting will actually
happen. Investors are also awaiting additional guidance.
In the meantime, it’s difficult for funds to fully organize.
Though those working on the funding, like Rockefeller and Kresge,
have seen a surge of interest — Rockefeller said the responses
they received are a “testament to the enormous market interest”
— adoption will be halting until there’s more clarity.
Before the rules are finalized, stakeholders are also hoping for
some changes. Currently, Evans said, the rules make it difficult
for multi-asset funds to participate in the funding. He said
allowing that participation would encourage more investment and
allow diversification of risk across a portfolio.
And an “insane oversight,” according to Bonanno, is the lack
of a community impact requirement tied to the funding. Though the
program is structured to increase investments in low-income census
tracts, the law doesn’t say the project necessarily has to
benefit the community in any measurable way.
“You could just be a banker and you could invest in a solar
project — you stick the solar project in an Opportunity Zone.
They don’t see a penny, they don’t get any of the work and
honestly, it’s not necessarily helping those communities,” said
Rosen at High Noon Advisors. “It’s our collective
responsibility to take these opportunities and proactively have
them benefit communities.”
This is especially a concern in Opportunity Zones already
experiencing displacement of low-income residents and communities
of color. Though EIG notes that under 4 percent of the selected
census tracts have seen high socioeconomic change between 2000 and
2016, some communities are skeptical.
A study that
looks at the potential for gentrification stemming from the
Opportunity Zone program, conducted by a national coalition of real
estate developers and investors called LOCUS in partnership with
George Washington University, highlighted Downtown Oakland,
Downtown Portland, Downtown Newark and Seattle’s downtown and
International District as the most vulnerable for “accelerated
gentrification” without policies in place to stop it.
But staunching negative impacts of the law may be left to states
and cities. California, for instance, still has state capital gains
tax and could require certain community impact requirements to
grant an exemption.
How implementation shakes out will be especially important in
states and metropolitan areas where gentrification is already an
issue. In the LOCUS ranking of vulnerable areas, 13 of the top 50
vulnerable locations are in California and 13 are in New York. Many
of the most vulnerable Opportunity Zone locations are also in
states with significant renewables development, including
California, New York, New Jersey and Massachusetts.
Source: FS – GreenTech Media
Will the Renewables Industry Seize the Opportunity of Opportunity Funds?