Saturday, February 16, 2019

Recap of testimony at the Feb 14 IRS hearing on Opportunity Zones


On Thursday, February 14, 2019, the IRS held a hearing on Qualified Opportunity Funds. Two hundred (200) experts and interested parties gathered at the IRS auditorium in Washington DC while 200 others waited.

My testimony focused on the general goals, regulations and fairness of the Opportunity Zone (OZ) Program. I started with a review of our performance:

•             On July 3, 1993, I wrote to Mary Schapiro, the former Chair of the US Securities and Exchange Commission (SEC) about correspondence dated July 2, 1993 from an “officer” of the Nigerian Ministry of Finance. I requested the SEC immediately warn the public. A timely warning was not issued to the investing public. (In response, the SEC launched retaliatory regulatory actions against Mr. Cunningham.)

•             In 1992, I designed the first mortgage security backed by 1 to 4 family home mortgage loans to low and moderate income persons and originated by Asian, Black, and Hispanic-owned banks.

•             On June 15, 2000, I testified before the House Financial Services Committee concerning H.R. 3703, the Housing Finance Regulatory Improvement Act. I warned that ethical issues at government sponsored enterprises (GSE’s), Fannie Mae and Freddie Mac may significantly damage the home mortgage marketplace. Both entities declared bankruptcy in 2008.

•             In 2001, I helped design a mortgage refinancing and investing vehicle for victims of predatory lending that led to the creation of targeted community development investments.

•             On December 22, 2003, statistical models I created using the Fully Adjusted Return ® Methodology signaled the probability of system-wide economic and market failure.

•             Our June 11, 2016 forecast predicted the election of Donald J. Trump: Why Trump Will Win. https://www.linkedin.com/pulse/why-trump-win-william-michael-cunningham-am-mba/

As part of our analysis, we reviewed the performance of the Trump Administration:

“Twice as many farmers in Illinois, Indiana and Wisconsin declared bankruptcy in 2018 compared to 2008, according to statistics from the 7th Circuit Court of Appeals. Bankruptcies in states from North Dakota to Arkansas leaped 96 percent, according to figures from the 8th Circuit Court of Appeals. Farmers are being harmed by sinking commodity prices — and stiff tariffs from China and Mexico in retaliation for Trump’s tariffs on imports.”

Millions of Americans are currently experiencing a tax refund decrease. The average American’s tax refund was 8.4 percent lower in the first week of 2019 than it was one year ago (under the pre-Trump tax code).

A real estate investment firm co-founded by President Donald Trump’s son-in-law and adviser, Jared Kushner, may benefit from the administration’s Opportunity Zone program. This is a violation of the Emoluments Clause (Article I, Section 9, Clause 8 of the United States Constitution). We expect to see a community group file a request for an injunction halting the allocation of Opportunity Zone tax benefits.

In general we are concerned that the OZ program diverts needed tax revenue from the public and places this revenue in the hands of a wealthy and white demographic unrepresentative of the US population as a whole. Given the desperate condition of the communities selected, this is inappropriate.

Further, we note the lack of performance of other programs that were supposed to help low income populations by energizing investments, specifically the CDFI Fund and the New Markets Tax Credit (NMTC) program. The bulk of the societal and monetary benefits derived from these "community development" programs are being captured by real estate developers, accountants, lawyers, and consulting firms, not low income community residents.

Creative Investment Research has applied for NMTC funding during several rounds. Our applications ranged in size from $2 million to $200 million:
  • In 2003, we applied for $2 million in NMTC funding to purchase and renovate a vacant commercial office building located in the Minneapolis Empowerment Zone. The application was not funded.
  • In 2004, Creative Investment Research partnered with the City of Minneapolis to develop a NMTC application. The application sought $120 million in community development funding.
  • In 2008, we applied for NMTC funding to invest in minority and community development banks. 
  • We have applied to create an online lending portal and an online resource guide for women and minority firms. None of our applications have been funded. 
During my testimony, I focused on two solutions: 1) I recommended regulations that would prohibit the President, senators, congressmen, and state governors from personally benefiting from the program; and 2) I suggested using the Ethereum blockchain to track and report Opportunity Zone investment social impact. I pointed out two young, African American technology interns who accompanied me to the hearing as sources of possible assistance in this effort.

I concluded by noting that many communities of color are at risk for rapid dislocation due to the Opportunity Zone program.