Communities Find a Better System of Housing Development Through Opportunity Zones

BY: DAVID HODES

One of the relatively newer methods of economic development for U.S. communities is the opportunity zone (OZ) program, created to address the economic and social inequities that have been building up as a result of the Great Recession from 2007-2009. ...........................................................................................................

As part of the Tax Cuts and Jobs Act of 2017, OZs were first proposed in the bipartisan Investing in Opportunity Act, which was originally introduced in Congress in 2016.

The program provides a capital gains tax credit for investments made in more than 8,000 high-poverty neighborhoods across the U.S. Two types of investments qualified: investment in new or existing businesses that largely operate in OZs, or investment in the development of properties located in OZs.

The Congressional Joint Committee on Taxation estimates that this incentive will reduce tax revenue by an average $3.4 billion per year from 2019 to 2023.

According to a report by the Economic Innovation Group (EIG), a bipartisan public policy organization, since 2018, OZs have already achieved a “combination of expansive geographic reach, large- scale private investment, and significant economic effects that is unique in the history of U.S. place-based policy.” They are “an experiment in what placebased policy can achieve through a more decentralized, flexible, and scalable model.”

OZs are an approach to community and economic development efforts that is designed to increase access to capital for a wide array of uses in eligible low-income communities.

The EIG report also found that OZ investment reached approximately 3,800 communities from mid-2018 through 2020, representing nearly half (48 percent) of the total number of designated OZ communities nationwide.

Total OZ equity investment was at least $48 billion by the end of 2020.

This capital came from approximately 21,000 individual investors and 4,000 corporate investors who put their money into 7,800 Qualified Opportunity Funds.

The likelihood of investment in a given month increased by more than 20 percent in designated areas across 47 cities that were studied, according to the report. OZ designations were found to have had positive economic effects on neighboring communities and contributed to development on a city-wide scale.

COLORADO’S OZ STORY

One example of the successful implementation of opportunity zones is in Colorado, which embraced OZs in 2018. In fact, Colorado was one of the first states to be approved for OZs by the U.S. Department of Treasury. There are 126 OZs designated in the state, with eight new programs or initiatives launched by the Office of Economic Development and International Trade (OEDIT). Of these, 56 percent are located in metropolitan areas.

The state formed the Colorado Opportunity Zone Program in February, 2019 inside of the Colorado Office of Economic Development and International Trade (OEDIT), designed to encourage long-term private investments in real estate projects and operating businesses located in designated OZs by helping economically distressed communities leverage the OZ program, support businesses in securing OZ investment, and connect investors and projects through Colorado’s Investment Database.

According to a press release, the program office will offer grants to support economic modeling, prospectus development, and other technical assistance needed to help community-oriented projects come to fruition.

More than 20 communities in Colorado have attempted to attract OZ investment by developing an investment prospectus, creating OZ marketing materials, and/or ensuring that information pertinent to OZ investors was included on their websites, according to an overview of deliverables about known OZ activity in Colorado through 2022.

To be eligible for a Colorado OZ designation, a community in the state must have a poverty rate of at least 20 percent, and median family income cannot exceed 80 percent of the statewide median family income if located outside of a metropolitan area.

Here are two success stories about Colorado’s OZs:

• The Eddy Apartments in Grand Junction, which opened in August 2022, and was fully leased within 60 days. This multi-family project created 96 rental homes close to downtown Grand Junction, with affordable one- and two-bedroom rental houses.

• Camp V, on 120 acres of desert between Telluride and Moab, Utah. It is part of the Four Points. Funding outdoor hospitality portfolio.Camp V’s lodging and recreation has a mission to connect people, art, and community in the historic mining town of Naturita.

“My office really was quite proactive and getting all of its ducks in a row,” Jack Tiebout, senior program manager of business funding and incentives for the OEDIT, told BXJ. “It was a really short period between the announcement of the OZ program and the designation of the zones. We did a deep dive on the data, but we also had plans specifically for each zone, and which projects would be feasible for investment, and who would be the local person that was someone that we could connect them with. So I think kind of building that infrastructure was really crucial.”

Tiebout discussed one way of measuring how an OZ program is by working through the Mastercard Center for Inclusive Growth, which ranks OZs relative to OZs within the same county, city, state or across the entire country. The higher the score, the more likely it is that indicators of inclusive growth are trending in the right direction over time. “They aggregate together different factors like new business starts, lending activity, broadband access, things like that within opportunity zones,” Tiebout said. “And going back to 2017, 62 percent of the census tracts that were designated as OZs in Colorado have seen an increase in that total score.”

He said that the OEDIT continues to make a huge push to educate community leaders, investors, and all the stakeholders across the state to make sure they had an understanding of the OZ program. “Once you get past the kind of headline summary of how it works, it does get almost intimidatingly complex,” he said. “So just educating them, making sure that they knew they have us as a resource, and that they were building out investment prospectuses for investors—all that really makes a huge impact.”

The complexities of OZs included such things as how to ensure that the investment stays compliant. “It’s 100-plus pages of rules. It kind of takes an accountant or a tax lawyer to parse it,” Tiebout said. “We’ve seen this in Colorado where people are dissuaded from participating in the program just because it’s so intimidating. So to whatever extent we can even just make introductions to accountants and lawyers, that helps a lot.”

Tiebout said that they don’t get as granular data as they would like where they could say that a certain OZ investment created certain effects in this community. “But one impact I definitely like tracking is just the number of new housing units that have been built as a result of OZ investment in Colorado. We have a bit of a housing crisis here. So knowing that this program has helped add at least 1,000 if not multiple thousands new housing units at market rate that is workforce affordable, it’s been great to see that. I think that’s probably the clearest indicator that we can point to statewide.”

And beyond OZ, but inspired by OZ, is a strategy of having municipalities and counties and other more local entities create not just plans for their entire city, but plans to show what will happen for an investor who is interested in their area, Tiebout said. “They can point to these catalytic projects that are both going to get them their returns and help make a huge impact in their community. I think that kind of prospectus building, that sort of pipeline building strategy, is really crucial, both in opportunity zones and beyond in other economically distressed areas.”

Looking Ahead

The EIG report added that there is still a lot of work to be done to educate investors, local leaders, and other potential market players about the OZ incentive and how it functions. “It is becoming clear that many of the loftiest hopes—that a tweak of the tax code could fundamentally transform the economics of investing in low-income communities overnight—and greatest fears—that an OZ-fueled tidal wave of resident-displacing gentrification would crash across the designated communities—proved foreseeably off the mark.”

The market is in the process of figuring out where the OZ as a new tool of development finance fits in the broader toolkit, the EIG report found. “Broadly, the early 2020s are shaping up to be a ‘proof of concept’ phase for the policy. The early results are promising but also suggest that further tweaks to the policy will be necessary for it to fulfill its promise.” X