On May 30, 2019, both houses of the Alabama legislature approved HB540 of the 2019 Regular Session, which is entitled the “Alabama Incentives Modernization Act” (the “Act”). The stated purpose of the Act is to attract and retain companies in rural and low growth areas in Alabama and to attract high-tech companies and workers throughout the state. To implement this purpose, the Act establishes a statewide Opportunity Zone program, amends provisions of the Alabama Jobs Act and the Growing Alabama Credit, and provides an income tax reduction for capital gains realized through the sale of investments in technology companies. The Act allows for a period of up to 60 days after the governor’s approval to take effect.
This blog post will provide a brief overview of the provisions found in the Act relating to opportunity zones. The entire text of the Act can be found here.
Opportunity Zones in Alabama
With respect to Opportunity Zones, the Act would add new sections 40-18-6.1 and 41-10-46.01 to the Code of Alabama. Section 40-18-6.1(a) would provide that the operating provisions of the federal opportunity zone program found in Internal Revenue Code § 1400Z-2 would “be applicable to an investment in an approved opportunity fund in calculating” Alabama income taxes and Alabama financial institution excise taxes.
This provision would essentially layer an additional requirement onto the federal program in order for the tax benefits of the opportunity zone incentive to apply with respect to Alabama income and financial excise taxes. That new layer is the requirement that a qualified opportunity fund must also satisfy the definition of an “approved opportunity fund” as defined by the Alabama Code. Accordingly, if a qualifying investment is made in a qualified opportunity fund as that term is defined for federal income tax purposes, in order to receive a reduction in Alabama state tax that qualified opportunity fund would also need to be an “approved opportunity fund” as defined by the Alabama Code.
Approved Opportunity Funds
If enacted, an “approved opportunity fund” would be defined by the new Ala. Code § 41-10-46.01(b)(2). If all three requirements found in that paragraph can be met, the subsection would require the Alabama Department of Economic and Community Affairs (ADECA) to “approve” the fund. In contrast to the federal opportunity zone program where a qualified opportunity fund is allowed to self-certify itself as such, to become an “approved” fund in Alabama, the fund would be required to submit an application to the ADECA.
The first requirement would be that ADECA must review a fund’s application to determine whether the fund has the “capacity to improve Alabama’s low-income opportunity zone communities.” To that end, the application would be required to demonstrate all of the following: (1) the amount of existing committed capital or potential to raise committed capital; (2) the investment track record or strength of the applicant’s management team; (3) the existing project pipeline or strategy for developing new pipeline; (4) the fund structure and anticipated returns within that fund structure; (5) the presence of sound legal, accounting, and compliance policies and procedures; (6) a strategy for measuring, tracking, and annual reporting to ADECA on how the approved opportunity fund is achieving investment outcomes set forth in its applications; and (7) one or more clear and demonstrable partnerships with local or statewide public or nonprofit entities to ensure community engagement.
If enacted, the second requirement would be that ADECA must “determine that the fund has committed to deploying a substantial portion of its capital into qualified opportunity zone property in Alabama” in one or more of the following asset classes: (1) rural areas described in Ala. Code § 40-18-376.1(a); (2) technology companies meeting all of the criteria found in new Ala. Code § 40-18-376.3(c) or facilities housing such companies; (3) companies or projects described in Ala. Code § 40-18-372(1) or facilities housing such companies or projects; (4) workforce training; (5) affordable housing; (6) remediation of blighted or abandoned property; (7) revitalization of distressed urban neighborhoods; or (8) companies or projects that will have substantial, measurable impact on social, environmental, or economic conditions in low-income areas. Finally, this second requirement can also be met if a fund demonstrates to ADECA’s satisfaction “that it will create substantial wealth within and for residents of Alabama’s low-income and rural communities and will directly track the wealth created.”
The third and final requirement necessary to become an “approved opportunity fund” would be that it must commit to investing at least 75% of its committed capital in qualified opportunity zone property (as defined by Internal Revenue Code § 1400Z-2(d)(2)) located in Alabama. Further, ADECA would be required to promulgate rules for determining whether an investment should be considered as located in Alabama.
It’s also worth noting that there seems to be a typo in HB540 as enrolled by the state legislature. If enacted, new Ala. Code § 40-18-6.1(f)(2) provides that “An ‘approved opportunity fund’ is a fund that meets all the criteria of in Section 41-10-47.01(b)(2).” Section 6 of HB540 as enrolled would add new section 41-10-46.01, and the definition of “approved opportunity fund” would actually be found in new Ala. Code § 41-10-46.01(b)(2).
Impact Investment Tax Credits
Finally, if enacted as enrolled a fund approved by ADECA as an approved opportunity fund would also be permitted to enter into a project agreement with ADECA providing the fund’s investors with impact investment tax credits in case projects undertaken by the approved opportunity fund are not producing the returns provided in the project agreement by the fifth year. If enacted, the credits cannot be allocated in the first four years of a project, but in the fifth year, they can be allocated to a project to account for inadequate aggregate returns during those first four years.
Importantly, to be eligible for the tax credits, the approved opportunity fund would be required to obtain investment from a state-owned fund referred to in the Act as “qualified fund” and defined by the new Ala. Code § 41-10-46.01(b)(3). Under that provision, a “qualified fund” includes the Alabama Trust Fund, the Alabama Game and Fish Fund, the Alabama Marine Resources Endowment Fund, the Alabama Corrections Institution Finance Authority, the Public Health Finance Authority, the Public Road and Bridge funds, the Unemployment Compensation Trust Fund, the Mental Health Finance Authority, the Incentives Financing Authority, the Alabama Senior Services Trust Fund, and funds of those funds.
If you have any questions about HB540 or the new sections it may create, please do not hesitate to reach out to the authors of this blog post.