Will Opportunity Zones Spur Investment of Private Wealth into Underserved Communities?

Elaborate on the opportunity of Opportunity Zones to spur investment of wealth into historically underserved communities in California and nationally.

Ian Ross: The Tax Cuts and Jobs Act of 2017 provided a new tax incentive centered on the deferral, reduction, and potential elimination of capital gains taxes through investment in qualified real estate and business opportunities inside designated Opportunity Zones.

Opportunity Zones are low-income census tracts that have been designated by every governor in every state. There are approximately 8700 opportunity zones nationwide, approved by the Treasury Department.

The best way to think of Opportunity Zones are as communities in need. They are low-income areas that, in large part, have not been on the radar of the private sector capital markets, nor did they see the types of new investment that other areas benefited from over recent decades. This program creates a unique opportunity for an enormous amount of the nation’s wealth to find its way into historically underserved communities.

There is an estimated $6 trillion in capital gains that could conceivably be invested into qualifying opportunity zone business and real estate opportunities (QOZB). The three-step process for investment: is 1) capital gains are realized from the sale of real estate, stock, or business assets; 2) gains are invested into a Qualified Opportunity Fund (QOF); and 3) the QOF makes investments in business and real estate projects inside designated Opportunity Zones, bringing distinct tax advantages to the investors while investing new capital into low-income census tracts around the nation.

Investors receive three distinct benefits: First, the capital gains invested into QOF are tax deferred. Second, once the fund invests into a QOZB, investors receive a step-up in their basis of up to 15 percent depending on how long they hold the investment. This means that a smaller portion of the capital gains they invested into the fund are subject to taxes. After five years, the basis increases by 10 percent, so that only 90 percent of the original gains are taxed; after two more years, it increases another 5 percent, so that only 85 percent of the gains are taxed.

Third, if the investment is held for 10 years, there is no tax on the investment appreciation—the appreciation on the opportunity zone investment—is excluded from capital gains taxation. Since the value of the benefits greatly increases with time, investors will look for business and real estate opportunities that can be executed in the short run.

How are California and local governments responding to this new opportunity for $6 trillion of private investment in underserved communities?

This is a very important question. In the history of economic development, there has almost always been an assumption that a government or economic development organization is a required participant. In the case of Opportunity Zones, no government involvement is required at all. The private sector can self-certify funds and self-certify opportunities. In fact, it’s entirely possible for the state, county, and city to be completely unaware of private investments being made in their Opportunity Zones.

That said, this program creates an incredible opportunity for governments, institutions, and economic development organizations like chambers of commerce to get involved. There are already hundreds of millions of dollars looking for business and real estate investment opportunities in Opportunity Zones, so it behooves local governments and their economic development partners to do what they can to accelerate investments in their communities.

Some initial steps that local governments can take include identifying both business and real estate opportunities in their communities. That includes public properties, P3 opportunities, and looking to their institutional partners for business and real estate opportunities where they can partner to help advance the project. I believe one of the greatest acts a government can take is to take inventory of the business and property owners already operating in the opportunity zones, and provide them with resources so that they can get into the deal-flow themselves.

California is in a unique position in that includes 879 Opportunity Zones—10 percent of the national marketplace. So what can the state do? Under the leadership of Governor Jerry Brown, OppSites has partnered with the state to create an online marketplace aimed at matching capital partners with California communities. At opzones.ca.gov, the state has created a great website that providing education and resources, as well as a link to the marketplace beta.oppsites.com.

One of the challenges facing California QOZBs, especially for real estate related projects, is that things can move slowly here compared to other states. Particularly when CEQA processes are involved, things can really slow down. And every minute of risk and uncertainty about a project equals a minute that an Opportunity Fund’s investors may not necessarily be receiving the benefits.

In a competitive national marketplace of prospective investment projects, California needs to figure out how to streamline project approvals in order to ensure that investors see their benefits.

In summary, this program is an incredible opportunity for California cities to attract private-sector capital to underserved markets—creating projects that benefit communities, like housing, and new businesses, at significant scale. But in order to seize that opportunity, we have to make sure that projects can be approved and executed in a timely manner.

Elaborate on the partnership between the state of California and OppSites on facilitating investment in Opportunity Zones.

OppSites’ partnership with the state of California is to host the California marketplace for Opportunity Zone investments (opzones.ca.gov). The platform combines a Marketplace for creating and discovering opportunities, and a Network of professionals to perform due diligence, and bring local expertise to execute on projects in a timely manner.

The platform enables every person and organization—including real estate professionals, business and property owners, cities and economic development organizations, advisors, service providers and localbusiness and property owners; to create a profile, promote and discover project opportunities, be discovered for their expertise.

Because Opportunity Zones span the country, the money is in large part agnostic; a fund in Boston or in Chattanooga could find an opportunity in Fresno or Manteca. So the last piece of the puzzle of attracting investment to your particular area is the ability to execute on the project.

The other component of our platform, which is unique to us, is the PlaceNetworks, which function as online communities of people and organizations working to improve specific cities. Everyone can join the PlaceNetworks where they live, work, invest, and pursue business, to find and share opportunities, make new connections, and shape the conversation.

The upside opportunity for private investors is fairly clear. But what are the potential downside risks for communities from investment through Qualified Opportunity Funds? 

From the position of the communities designated as Opportunity Zones, I think there’s a major blinking yellow light, if not a red flag. That is the G-word: gentrification.

This new tax policy can funnel an enormous amount of private-sector capital into underserved communities. It mitigates the risk of investing in these areas, creating potential for new development, new businesses, and new jobs, —all the things that drive economic development and that we want to see. But on the flip side, it also comes with the potential for a change of market conditions that could encourage speculation and drive gentrification. It’s important to make sure that this influx of capital doesn’t become just another way of pushing people out.

Every city and community needs to look at how to ensure that the long-term benefits of Opportunity Zone investments are distributed to existing community members. Bruce Katz at the Brookings Institute, among others, is researching this. For example, folks who own businesses or property in low-income census tracts perhaps haven’t had a lot of luck getting commercial loans for new projects because the market conditions weren’t there—and now, the needle on those market conditions is moving.

In my opinion, this program actually creates a unique opportunity for communities to take ownership of the benefits of private investment. Recently, we’ve seen a lot of what I call “silver-bullet” or economic development, like chasing after Amazon’s HQ2: the idea that if you can just land the big one—that great white whale—it’s going to solve all your problems. With Opportunity Zones, communities could spend their resources trying to attract the Goldman fund or the JP Morgan fund—the “big one”—but there’s another way to approach it.

What’s fascinating about Opportunity Zones is that any accredited investor can participate. This means that communities could look at their own inventory of business and property owners with prospects for growth, look at how their local rules could be modified to enable new development, and look at what institutions and corporations in the community could pool their capital gains—and then create their own funds and invest in projects in their own communities. This is something that, so far, the regulations seem to enable through the self-certification, and it would mitigate some risk of gentrification while allowing communities to participate in the upside.

I’m very focused on learning how these new regulations enable and empower underserved communities to look generate for themselves rather than only outside their community for new capital. And it’s a goal of OppSites to provide everyone with resources and education so that anybody can create and discover opportunities, and get themselves into the deal flow.

Right now, the platform is live in Beta; That means it’s available to everyone to create their profile, showcase their expertise, create and discover opportunities, and make new connections. We ask everyone to recognize that we’re actively building new features, mainly in response to user feedback. We’re still learning, and new features are being released every day. It can be found at beta.oppsites.com, and information about our California marketplace can be found at beta.oppsites.com/about/california.