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The Pros and Cons of Opportunity Zones


Part Two in a Two-Part Series

In part one of our two-part series, BCT Partners explained the why, what and how of Opportunity Zones (OZ). In part 2, we are going to explore the potential benefits and downsides of OZ’s.

(1)

Pro: Investors are being incentivized to put development dollars into underprivileged communities that might not see that investment otherwise. It is estimated that over $6 trillion in unrealized capital gains lies untapped, and that capital could be used to benefit the communities that need it the most. For example, the average poverty rate throughout the U.S. is 12 percent but the average across the 8,762 designated Opportunity Zones is nearly 31 percent. Most of the post-recession recovery took place in a concentration of wealthy metropolitan areas so OZ’s could be one way to distribute economic growth more equitably.

Con: Investors have zero requirements to include community leaders or local residents in the planning process. The concern is that many investors are completely removed from the areas where they would be investing, and they don’t have a clear understanding of what would actually benefit those that currently live in those communities. The developer’s only incentive is to make money which could be achieved through luxury development. However, this could potentially increase rents and make it unaffordable for low-income residents to continue to live in their own neighborhoods.

(2)

Pro: Opportunity Zone Frameworks have been created to guide investors towards deploying funds in a way that will create positive social outcomes. The U.S. Impact Investing Alliance, Beeck Center for Social Impact + Innovation at Georgetown University, and the Federal Reserve Bank of New York partnered with other stakeholders to develop a shared set of principles. These guidelines can be implemented through a flexible reporting framework and are designed to provide the best chance to deliver on the potential of Opportunity Zones. While cities always have the “stick” in terms of zoning laws, many are choosing to use the “carrot” and proactively engage community leaders, universities and developers to identify projects that will benefit the community holistically and avoid overzealous gentrification.

Con: While frameworks are helpful, there is absolutely no mandate for developers to follow them or prioritize benefits for residents. For example, a Ritz Carlton is being built in a Portland Opportunity Zone. While there is nothing wrong with developing a luxury hotel, you have to wonder if that provides the best use of development dollars for a poor community. Wouldn’t it be more beneficial to have a selection of services and businesses that residents need such as grocery stores, affordable housing, and transportation? While there will surely be an increase in terms of job creation with the new Ritz Carlton, it is not likely that most of those jobs will pay much above minimum wage or reduce poverty for those living in the area. Each Opportunity Zone will have its own set of challenges and priorities and each one must be evaluated independently to ensure the best possible outcome for that community. So, while frameworks are a good start, mandatory guidelines are needed to ensure that they are utilized.

(3)

Pro: Opportunity Zones cast a much wider net in terms of the number of low-income communities that could benefit. While programs similar in nature have been tried (Empowerment Zones, Enterprise Communities, and Renewal Community Initiatives), their impact was limited to a small subset of impoverished areas. Previous initiatives primarily provided passive investment such as tax credits to businesses located in designated zones and resulted in only 38 Empowerment Zones, 40 Renewal Communities, and 115 Enterprise Communities being authorized for investment compared to 8,762 opportunity zones. Also, new techniques such as precision data analytics can help local government and community leaders determine the best development opportunities for each zone and evaluate the outcomes more effectively.

Con: Not all Opportunity Zones were selected based on the greatest need. While most states did their due diligence in identifying the neighborhoods that could benefit the most from investment, other states seemed to treat it as a windfall for developers. For example, according to the Brookings Institute, states such as Mississippi, South Dakota and Idaho all designated areas as OZs that were better off, on average, than eligible communities that were not selected. In Mississippi, in particular, tracts were chosen that had lower average poverty and child-poverty rates, were better educated, and had smaller minority populations than the low-income areas that were omitted. Another flaw in the selection process was that many states chose OZ’s that were already in areas that were showing signs of investment. Many also had higher-than-average home price appreciation—one indication of gentrification. Again, Mississippi stands out—about 40 percent of the tracts that they selected were in high home-price-appreciation neighborhoods versus 22 percent of the neighborhoods they passed over.

So, like most things in life, the devil’s in the details. Depending on who you speak to, OZ’s offer the best opportunity to help impoverished neighborhoods, or they are simply another tax write-off for rich investors. That said, whatever side of the debate you fall on, Opportunity Zones are here, and it is up to city officials, community leaders, and institutions to take an active role to ensure that investment is distributed as equitably as possible. In some states, universities are providing much-needed input. For example, Arizona State University is leveraging the potential for the social and environmental impact of OZs in their state. In collaboration with Impact Experience, the institution has brought together tribal leaders, university leaders, Latino fund managers, philanthropists, and community leaders to form a working group. As Jenna Nicholas, Co-Founder and CEO of Impact Experience states, the goal is to “collectively brainstorm equitable and inclusive strategies for Opportunity Zones in Arizona, discussing and ideating solutions across sectors to spur collaboration and ensure inclusive and equitable economic development.”

Let’s hope that collaboration becomes the norm for OZ’s throughout the country.The future of many communities depends on it.

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