Identifying Potential Operating Business Investments for Qualified Opportunity Funds
22 September 2019
By Steve Waters
Founder & CEO, SMB Intelligence
This map identifies potentially investable operating businesses in Opportunity Zones (blue pinpoints) and prime growth activity in areas surrounding Opportunity Zones (grey pinpoints).
We define an investable operating small business1 as:
a) A new, seed stage independent2 currently planning their launch, that will be an employer firm3 with a commercial location4 within an OZ acquired after Dec. 31, 2017.
b) An existing, recently opened independent, that is an employer, with a commercial location within an OZ acquired after Dec. 31, 2017.
c) An existing, expansion stage small chain5 that is currently planning to add an establishment within an OZ, at a commercial location acquired after Dec. 31, 2017.
d) An independent or small chain currently planning to relocate their firm, or an establishment, to a commercial location within an OZ, acquired after Dec. 31, 2017.
The businesses can be in any industry, other than a few “sin businesses”6 excluded from the program.
Notes on restrictions as of November 2018:
70% of a company’s tangible property has to be in a designated area.
Most of the firms we identify would meet this threshold.
Generate at least 50% of their gross income within the zone they operate.
As most of the firms we identify are local businesses, many would meet this threshold. However, we believe this restriction severely limits the possibility of investing in high-growth firms and is at odds with the intent of the legislation. We are optimistic it will be revised or eliminated in the next round of regulations. This is why we also identify otherwise qualified, high-growth firms that would not currently meet this threshold.
Substantially all of the tangible property owned or leased by the company is qualified opp zone business property.
Most independents we identify would meet this threshold.
Small local chains adding establishments within opportunity zones.
We also identify local chains adding establishments in OZ, as dependent on the structure of their legal entities, they may or may not meet the above restrictions. We are optimistic this will also be addressed in the next round of regulations.
Based on our concept of Prime Growth Classification, prime growth activity outside OZ’s is defined as:
a) A new, seed stage (pre-opening) independent currently planning their launch, that will be an employer firm with a commercial location.
b) An existing, expansion stage small chain that is currently planning to add an establishment(s).
c) An independent or small chain currently planning to expand by relocating their firm or an establishment.
d) An independent or small chain that has recently raised a substantial round of outside funding.
These are the entrepreneurs currently most likely to expand into, relocate to, or build a new business in an OZ, and provides high-level context as to planned small business growth activity in the region.
The purpose of this dataset is to help direct capital to businesses in economically distressed communities, by enabling local or state agencies and Qualified Opportunity Funds to more efficiently identify potential operating business investments, and / or identify potential local partnerships to pursue new Opportunity Zone-based businesses.
This map is a visual representation of the dataset included in our Prime Growth Framework for Opportunity Funds.
Request access to this dataset.
2. Independent is defined as a single establishment (location) firm with less than 500 employees. It’s important to note that while we include firms with up to 500 employees, nearly all (98%) of small businesses have less than 100 employees, and 96% have less than 50.
3. Employer firm is defined as a firm with employees beyond the owner.
4. Commercial location is defined as a place of business that is not a residence.
5. Small chain is defined as a firm with between 2-20 establishments.
6. “Sin businesses” are defined by §144(c)(6)(B) as a private or commercial golf course, country club, massage parlor, hot tub facility, suntan facility, racetrack or other facility used for gambling, or any store the principal business of which is the sale of alcoholic beverages for consumption off premises.
Investable small businesses are sourced from our bi-weekly Prime Growth Briefing. SMB Intelligence uses proprietary open-source intelligence (OSINT) methods applied through a combination of machine analysis and human analytics to continually monitor over 30,000 real estate, editorial, public government data, social media and other sources to track planned growth activity in the small business sector. We apply Prime Growth Classification to that data to identify prime growth firms, and then aggregate additional data points to determine key characteristics including their current job creation status, contact details and digital engagement. We then geocode each prime growth firm, assign a US census tract, and use extensive public government data to determine the current socioeconomic status of the community each firm is located in.
Firm format is either independent or small chain.
Development stage refers to where the firm is in their business lifecycle. Prime growth firms are currently at a seed or expansion development stage. We define seed stage as a new, pre-revenue, pre-opening firm currently planning their launch. We define expansion stage as an existing firm currently planning to add an establishment, relocate the firm or an establishment, or that has recently closed a substantial fundraising round.
Employer firm confirms that the firm is an employer – they have employees beyond the owner, accuracy is 98%. All prime growth firms are employers (or in the case of seed stage firms, they will be once they launch).
Commercial location confirms that the firm is not operating from a residence, accuracy is 98%. All prime growth firms have commercial locations (or in the case of seed stage firms, they will once they launch).
Job creation status is determined through a proprietary process, accuracy is 97%. Current means the firm is currently hiring for newly created jobs. Near future means the firm will be adding newly created jobs in the near future.
Opening or expansion date determines when the firm opening or expansion is scheduled for. Firms with “current” status are expansion stage firms who have recently closed a substantial funding round. SMB Intelligence clients can access specific opening / expansion timeframes.
Minority-owned determines if the owner of the firm is a member of a minority group. We use a proprietary process to determine minority-owned status, accuracy is 87%.
Prime growth segment determines which Prime Growth segment the firm is categorized as. Prime Growth Classification groups prime growth firms into one of nine segments based on their current growth priorites. Growth priorities define the format and scale of growth an owner is currently working to accomplish. Learn more about Prime Growth Classification.
Opportunity Zones are a new community development program established by Congress in the Tax Cuts and Jobs Act of 2017 to encourage long-term investments in low-income urban and rural communities nationwide. The Opportunity Zones program provides a tax incentive for investors to re-invest their unrealized capital gains into Opportunity Funds that are dedicated to investing into Opportunity Zones designated by the chief executives of every U.S. state and territory. Learn more at Economic Innovation Group. Opportunity Zone designation is based on the June 14, 2018 dataset from the Department of Treasury CDFI Fund.
Tract type is either low income or contiguous. Contiguous are census tracts sharing a common border with a low-income tract, with median family income that does not exceed 125% of the qualifying tract. The vast majority of Opportunity Zone tracts are low income.
Investment flows reference the Investment Score for Opportunity Zones developed by the The Urban Institute. This measures the level of commercial, multi-family, single-family and small business lending already flowing into the tract. A higher score indicates a higher level of previous investment into that community. Learn more here.
Gentrification references the Socioeconomic Change Flag for Opportunity Zones developed by the Urban Institute. The flag identifies tracts that have recently experienced high levels of socioeconomic change. Eligible tracts that have gentrified may need investment support less than other tracts that have not. Learn more here.
Concentrated poverty determines if a tract has more than 40% of individuals living at or below the poverty line, or is three or more times the average tract poverty rate for the metro / micro area, whichever is lower. Data is from the Department of Housing and Urban Development 2018 Areas of Concentrated Poverty File, and is based on 5 Year ACS Data 2012-2016.
ReCap (Ethnically concentrated areas of poverty) determines if an area of concentrated poverty has a non-white population of more than 50%, or if it’s outside of a metro / micro area, a non-white population of more than 20%. Data is from the Department of Housing and Urban Development 2018 Areas of Concentrated Poverty File, and is based on 5 Year ACS Data 2012-2016.
Tract median income, metro median income, and tract minority %, are based on 5 year ACS Data 2012-2016.
Area economic index provides insight into the level of economic distress or advantage of the census tract the firm / establishment is located in, in relation to the surrounding metro area. The index is calculated by dividing the median income of the census tract by the median income of the metro statistical area based on 5 year ACS data 2012-2016, providing a percentage. We define under 80% as economically distressed, and over 120% as advantaged.
FEMA disaster area determines if the census tract is located in a county designated a disaster area eligible for individual assistance within the previous three years. Data is from FEMA, 2018.