How Opportunity Zones Could Improve

Patrick McKenna, a managing partner at Catalyst Opportunity Funds, is a huge fan of the Opportunity Zone program, but that doesn’t mean there aren’t areas for improvement. “Any program, particularly a government program is going to have some abuse,” he says. “But the vast majority of things that are happening are incredibly positive. Generally speaking, there’s more positive than negative.”

Still, there are some things McKenna would improve, including the reporting requirements. “We as a firm truly believe in reporting,” he says. “I think that was something that was in the original legislation that was dropped when it was pushed into the tax bill. We love transparency, and we want to see the measurable impact [of investments].”

McKenna thinks that the reporting legislation will eventually “come around” to show how funds are performing. “If you start measuring it, then you can actually start managing it,” he says. “So, I would say number one is let’s get the measurement right.”

While McKenna was happy that the IRS finally published clarification on the rules, he wanted to see those released earlier. “We were operating without a net for the first two years,” he says. “For the last nine months, we were out underwriting projects and weren’t exactly sure how the rules were going to come together. In the end, those rules, particularly for real estate, came together quite sufficiently.”

With the rules in place, McKenna expects even more investment in Opportunity Zones. “Now that the rules are understood, groups are going to start forming around that and getting some certainty and investors,” he says.

McKenna also sees room for enhancements with operating businesses. He thinks there should be rules to back growing businesses in Opportunity Zone areas. “The real estate stuff is a little more clear, but eventually it needs incentives,” he says. “So, we should be investing in equity businesses that are either scaling up, locating in or are already in Opportunity Zones.”

Catalyst would like to focus on operating businesses in future funds, according to McKenna. “I think there are a lot of ideas out there about what we need specifically to do,” McKenna says. “But, if we don’t make operating investments in the next three to five years, I would think we missed the full potential of the program.” But the program isn’t quite there yet.

“This is a place where I think that there’s probably some more work to be done,” he says.