OZ Legislation Includes Businesses, Too: Q&A with Compound’s Janine Yorio

By Amy Sorter

Much has been written about the benefits of Opportunity Zone legislation — at least, from a commercial real estate standpoint. Not seen as frequently is the impact this legislation is having on businesses operating in designated Opportunity Zones. Connect Media recently directed questions to Janine Yorio, CEO of Compound, a fintech that also operates as a Qualified Opportunity Zone business (QOZB) in New York City.

Q. Why is so little discussed about QOZBs and their benefits?
A. Opportunity Zone legislation was part of the Tax Cuts and Jobs Act of 2017, and was designed to spur long-term, patient private capital investment and job creation in eligible low-income areas. In April 2019, the IRS clarified that QOZ businesses are eligible for the same capital gains tax benefits they would receive on real estate investments in opportunity zones. This lag in clarification gave investment in opportunity zone real estate a significant head start, leaving people with uncertainty as to how to treat and capitalize on operating businesses in OZs. In addition, real estate investment in opportunity zones garnered negative attention; stories have been more focused on tax benefits for individuals, rather than the potential for positive community impact. QOZBs, which hire new employees and support local businesses, stand a far better chance of achieving the designed benefits of the program than real estate development. Now that communities are beginning to realize the advantages of businesses operating in OZs, we believe investors will begin to take note of this favorable framework and help fuel the focus on QOZBs.

Q. What types of businesses tend to make the best O-zone businesses, and why?
A. From a policy and community impact perspective, businesses that can add employment and spending in Opportunity Zone neighborhoods make attractive QOZBs. While real estate investment can temporarily create jobs through construction, businesses that establish themselves in O-zones are introducing permanent jobs and long-term opportunities for the community. From an investment perspective, it is important to focus on businesses that produce capital appreciation, versus high current income. The key tax benefit is the elimination of capital gains. A business that generates high income, but does not appreciate, won’t yield a significant benefit for an investor. Of course, in addition, investors need to perform the standard due diligence when investing in any company, taking a look at management experience, business model, track record of execution, and so on.

Q. What are some of the advantages that come from investment in O-Zone businesses (other than what we already know — tax deferral and reduction, and elimination of all tax)?
A. In addition to creating jobs, when businesses open in a QOZ, they also bring new customers to existing local businesses. Employees buy coffee at the local shops, eat lunch at the local cafes and bring new activity and people to the Opportunity Zone neighborhood—exactly what the legislation was intended to do. Investors benefit from investing in OZ venture investments, such as Compound, because the return potential is extremely compelling and the tax benefits are commensurately amplified. While typical real estate investments can make 2x to 4x on your investment in 10 years, an investment in an early stage company can yield a 10x to 50x return, with massive tax savings. For O-zone funds looking to diversify their portfolios, investment in O-zone businesses can be an attractive complement and help energize returns.

For comments, questions or concerns, please contact Amy Sorter