The Qualified Opportunity Zone (OZ) program in the 2017 “Tax Cuts and Jobs Act,” created great new tax savings options to encourage development and jobs in certain designated low income census tracts. The OZ program can provide substantial benefit to an investor with a recent capital gain, to a developer looking for funding for a project located in one of these zones, and to an investor wanting to have tax free income in an investment over the life of this program. We have a task force at Michael Best to address these issues and help clients to develop creative ways to “stack” this tax credit financing with conventional bank financing and other private/public funding mechanisms like Tax Incremental Financing money from a municipality.

Banks and other financial institutions, however, may find that there is another hidden benefit to them: the ability to secure CRA credit from an investment in one of these zones.

For those less familiar with “CRA credits,” the Office of the Comptroller of the Currency (OCC) enforces the Community Reinvestment Act (CRA) of 1977, which was enacted to prevent redlining (which is the process of systematically avoiding lending in low income neighborhoods), and to encourage banks and other financial institutions to help meet the credit needs of all of their communities. Each time a financial institution requests approval for a charter, bank merger, acquisition or branch opening from the OCC, the Federal Reserve Board of Governors, or the FDIC, these governing entities are required to assess that financial institution’s record in complying with the CRA and interpretive regulations. Banks that demonstrate more investments in low income neighborhoods, and to low income individuals, stand a better chance, or at least have a better argument, to encourage the regulators to grant the requested action.

Under the National Bank Act governing these banks, they are not normally allowed to make certain investments. However, under the OCC’s public welfare investment authority, national banks may make investments in community and economic development entities and projects that are designed primarily to promote the public welfare, including direct and indirect investments that provide housing, services or jobs in low and moderate income areas. Because the designated investment zones under the OZ program are defined by their low income, these two programs seem to mesh nicely. Detailed CRA regulations control the maximum amount of bank investment, recordkeeping, and permissible activities, and require notice to the OCC, depending on the bank’s status.

The OZ program created in the Tax Act did not have much detail, and only the first round of regulations clarifying the OZ program have been issued, so there are many unanswered questions as to details and procedures. The goal of the two programs however seem to allow a bank’s investment in an OZ to qualify for CRA credit. In fact, the OCC is currently in the comment stage of proposed rulemaking to revise, update and clarify the CRA, which has not been substantially revised since 1995. The American Bankers Association and some state bankers associations have already submitted comments to suggest CRA reforms and we are hoping such new rules will explicitly link CRA credits to the OZ program.