Investors looking for a break on tax payments have responded to a Congressional provision that forgives capital gains taxes on properties in economically underserved neighborhoods.
People in these neighborhoods also pay high energy bills and deal with excessive pollution, so one Virginia entrepreneur wondered if the tax break could boost solar supply.
Her solution: create funds that capture the "Opportunity Zone" capital and steer it toward siting, building and hiring local people for solar projects.
This article fits in our "CBEYond the Moment" series exploring strategies for clean energy after Covid.
Clean energy advocates can find allies wherever people apply financial tools to lift communities’ access to fossil-free energy. A recent webinar showcased NASA engineer Ruth McElroy Amundsen, who parleyed a desire to work toward safeguarding the environment into redoing her Norfolk, Virginia home. She added a green roof, permeable pavers, rainwater cisterns, and composters, solar hot water, and solar PV installation. After making her home as green as seemed possible, she wanted to pursue her passion at the community level. That led her to learn about a provision in a Trump-era tax law- and to leverage it for good jobs and broader solar affordability in her city.
Speaking to a Zoom audience affiliated with the nonprofit Clean Energy States Alliance, Amundsen described a successful partnership with a number of parents to install a 600 kW solar PV system at the Norfolk Academy with a payback period of seven years. The accomplishment, she said, earned her the chance to advocate for solar in speeches and seminars. In one, she told the audience, an attendee asked her about installing solar projects in Opportunity Zones. Amundsen hadn’t heard of Opportunity Zones. But motivated by the need to help disadvantaged communities - and with some research, creative thinking and persistence- she helped launch the Norfolk Solar QOZ Fund.
Opportunity Zones arose in the Tax Cuts and Jobs Act of 2017 as places where investments in low-and moderate-income communities don’t trigger capital gains taxes. In theory, they provide a win-win for investors with capital gains and for people in target areas. Since the investors of Opportunity Zones must park their capital for at least a decade to benefit entirely from tax provisions, investors are rooted in communities’ long-term success.
Norfolk Solar QOZ Fund
Following many conversations with lawyers and accountants, Amundsen said, she formed the $750,000 Norfolk Solar QOZ Fund with three parts. The Fund’s structure consists of the QZ Fund to lasso capital gains, a non-capital gains investment fund, and a third component that takes deposits from the other two funds. In this third bucket, OZ businesses take depreciation against non-capital gains in the real estate and ultimately buy and own solar.
The project included seven solar installations totaling 1,200 solar panels at 420 kW with an annual production of 530 MWh - all benefiting local businesses and non-profits at no cost to them. Amundsen’s team went a step further by hiring and training local residents from the Opportunity Zone to do the installing.
The team did, of course, run into barriers. These included struggles to earn participation from minority-owned businesses and to find suitable project sites. At the onset, there was generally a lack of trust among local community leaders and businesses. Amundsen told listeners that civic leaders in Norfolk’s low-income communities hear a constant barrage of advertisements from entities that turn out to be gimmicks, fraudulent, or false hopes. In Amundsen’s case, she said, media coverage really helped overcome the trust barrier.
Amundsen also struggled to find buildings in low-income communities that could begin renovations without first undertaking a costly set of structural repairs to meet local building codes. Bringing buildings "up to code" requires upfront capital that many small businesses and residents cannot provide. Third, setting up OZ Funds is a complex process and requires an understanding of tax structure and the resulting legal and tax implications.
Based on her success, Amundsen said, she and her team are opening a Norfolk Solar II QOZ Fund to commercial investors and have identified $150 million worth of potential sites needing 90 MW of solar. The partners expect to create 200+ clean energy Opportunity Zone jobs.
Opportunity Zones can advance clean energy goals in an equitable way that can create local jobs, spur investments, provide clean energy access, and reduce electricity bills. Utilization of the Opportunity Zones program for clean energy has been slow. According to a database that the National Council of State Housing Agencies maintains, there are only 11 Opportunity Zones projects in renewable energy. (Greentech Media has reported extensively on this phenomenon.)
Opportunity Zones come with broader flaws, too. Since the tax break encourages promotes profit-seeking real estate plays, Opportunity Zones can potentially make rents exorbitantly high, and in turn, worsen the conditions of the very people the program officially seeks to help. By default, those likely to benefit from Opportunity Zones are people that are wealthy and not the residents of Opportunity Zones. Requiring certain criteria such as local hire, local benefits, and local control and ownership can mitigate some of these risks. Another issue is how census tracts that locate Opportunity Zones are determined by state legislators. Investors doing due diligence should confirm that a zone contains low-to-moderate income households and small businesses that are economically distressed.
The Opportunity Zone’s 15 percent capital tax deferral rate expired in 2019 and the new rate, 10 percent, will be in place until 2021. Proponents are pushing to expand the program, which began with bipartisan spirit but which President Trump now describes as his initiative. If the Opportunity Zones program is expanded, the public must demand accountability and transparency from the investors, projects, and clear documentation of benefits to local community members. While Opportunity Zones have bipartisan appeal, the devil is in the details. Having clear guidelines can indeed improve the well-being of our communities, as these guidelines can measure and enforce material benefit to people in the investors' catchment area.
For now, engineers and others may follow Amundsen’s lead and continue to increase clean energy access to those left behind.