Opportunity zones: Changing the face of economic development
Are localities prepared to capitalize on opportunity zone investments?
Opportunity zones could transform economic development in cities, suburbs, and rural areas throughout the country. But how those localities are transformed is largely up to state and local stakeholders.
Introduced by the Tax Cuts and Jobs Act of 2017, the federal opportunity zone tax incentive is intended to move trillions of dollars in unrealized capital gains off the sidelines. Those investments will be used to revitalize economically distressed areas – from rural farmland to small towns to inner cities to suburbs. At least, that is how the program’s creators and legislative sponsors envisioned it.
In a 2015 position paper that introduced the concept on which the federal tax incentive is based, the Economic Innovation Group (EIG) stated their vision:
In our view, policies promoting the establishment of investment funds specifically designed to allow all Americans to invest in the restoration of depressed areas could ... provide the capital needed to reshape our most distressed communities by incentivizing those who have benefited from the American dream to invest in ways that seek to serve the common good.
Will such a vision be realized? The frustrating answer: It depends.
The degree to which any given locality will realize the economic and social potential of the federal tax incentive depends on the local players themselves.
“Cities need to be committed to this,” said Ben Seigel, who in October 2018 became Baltimore’s opportunity zones coordinator. The position is a part of the city’s economic development agency, the Baltimore Development Corporation.
From the mayor’s office on down, Baltimore’s city leaders are committed to facilitating projects in its 42 opportunity zones that will have social impact, including affordable and mixed-income housing, as well as commercial and startup development. “The challenge is finding that balance where these funds get the financial as well as the social impact return,” Seigel said.
One of the most positive outcomes to date, in Seigel’s view, is that the incentive “has opened the floodgates to a new class of investors that hasn’t typically thought about investing in these types of projects, which we have been prioritizing for years in our local economic development strategies,” Seigel said. “So the hope is that, given the interest among a larger pool of investors, some of these projects that often take a really long time to move through – in part because capital is so hard to come by – will be able to be implemented at a much quicker pace.”
A big part of Seigel’s job is helping these projects “pencil out” by identifying other sources of capital, such as the low-income tax credit, the state historic tax credit, and the city’s Neighborhood Impact Investment Fund, which provides low-interest loans for projects in underinvested areas. A statewide demolition grant program, Project CORE, has proven critical by literally clearing the way for projects to get started.
Failing to designate a full-time point person for opportunity zones will prove to be a major missed opportunity for any city the size of Baltimore or larger, Seigel said.
The opportunity zones coordinator is a different type of position than what currently exists in most city governments. “This is a little bit of a different approach to making community development financing work,” Seigel explained. “Unlike a tax credit or other direct incentive program, which would involve an application process and bureaucratic operations, this is more about relationship building, connecting capital with projects, bringing in other partners who can help with the workforce development piece, and engaging the community.”
Providing support for these coordination roles is an area where the philanthropic community can make a real difference. Seigel’s position is funded by Baltimore’s Abell Foundation. The Rockefeller Foundation’s Opportunity Zone Community Capacity Building Initiative is funding similar roles in six cities: Atlanta; Dallas; Newark, New Jersey; Oakland, California; St. Louis; and Washington, D.C.
Even as we write this, government leaders from Erie, Pennsylvania, to Dayton, Ohio, to Los Angeles are creating long-term opportunity zones strategies designed to attract investors intent on doing well by doing good.
These city leaders recognize that business-as-usual will not achieve the transformation they seek. As the pace of investments starts picking up in areas that have historically seen little activity, state and local leaders must decide what role they will play. Will they sit on the sidelines, happy just to see money moving in those distressed areas? Or will they step forward, taking an active role in creating a comprehensive plan that will transform the area for the benefit of the community?
In this series, we examine the ways local stakeholders are coming together to catalyze opportunity zone investments, and thus changing the conversation around economic development. Watch for our next article.
Any advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues. Nor is it sufficient to avoid tax-related penalties. This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.
InsightAffordable Housing News & Views - April 2021Beth MullenFrom legislative issues to technical updates to performance and industry trends, CohnReznick's Affordable Housing News & Views has the housing tax credit industry covered.
InsightBusiness of Construction – March 2021CohnReznick will be featuring several topics important to the construction industry in a series of listen-in-style conversations, webinars, best-practice insights, and other helpful tools.
InsightAffordable Housing News & Views - March 2021Beth MullenFrom legislative issues to technical updates to performance and industry trends, CohnReznick's Affordable Housing News & Views has the housing tax credit industry covered.
InsightAffordable Housing News & Views - February 2020Beth MullenCatch up on the latest affordable housing insights, events, headlines, and resources in our February 2020 Affordable Housing News & Views newsletter.