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How OZ Investments Can Drive CRA/ESG Goals

Updated: Aug 11

Banks have recently been empowered with an exemption that enables investment into private equities via a Qualified Opportunity Zone Funds (QOF). Prior to this exemption, banks were largely prohibited from investing in private equity due to the Volker Rule. The recent modification of the Volker Rule was approved by the SEC, CFTC, FDIC, OCC, and Federal Reserve Board and went into effect on October 1, 2020. (https://www.sec.gov/rules/final/2020/bhca-9.pdf)


With this Volker Rule QOF exemption firmly entrenched, banks now have a clear pathway to leverage QOFs private equity when appropriate. This expanded flexibility comes just in time to meet the increasing pressure to address ESG guidelines. Striving to have a community impact, banks can now make QOF equity investments in specific locations, which at times can be easier than placing a loan. Fortunately, the latest iteration of QOFs includes more projects focused on business and job creation and not solely focused on building projects.


There are 8700 Opportunity Zone (OZ) designated areas within the US and territories that allow for preferential tax incentives. The purpose of OZ is to spur economic growth and job creation in low-income communities through tax incentives that reward long term investment. OZ were a bi-partisan idea created under the Tax Cuts and Jobs Act of 2017.


Most QOFs do not require investors to use capital gains. Banks can simply forego the OZ tax benefits if they do not have capital gains to deploy. They would treat the project as a regular taxable investment. This exemption will enable small and mid-sized banks to build a portfolio of uncorrelated QOF assets that have the potential for increased returns given most QOFs have expected IRRs greater than 10% per annum.


QOF’s represent the potential for banks to receive CRA/ESG credits, all while striving to generate higher yields. These projects span a wide array of investment options. From large scale greenhouses that improve the local food supply to responsible metals mining needed to supply the green technology revolution. The number and diversity of these projects are growing fast.


Javelin Securities is a FINRA registered broker dealer focused on vetting and promoting Qualified Opportunity Zone Funds. For more information about our current QOF projects please contact us at info@thejavelin.com


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