Investing in Opportunity Zones: Ensuring the Public Benefit
Adrian Franco, Director of Community Development Finance, Communications and Outreach, and George Ashton III, Local Initiatives Support Corporation (LISC)
Opportunity Zones are a new part of the federal tax code that seeks to incentivize long-term investment in low-income urban and rural areas across the country. The policy, which was introduced as part of the 2017 Tax Cuts and Jobs Act, aims to support the growth of inclusive, local economies that benefit the people who live and work in them, while also providing tax benefits to investors.
On June 24, the Federal Reserve Bank of New York and the Local Initiatives Support Corporation (LISC) facilitated a roundtable discussion to solicit input from national community and economic development leaders on how to ensure that residents in designated zones will benefit from resulting investments. The panel was chaired by New York Fed President John C. Williams, and attendees included senior representatives from community development organizations, financial institutions, impact investing firms, and federal and local agencies, as well as philanthropic organizations, think tanks, and academia. The discussion centered on:
- how communities can influence capital flows and ensure investments align with their local economic development goals;
- planning for unintended consequences from these investments; and
- identifying gaps in technical expertise and education in communities that prevent them from developing a strategy regarding Opportunity Zones.
Participants also shared their input on leveraging existing resources and designing new tools to encourage communities to actively participate in the development of Opportunity Zone strategies. Here are takeaways from the discussion:
1) Participants expressed a need for two-way education, among both communities and investors
Multiple participants said there is a clear need for more education on Opportunity Zones for community representatives and residents, as well as for prospective investors. Roundtable participants said that communities in designated zones need to be able to define what they want out of the investments and identify what levers they have to achieve them.
At the same time, participants also stated that investors need a better understanding of the risk-return profile. In particular, high-net-worth individuals need more information on community-led plans and projects that have long been underway in under-invested communities. Roundtable participants also underscored the need for concrete examples of Opportunity Zone-related investments and activities aimed at benefiting local residents. If these were available, more investors might be comfortable deploying capital.
2) Trusted intermediaries may be key in connecting communities with investors
Participants said that intermediaries might help communities articulate their desired benefits to investors, developers, and local government. Furthermore, intermediaries can engage government officials to align projects with regional economic development strategies and can connect communities with investors.
While intermediaries might take many forms, participants stressed that they should be trusted liaisons with longstanding relationships with community advocates. Examples might include anchor institutions such as universities, community foundations, and Community Development Financial Institutions (CDFIs). Roundtable participants also noted that local economic development agencies have increasingly designated specific officers to steer and implement an Opportunity Zone strategy, and facilitate information exchanges between internal and external stakeholders.
Finally, roundtable participants said philanthropy could play a role, with philanthropic gifts helping to shape the market and lead investors to get involved.
3) Data reporting could safeguard against unintended consequences
Participants suggested that information gaps around Opportunity Zones could lead to unintended consequences, such as the displacement of existing residents, or dampen the potential impact of investments. Accessible data on investments and investors can help communities to shape economic development strategies that maximize benefits for local residents and target places where the capital could be the most useful, including workforce development programs and local zoning designations. More transparency around Opportunity Zone investors could allow communities to target them for potential opportunities.
When it comes time for the Opportunity Zones legislation to be revised or renewed, consistent and clear data reporting can also show the impact of the program and help shape lawmakers’ discussions.
4) It takes time to make investments in Opportunity Zones
Participants noted that Opportunity Zone investments take time to structure and close, and require careful coordination with local stakeholders to ensure that community needs are met. Opportunity Zone funding might gravitate toward areas where development would have happened anyway, and one challenge would be how to direct funding to places where it would not have gone otherwise. Still, many investors may be looking to deploy capital by the end of this year in order to gain the full tax benefits of the program.
5) The conversation is bigger than just Opportunity Zones
Many participants said Opportunity Zones should be part of a broader approach to catalyzing opportunity in distressed communities. They noted that in many places, there is a need for permanent capacity-building efforts to increase the expertise of local stakeholders to develop investment strategies that support development and growth. Communities could have certain “carrot” and “stick” incentives available to them.
Potential “carrots” include: (1) local tax incentives to match the federal tax incentives that the Opportunity Zone legislation provides; (2) expedited zoning for projects that provide more community impact; and (3) Tax Increment Financing (TIF) or other local subsidies that improve the returns on projects that may carry a higher risk profile but are expected to have greater community impact.
Participants also outlined potential “sticks,” such as : (1) smart development ordinances that prevent certain types of development or over-build; (2) improving transparency in the permitting process so that the community has an opportunity to weigh in on new developments; and (3) maintaining close oversight of developments that are built on community or municipally-owned land and leveraging policy tools, such as builder restrictions on property sales, to drive Opportunity Zone funding to the appropriate projects and areas.
Additionally, participants stressed that the conversation about Opportunity Zones needs to move from potential ideas to actual investments. Because well-structured debt can actually be easier and cheaper to use than Opportunity Zone funding, the initiative should link to existing programs such as New Markets Tax Credits or local economic development incentives to leverage other resources in order to support development efforts.
The New York Fed’s Community Development Finance initiative (CoDeFi) is working with the San Francisco Fed to host another roundtable that will focus on the role of intermediaries and the development of a “Community Toolkit” to foster active participation at the local level in designing Opportunity Zone strategies. The New York Fed’s CoDeFi team also continues to work with the US Impact Investing Alliance and the Beeck Center for Social Impact + Innovation in advancing the Impact Reporting Framework, a voluntary guideline designed to define best practices for investors and fund managers looking to invest in Opportunity Zones.
LISC has created a playbook, targeted to community partners, that aims to lay out possible trajectories and best practices for the range of Opportunity Zone actors. Two more editions of the playbook will be released: (1) Impact Investors — a dos and don’ts to help impact investors understand what to look for in their impact investments and in their investment partners; and (2) Impact Developers — a guide for impact-focused developers to help them take advantage of available resources in the pursuit of more impactful, community-friendly real estate developments.