The opportunity zone (OZ) program is designed to funnel private investment into distressed communities across the nation, creating housing and essential infrastructure and spurring economic revitalization. Program proponents call it a once-in-a-generation opportunity for local communities in need and a creative way for private sector investors to fund improvements. Skeptics argue the program is a tax break for the wealthy and doesn’t address fundamental issues facing the low-income areas it was designed to help. These cynics claim the program will cause gentrification and further displacement of low-income residents and minorities. Achieving the positive intent of the legislation will be addressed in this first installment of a column that explores how a local focus can revitalize low-income communities.
To start, the Tax Cuts and Jobs Act of 2017 established the OZ program with broad bipartisan congressional support to create long-term positive change via capital gains tax incentives for those who reinvest capital gains in qualified opportunity zone funds (QOZF). The media has focused on billionaires lobbying to create new OZs where they own property and large fund managers claiming that the program isn’t attractive enough to solicit investment.
This doesn’t paint a clear picture of the whole story. Real estate development is an integral part of any healthy city. Issues like gentrification and displacement always have to be taken into account regardless of where the development occurs. Working in coordination with local residents, community leaders, city staff and elected officials to address issues like these can generate the positive economic impact the OZ program was designed to create.
In order to realize this positive economic impact, we must understand what we are trying to achieve in the communities served by QOZFs. I believe that impact studies will be essential to proving the OZ program’s success. Others, like the U.S. Impact Investing Alliance and the Beeck Center, are in agreement and have developed a framework to help OZ stakeholders measure, manage and deploy capital — benefiting both investors and the community.
As a local-first OZ fund, my company’s mission is to deliver positive outcomes for investors and positive impact on the community. I’ve seen firsthand in our area of San Jose how local-focused investment can benefit both parties involved.
The Win-Win End Game
I believe the ultimate objective should be executing OZ development that results in a win for investors and communities, giving each the type and scale of projects they desire. For example, Northern California is experiencing a housing crisis driven by 30 years of unprecedented job growth. Skyrocketing housing prices have forced low-income residents to seek affordable housing outside job centers, creating urban sprawl and clogging freeways with commuter traffic. The OZ program incentivizes private investment in new housing development in places where housing is desperately needed. New homes will help balance supply and demand to better equalize prices, making more affordable local housing more attainable.
Early on, potential QOZF investors often equated confusing program details to increased risk, and investment dramatically slowed. It took four months for the IRS to issue important clarifying guidance. Then potential QOZF managers had to get their heads around the clarified legislation, determine that changes were sufficient to create successful business plans and structure funds around those plans. A slower-than-expected rollout of the OZ program has delayed funds, and, as a result, the positive impacts of the program are yet to be seen.
In most cases, it will be several years before new buildings are constructed and tangible impacts are apparent, and in that time I expect to see best practices emerge — from measurement guidelines and impact studies to the unveiling of trend-setting developments. Yes, opportunity zones are new to investors and communities alike, but I believe exciting times are ahead for those who decide to play.
Community-First Development
For the OZ program to reach its full potential, everything should point back to the community. Local-focused developers and funds that benefit the community, as well as investors, are critical because positive local economic impact requires active fund involvement and participation within the OZ. A fund model spreading hundreds of millions of dollars across multiple, disparate OZs and lacking critical connections within the community simply won’t cut it. Development must meet the expectations and needs of the community and promise investor returns to fund well-conceived renovations and ground-up developments at scale. Bottom line: Both communities and investors must be rewarded.
Local-focused developers and fund managers have the boots-on-the-ground experience and connections to engage important constituents, devise the right strategies and — paramount — quarterback projects from inception to completion. A community-first pedigree means being part of the fabric of the community and knowing how to listen to important leaders and constituents who are next-door neighbors: residents, business groups, community advocates, nonprofits, city planners and local elected officials. It requires walking the neighborhoods, meeting the residents and acknowledging what can be done to bring the city together. This will give OZ investors a way to impact the community and realize financial benefits.
The Tightrope
This balancing act involves weighing competing priorities. What does the community want to see? What will the planning department want to see? What is going to revitalize neighborhoods and not cause displacement and gentrification? What do local politicians need to deliver? What would attract investors to fund projects? Understanding the tradeoffs and finding that balance between needs, wants and returns is key to uncovering transformative projects that are the right fit, which will be different for each community.
Addressing long-term decline and generations of underinvestment is complicated. Opportunity zones present an innovative solution involving the private sector to rebuild communities. Rigorous accountability and reporting are needed to measure impact, while an established framework is essential to program success. Developer-led funds with a community-first focus play a critical role in building the win-win outcome for investors and communities in need.