Do Opportunity Zones Do Enough for Operating Businesses?

At least one observer thinks the Opportunity Zone program missed the mark in one area.

“Opportunity Zones were not designed to be a real estate play,” says Steve Sharkey, a partner based in Baltimore for DLA Piper. “The guys who put this stuff together actually were thinking about operating businesses. And it really has not grabbed hold in that area. It has kind of underperformed relative to being fuel for investment into startup businesses as opposed to real estate projects.”

Sharkey isn’t alone in that assessment. James C. Seiffert and Jameson M. Seiffert of Stites & Harbison wrote that the Opportunity Zone program “has yet to take a major step in connecting private capital with operating businesses in these distressed communities.” So far, Opportunity Zone Funds have invested in real estate, but they have largely avoided operating businesses and venture-staged companies.

Sharkey thinks the program misses its full potential by not being more welcoming to investments in operating businesses. Though Sharkey designs arrangement structures for these investments, he doesn’t see a lot of them being done that way.

“Even though I think it’s clear that it was designed to have a broader application and to pick up operating businesses, I think they [Opportunity Zones] are not great for that application,” Sharkey says. “I think it’s a tool that doesn’t have a great fit.”

The length of the investment is one of the reasons for this 

“One of the things that make real estate investments such a good match for Opportunity Zones is that they are long-term assets,” Sharkey says. “Real estate projects are much more likely to have a box around them that you can steer out of.”

But a lot of things can happen to a startup over a decade. “For a startup business, ten years is a long time,” Sharkey says. 

Mike Krueger, a partner at Newmeyer Dillion, does see a path for OZ investments into startups. “I think that’s one of the easier transactions to do is working with companies who are looking to raise capital,” he says. “Startup companies are just as good of an Opportunity Zone deal as real estate. I think a lot of people forget that it doesn’t have to be a real estate deal for an opportunity.”

In fact, Krueger thinks Opportunity Zone Fund investments in operating businesses will grow in popularity. “It can be any type of business, and I think we’re going to see that increase,” he says. 

Some of that money could come from funds earmarked for foreign investment. “I think people are now reconsidering a lot of foreign investments—money that people were taking out of the US economy to put into foreign investments,” he says. ” I think [now] they invest that money domestically. We’re going to see more money staying in the US and being put into local projects.”