Route Fifty: What to Think About Next With Opportunity Zones? Community Input For One Thing.

Press Coverage: 19, March 2019

AP Photo/Julio Cortez

STANFORD, Calif. — Mayor Sly James, of Kansas City, Missouri, says the Opportunity Zones in his city are getting ample attention from investors and developers, but emphasizes that it’s going to take more than that to make the program a success.

“There’s a high level of interest,” he told Route Fifty here Monday during a summit of about 400 state and local leaders, investors and others gathered to discuss the economic development program. “There’s people that want to make the investments.”

But some, James says, are eying ventures that may not mesh with the city’s overall vision for developing the zones—census tracts that are eligible for investment under the program.

“We’re saying, ‘No, no, no, no, no.’ We’re not going to have these little scattershot one-off projects,” he said. “We want transformative things. So everybody cool your jets. Let’s focus this.”

Monday’s summit shed more light on how governments, the investor community, and nonprofit organizations are approaching Opportunity Zones, a program designed to stimulate investment in low-income areas by offering taxpayers a federal tax break on their capital gains.

Attendees stressed that community engagement will be crucial in any places where investment does take place. There was also discussion about the need for working across agencies and levels of government as the public sector interacts with potential investors in the zones.

And there was talk about the key role philanthropic organizations and foundations may have to play as the program continues to unfold.

“This is one of those moments when we have to go on offense,” said Mary Ellen Wiederwohl, CEO of Louisville Forward, an economic development agency in Louisville, Kentucky.

Wiederwohl says there’s a need for cooperation among agencies involved in economic development, land use and permitting, with the aim of providing “concierge service” when inquiries comes in from prospective Opportunity Zone investors and developers.

“You don’t have to go: ‘Well, call the planning department and get back to me on what they say,’” she said. “You’re going to lose that deal.”

Ben Seigel is Baltimore’s point person for Opportunity Zones. In his remarks he bemoaned that he was appearing at the event days after The New York Times Magazine published an article headlined: “The Tragedy of Baltimore,” billed as a look at “the crackup” of the city.

But he said in his work he’s trying to serve as sort of a “Match.com” for investors and projects in the city that might be a good fit for them.

He noted that Baltimore has launched a “neighborhood impact investment fund” backed by lease revenues from city-owned parking facilities and that the fund will operate alongside the so-called “opportunity funds” that will make investments in zones.

California’s treasurer, Fiona Ma, said the state is hoping to pair Opportunity Zones with other programs, like the low-income housing tax credits her office oversees.

“But I do think there has to be coordination,” Ma added. “It can’t just be one building here, one building there.”

People refer to what’s called the “capital stack” when they talk about possible zone-based projects—an apartment building for instance. The stack refers to the mix of debt, equity investments, and public subsidies required to make a deal viable for investors.

Opportunity Zones provide a way to subsidize returns for equity investors in real estate projects, possibly helping to bridge gaps in the capital stack, says Rachel Diller with Hunt Capital Holdings, an investment firm and “this should make deals on the bubble work.”

While it’s open to debate and depends on a range of variables, Diller said that generally people say that the Opportunity Zone benefit amounts to between 200 and 400 basis points, or between 2 and 4 percent, per-year over the life of a project.

That means that equity investors might be willing to accept lower returns than they would otherwise after factoring in this benefit.

Patrick McKenna, founder of HighRidge Venture Partners, emphasized that there are risks that come with investing in young companies, particularly in places with still-emerging tech sectors.

“I’m always wondering where’s the $5 million and $10 million check going to come,” he said.

“One of the key things that I’m excited about,” McKenna added, is “how does this incentive program lower the risk of these investments.”

Investors do tend to view Opportunity Zones as riskier places to invest, Agnes Dasewicz, a fellow with The Rockefeller Foundation said.

But she also suggests that foundations can help build “connective tissue” to help them manage this risk.

For instance, she said, by investing in funds, supporting first-time fund managers, helping communities collect and analyze data about what types of projects might make the most sense, or compiling information that might help investors get a better idea of what the zones are like.

Dasewicz also points out that often people in local government outside of big cities working on Opportunity Zones issues have other responsibilities, and stretched budgets. “They really need philanthropy and other donors, local investors to step up and help them,” she said.

Ensuring that residents living in census tracts that are designated as zones get a say in what types of investments take place in their neighborhoods is another leading concern.

“If you simply try to impose something on a community, you do so at your own peril,” James, the Kansas City mayor, said at the summit.

“Our team in Kansas City is working to find that sweet spot between meeting both community needs and a good return for the investor so that they’ll continue to want to invest,” he added.

It’s up to local governments to try to weed through speculators and gentrifiers looking to do business in the zones, according to Los Angeles Mayor Eric Garcetti, advisory council chair of Accelerator for America, which organized the summit. He says if government doesn’t block those types of practices, he expects communities will.

“If you haven’t listened to the community, if you don’t take this playbook from the beginning, you might find someplace for your capital to land. But it’s going to take you longer, it’s probably not going to be as good deals,” the mayor said during an interview.

“Or you might even get chased out of town,” added Garcetti.

Wiederwohl, with Louisville Forward, said her office received an email last week about an upcoming forum premised on the idea that Opportunity Zones could be worse than “urban renewal.”

That lightning rod term refers to federal policies that ramped up in the 1950s and resulted in the demolition of neighborhoods and displacement of residents to make way for new projects.

“It hurt,” Wiederwohl said of receiving the email. “But it is a perception that’s out there.”

David Gross, a former investment banker with Citigroup and founder of The Confluent Group, a private investment organization, is originally from south central Los Angeles and explained to the audience how he’d lost a younger brother to gang violence.

He said it would be a disappointment if Opportunity Zones result in investments that feel like something “being done to” or “even being done for” low-income neighborhoods. “For this to be a success,” he said, “it has to actually be something that’s done with them.”

Article originally published in Route Fifty on March 19, 2019.