Opportunity Zones: Don’t Let Perfect Be the Enemy of the Good

Despite some criticisms, the "big picture" is largely positive, according to Ira Weinstein of CohnReznick and Reid Thomas of JTC Group.

Ira Weinstein

The Opportunity Zone program has proven to be a beacon that opportunity truly serves as an antidote for inequality as it catalyzes new community development ecosystems. These projects, however, might involve developers and investors who have limited experience in community development work.

That’s why it’s central that key players in the community—including community development corporations, community development financial institutions, development finance agencies, state and local governments, philanthropic foundations, and leaders of anchor institutions, among others—engage with OZ stakeholders.

It’s also crucial to remember how young the OZ program is. Investments so far have occurred in only about 1,300 of over 8,700 OZ census tracts. This is much greater than some other long-established incentives, indicting that getting a program like OZs to its ideal state takes time.

The data around OZs, and the program’s outlook, provides clarity and nuance in the face of negative publicity. For example, Senator Wyden recently released letters to several real estate developers to investigate whether they are abusing the OZ program. And, while Senator Wyden’s letters are the latest in a line of critiques targeted at OZs—with some certainly having merits—it is our view that many are often be misguided.

For now, we shouldn’t let the perfect be the enemy of the good when looking at the big picture for the OZ program. Instead, we should focus on what’s already being done and what more can be done while realizing that OZs are just one part of the toolbox that stakeholders should utilize to better the lives of those in our most vulnerable communities. Here’s how.

Leverage OZs in APR projects  

The American Rescue Plan earmarked $350 billion in funding to state and local governments, spurring new projects in a wide variety of community support areas. And, as often with public-funded projects, overspending issues and scheduling delays are frequently incurred. Another crucial aspect is that it’s difficult to identify projects with the most significant impact in the shortest amount of time.

OZs, however, are a notable example of how the injection of private capital can help accelerate this process and deliver the projects’ intended impact more effectively and efficiently by spurring more private investment in these areas. They do this through deferred capital gains taxes and incur potentially less complicated approval processes than other forms of private investment.

ARP and OZs are fully aligned in helping underserved communities begin to flourish through affordable housing, infrastructure, improvements, job creation and more. And with the increased private investment from OZs, combined with ARP’s public funding, a highly beneficial, symbiotic relationship between the two programs can take hold.

Engage community stakeholders

Reid Thomas

Numerous resources and strategies are available to help get every stakeholder involved. The Local Initiatives Support Corporation, for instance, offers a community partners playbook with guidance around convening stakeholder meetings, aligning OZ investments with previously identified community goals, leveraging financing tools and incentives to attract investors, building consortiums (like the Opportunity Investment Consortium Indiana) to better facilitate activity, and more.

These efforts pay substantial dividends to investors and communities alike. The Rockefeller Foundation’s work here is a telling example. In Atlanta, they funded a Chief Opportunity Zone Officer to collaborate with the city’s economic development authority to educate community stakeholders, align them around a set of principles promoting authentic community engagement, identify projects, and cultivate support from social impact funds. The organization predicts these new projects will deliver up to 750 jobs and more than 2000 multi-family housing units each year.

With active community engagement, OZ developers and investors can create more holistic, long-term solutions that support localities’ existing economic plans—while also democratizing the program to allow local players to invest in their own backyard.

Understand the timeline

Once you understand the timeline, a pessimistic view of the OZ program is revealed as shortsighted. For instance, since final regulations were passed in 2019, the number of funds focused on operating businesses has steadily grown where critics want to see more investment. According to JTC America’s OZ Data Insights, half of all new fund formations in the second quarter of 2020 were centered on or contained such investments, a trend that continues to accelerate (as does OZ investment activity writ large).

Meanwhile, a 2020 report by the White House Council of Economic Advisors showed that OZ investments nationwide are on track to decrease the poverty rate by 11 percent and have created at least 500,000 new jobs.

But like other government programs, it will take time to work out the kinks in the OZ program. The low-income tax credit program is a great success now, but as recently as 1997, there were still lingering doubts, controversies, and pricing spreads. Over time, risk factors were absorbed as portfolios traded hands. The OZ marketplace has developed rapidly, primarily because regulations took two years to be promulgated. Within three months, we were struck by a pandemic.

Let’s consider other government programs, like the Low-Income-Housing Tax Credit. It is not unusual to be skeptical of a new approach to public policy through tax policy. The LIHTC program is considered a success by all objective measures. Still, it took at least 10 years from the passage of the 1986 tax act (that brought the program into existence) for pricing to stabilize and for the requisite technical acumen and organizational sophistication to be developed. We should not expect a different result from the OZ.

The bottom line? It takes time for these types of programs to iron out issues and get people to understand how they work.

The importance of measurement

Moving forward, measurement and data in OZ reporting will be critical to ensuring its continued success and demonstrating the program has the impact it purports to.

Fortunately, momentum on that front seems to be gathering. The Biden administration has stated it wants to empower the Treasury Department to ensure the OZ program provides distinct economic, social, and environmental benefits. At the same time, Senator Tim Scott’s bipartisan legislation aims at providing a robust analysis of OZ investment impacts.

Success—and more to come

In the meantime, it can be tempting to focus on the negatives instead of all the positives. But shining a light on success stories is essential to the program’s vitality. For instance:

In Erie, Pa, OZ funds—in partnership with the Erie Downtown Development Corporation—have contributed $40 million to projects including 140 new residential units and a grocery store in a USDA-designated “food desert.”

In rural Colorado, OZs are helping build multi-family housing for workers in small, resort-adjacent communities, as well as small businesses like Inclusion Coffee, which employs people with disabilities to teach them marketable skills and give them a sense of belonging.

In South Los Angeles, SoLa Impact leveraged OZ funding to build The Beehive, the first OZ business campus. With over 90,000 square feet of commercial space, the campus is now home to the first Black-owned craft brewery in California, a Black-owned art gallery for South LA emerging creatives and a Technology and Entrepreneurship Center to develop future tech leaders.

These are just a few examples of where the OZ program is changing lives. Together, and with time, we can ensure that the OZ program continues to improve, serving communities and investors alike.

Ira Weinstein is managing principal, Real Estate, Cannabis Industries, at CohnReznick LLP. Reid Thomas is chief revenue officer and managing director of JTC Americas, the North American division of JTC Group. 

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