Opportunity Zones, Take 2

In my quest to get a better understanding of the new federal Opportunity Zones program, I’ve been attending an excellent forum sponsored by the Council of Development Finance Agencies.   As a reminder, this Opportunity Zone program was created by Congress last year.  It provides generous tax credits for those who invest in projects located in opportunity zones around the US.  These zones are intended to be areas of high economic distress with unmet demand for equity investments in businesses and real estate projects.   This spring, states identified more than 8700 zones around the US, and most outside analysts think that they did a good job of targeting areas of great need.

But, now the devil is in the details.  My time at the CDFA event and outside research suggests (to me, at least) that the success of the Opportunity Zone program is going to depend highly on how key federal agencies opt to regulate and manage the program. These decisions are still under consideration so we’re in something of a waiting mode.

While we’re waiting, there are key questions still on the table.  The tax benefits for the program are generous, so it seems likely that investors will be attracted to Opportunity Zone investments. But, can we ensure that the investments make a difference in distressed communities?  After all, that’s the program’s purpose!  Here the jury may still out.  A few key issues include:

• Geographic Diversity:  How can we ensure that these investments don’t just go to major urban markets, but also hit rural areas and zones located in smaller communities?  There is a short timeline for deploying funds, and this tight deadline may limit the ability of investors to seek out deals in out of the way places. Here’s another good look at these issues.
• Small Business vs. Real Estate Projects:  Opportunity zone funds can be used to finance small businesses, but the market for these equity deals may be small.   There may be few companies located in zones that are seeking major equity infusions.  If this is the case, we should expect most investments to be targeted to real estate deals.  (This is the case with funding from other new programs like EB-5, the New Markets Tax Credit, and the Community Development Financial Institutions programs as well.) Of course, real estate projects can have transformational impacts, but we need more business investments too.  Also, if the funds are used to invest in luxury real estate (as we have seen in many EB-5 projects), we’re missing the purpose of Opportunity Zones.
• Tracking Impacts:  At present, the program contains no mechanisms, beyond tax audits, to track whether and how investments help low income people and communities.   Many advocacy and research groups are seeking to address this problem by developing project clearinghouses and other tools.  We will clearly need better tools to understand if and how Opportunity Zones are bringing real benefits to at-risk communities.

While I have many questions, I’m still optimistic.  I think Opportunity Zones have potential, but they won’t be a panacea.  But, if we can find new and effective approaches to invest in and nurture distressed regions, let’s do it and let’s do it right!

If you want to track future directions, I can highly recommend Enterprise Community Partners Opportunity Zone Platform.