The Promise Of Opportunity Zones Is In Reach

Looking back, it would have been difficult to predict that six pages out of the 2017 Tax Cuts and Jobs Act could have caused so much consternation. The opportunity zone designation, designed to incentivize investment in distressed communities, appeared in multiple 2017 House and Senate bills with broad bipartisan support. Seven of the 14 cosponsors of the Investing in Opportunity Act, where opportunity zones originally appeared, came from the Senate Democratic Caucus. Thirty-six of 81 cosponsors of the House’s version of the bill also came from the Democratic Party. Despite finding its final home in a Republican tax package, Democrats like Senator Cory Booker and New Jersey Governor Phil Murphy have continued to express optimism about opportunity zones.

In recent months, however, opportunity zones have rapidly gathered column inches based on the assertion that they primarily benefit the wealthy, that they’re solely focused on real estate and that they can accelerate the worst effects of gentrification. But it’s far too premature to write off the potential good that can come from opportunity zones. Contrary to recent stories of bad actors, preliminary results from The Forbes OZ 20: Top Opportunity Zone Catalysts paint a picture of a diverse group of communities and funds who are committed to delivering on the spirit and intent of this incentive.

As far as tax law is concerned, the opportunity zone incentive is a relatively simple amendment to the US tax code, particularly so when compared to the complexity of New Market Tax Credits or Low Income Home Tax Credits. As long as a qualified opportunity zone fund (QOZF) or qualified opportunity zone business (QOZB) operates within the parameters of the OZ incentive — i.e., deploys capital within six months of transferring gains, meets substantial improvement clauses and derives 50% of gross revenues from services generated within their census tract, among other requirements — they will remain within the letter of the law. For these reasons and more, the early movers in opportunity zones were inevitably going to be real estate developers seeking a tax subsidy for deals already in progress.

This is only the beginning of the journey. To characterize this incentive as welfare for the wealthy is overly reductive and does nothing to address the systemic and long-term challenges facing people living in the nation’s most deprived communities. When it comes to economic and community development, the voice that matters most is from people living in opportunity zones. But this voice is at risk of going unheard or being even further marginalized if current narratives prevail. In a recent piece Mayor Michael Tubbs of Stockton, California, touched on opportunity zones by saying, “this is about delivering on the aspirations of our residents and future generations.”

Opportunity Zones by the numbers

Based on US census data analyzed by the Economic Innovation Group (EIG), people residing in opportunity zones have a life expectancy three years lower than the national average (75.1 years compared to 78.3), earn an average of $26,200 less than US median salary ($44,700 compared to $70,900), and are roughly twice as likely to live in poverty (28.9% compared to 14.6%). 

These numbers are not changing. In fact, as evidenced by EIG, they are only becoming more entrenched. Thirty years ago, half or more of all counties grew at the national rate. Since the Financial Crisis of 2007–2008 that figure is down to roughly one quarter of U.S. counties. When economists talk about U.S. GDP increasing by 3.1% in Q1 of 2019 and 2% in Q2, much of this growth is being driven by a shrinking group of increasingly affluent metropolitan areas.

Preliminary trends from Forbes OZ 20

With 113 applications received from communities and funds across the nation, the Sorenson Impact Center has begun the process of analyzing the results from the Forbes OZ 20. This new list will be published on December 11, 2019, with four grand prize winners announced at the Winter Innovation Summit in Salt Lake City on February 5, 2020. 

62 opportunity zone funds that applied to the Forbes OZ 20 have indicated their intention to raise and invest close to $16 billion in opportunity zones in the coming years. This is further bolstered by responses from the more than two thirds of funds that stated their intention to hold capital for ten years or more. While preliminary, this shows a snapshot of the scale of investment currently in the works. It offers credibility to the assertion that this incentive represents patient capital being deployed in communities.

Through the Forbes OZ 20, the center has also seen a willingness among OZ funds (53%) to disclose the location of their investors, and just under half of the funds going further to list the nature, type and location of their investments. The significance of this is that even without statutory reporting requirements, there is a strong cohort of OZ funds committed to transparency and disclosure. This is bolstered by the 87% of funds that report a commitment to publishing an annual impact report.

We found more than 1,400 points of project-level engagement between community organization applicants and opportunity zone investments ranging from affordable housing initiatives to tech startups and renewable energy projects. 

Broader OZ developments

These early results from the Forbes OZ 20 are seen in on-the-ground progress. Based on an analysis of opportunity zone funds in the national and local press, from July to November 2019, at least 12 funds have raised or are in the process of raising over $1.85 billion in capital. Eight funds are focused on real estate projects, including the $50m currently being raised by NBA legend David Robinson, with the remaining four investing in renewable energy ($250 million), eliminating toxic waste ($500 million), tech startups ($10 million) and the expansion of 40 charter schools ($2 million). This goes to highlight the diversity of investments that hint at long-term improvements in opportunity zones.

Gentrification versus Displacement

Much has been made about the potential of opportunity zone investment to displace the very people it is designed to support and benefit. Critics argue that individuals living in opportunity zones will be priced out of their own communities due to cost of living increases. While EIG and the Urban Institute have developed compelling research that indicates less than 4% of census tracts are at risk of gentrification, the potential detrimental effects on communities cannot be dismissed.

A recent longitudinal study on the effect of gentrification on original residents by the University of Chicago and Federal Reserve Bank of Philadelphia presents some heartening results. The study indicates that gentrification is the likely culprit for only a small proportion of community out-migration by original residents. What’s more, the report states that “gentrification creates some important benefits for original resident adults and children and few observable harms.” The researchers highlighted that shifting demographics in gentrified neighbourhoods has more to do with population growth through in-migration than any other single factor. Aligned to this, the researchers noted a causal relationship between the original residents that remained in gentrifying neighborhoods and reduced levels of poverty, improved mental and physical health, and educational attainment.

This by no means seeks to diminish or detract from the very real challenges that many people are grappling with in regards to gentrification. However, it does start to unpack some of the benefits associated with gentrification which have received little or no recognition. 

All of this should create pause for thought on current narratives around the opportunity zone incentive and how best to deliver on its potential. At the Sorenson Impact Center, we will continue to promote best practices among opportunity zone funds and community organizations by elevating the work of those committed to supporting some of this nation’s most vulnerable people. 

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