Opportunity Zone Program Hearing Record Submission
SBIA Comment Letter to:
House Small Business Committee
Subcommittee on Economic Growth, Tax and Capital Access
October 21, 2019
Opportunity Zone Program Hearing Record Submission
On behalf of its membership, the Small Business Investor Alliance (“SBIA”) is pleased to submit these comments for the record in the hearing on October 17, 2019, by the Subcommittee on Economic Growth, Tax and Capital Access entitled, “Can Opportunity Zones Address Concerns in the Small Business Economy?”.
The SBIA is the national organization that represents small business private equity funds and their investors, including Small Business Investment Companies (“SBICs”) and banks that invest in them.
The SBIA commends Congress and the Administration for their successful bipartisan collaboration that brought the Opportunity Zone program into existence in 2017. The statutory purpose underpinning the program is to encourage sustained economic growth and investment in designated distressed communities (“Opportunity Zones” or “OZs”) by providing federal tax benefits to taxpayers who invest new capital in businesses (“qualified opportunity zone business” or “QOZB”) located within those OZs through a Qualified Opportunity Fund (“QOF”).1
SBIA’s members are a natural constituency for the OZ program because they are privately-owned and managed investment funds that invest exclusively in domestic small businesses. Market uptake among this group in the OZ program during its initial years of operation, however, has not been as robust compared to QOFs formed for real estate investments. SBIA believes this is more likely a function of the program’s regulatory structure and the operational focus of QOFs with investment strategies that lean heavily towards real estate opportunities.
Rather than crafting complex and targeted recommendations to amend the regulatory structure for QOFs, SBIA instead offers a straight-forward suggestion: leverage the U.S. Small Business Administration’s (SBA) long-standing SBIC program, created explicitly for small business investing and job creation, to complement QOFs and deliver on the legislative purpose for the OZ program to infuse capital investment in small businesses located in underserved areas.
A recent independent study prepared for the Library of Congress found that SBIC-backed small businesses created almost three million new jobs and supported an additional 6.5 million jobs over the 20-year period of their study.2 Every one of those jobs created by each of those small businesses was a gain to the communities where they are located and to the broader regions from where they drew employees and to whom they provided goods and services. Additionally, the SBIC program receives an annual $4 billion authorization but rather than maximize zero-subsidy loans to domestic small businesses, the SBA does not deploy this capital fully to SBICs, which leaves money on the table that could be stoking small business growth and fostering job creation.
If the goal of Opportunity Zones is to bring prosperity and economic opportunity to parts of America that lack both, then there is no better example of the type of investments that the QOFs seek to make than the mission-driven, job-creating small business investments made by SBIC funds.
Since its inception more than 60 years ago, the SBIC program has included various classes of SBICs including early-stage, energy, impact investment and low-and moderate income (“LMI”). An LMI Zone is a low and moderate-income geographic area that meets one of several federal definitions for targeted underserved areas because of economic or employment challenges. By the end of the third quarter of FY19, approximately 21 percent of SBIC investments were in small businesses located in LMI areas.3
SBIA recommends that Congress direct the SBA to amend its existing regulations and designate Opportunity Zones within the definition of an “LMI Zone” eligible for SBICs to make investments of debt and equity capital.4 Upon such designation, interested fund managers including current SBIC licensees could structure investment strategies and begin the licensing process to stand up this new class: Opportunity SBICs (“OSBICs”). This also aligns the current implementation plan of the White House Opportunity and Revitalization Council for the integration of OZs “into existing federal programs”.5
By taking this step, Congress enables the OZ initiative to expand capital access more rapidly to QOZBs by leveraging the proven infrastructure of an existing federal program to evaluate, qualify, and monitor OSBICs and their investment strategies.
Thank you for the opportunity to present these comments. SBIA looks forward to continued collaboration with the House Small Business Committee to ensure that America’s small businesses and the communities served have access to the capital they need.
About the Small Business Investor Alliance (SBIA)
The Small Business Investor Alliance (SBIA) is the premier organization of lower middle market private equity funds and investors. SBIA works on behalf of its members as a tireless advocate for policies that promote competitive markets and robust domestic investment for growing small businesses. SBIA has been playing a pivotal role in promoting the growth and vitality of the private equity industry for over 50 years. For more information, visit www.SBIA.org or call (202) 628-5055.
1 26 U.S.C. 1400Z-2 (2017). SBIA’s membership are also mindful that time is of the essence when it comes to investing in QOFs because investments must be made on or before December 31, 2019, to ensure maximum tax benefits under the OZ program because its authorization expires in 2026.
2 Paglia and Robinson, Measuring the Role of the SBIC Program in Small Business Job Creation, Report for the Library of Congress, at 4 (January 2017) <https://www.sba.gov/sites/default/files/articles/SBA_SBIC_Jobs_Report.pdf>.
3 SBIC Program Overview at 2, U.S. Small Business Administration (June 30, 2019). (The percentage share jumps to 25 percent when including SBIC investments in women, minority, or veteran-owned small businesses.)
4 13 C.F.R. 107.50
5 Implementation Plan for the White House Opportunity and Revitalization Council at 11 (April 2019).