Responsible Investment

Opportunity Zones & Impact

I had an interesting discussion this week about Opportunity Zones and the challenges many communities have simply due to the compressed timing the legislation imposes. There are so many places where a given community hasn’t really thought about what they want and are just getting started, where the local skill and capacity is limited, technical assistance is needed, investors are reluctant to take a risk and there are few shovel ready projects that have already made it through community engagement. I fear without some changes (extension) to the legislation, many communities are going to miss out on the opportunity.

I got pulled in early into the O-Zone conversation in January last year when EIG reached out to get a perspective on the legislation might play in real estate. At the time I was the Chair of the Responsible Property Investment Council. Since then I’ve been working with investors/developers and cities in developing their O-Zone strategies and O-Funds. I’m presently working on 4 funds - 2 project specific (mixed-use - community library, housing, maker space; the other a multi-family project), one a local/regional fund for the Rocky Mountain West and the final one for our work with the Lotus Campaign - investing in workforce housing and making units available for people experiencing homelessness.

I’m working to integrate a series of metrics for investors that include a variety of social equity, community outcomes and environmental touch points so that when they make investment decisions, they have a sense of how the investment aligns with their values. However, that doesn't necessarily address how a community can ensure the incoming capital meets those same needs. Looking forward to having some further conversations with communities on how they can optimize their O-zones.

Navigating the Land of OZ: Understanding Opportunity Zones and Opportunity Funds

Flying under the radar in the 2017 tax reform package was a sleeper provision that authorized the designation of “opportunity zones” and the creation of “opportunity funds.” This versatile program has the potential to stabilize and revitalize distressed neighborhoods and surrounding communities by unlocking private investment capital through a series of tax benefits.

The provision allows individual and corporate investors to defer capital gains tax until 2026 if those gains are reinvested into new construction or major rehabilitation of projects in economically depressed areas via designated opportunity funds. If held for five years, the original amount of capital gains tax due is reduced by 10%; if held for seven years it is reduced by an additional 5%.  If the investment is held for at least ten years, gains on the invested amount accrue tax-free. 

Estimates suggest that $6.1 trillion of unrealized capital gains is held by American households ($3.8 trillion) and American corporations ($2.3 trillion). Getting to that capital will be a bit trickier. Much of the money is disaggregated across individual accounts managed across myriad institutions and platforms. 

At least 90 percent of the assets in such funds must be invested in government-designated low-income zones. The governor of each state was able to designate up to 25 percent of the state’s low-income communities (LIC) as opportunity zones. Up to 5 percent of the designated zones could be contiguous to LIC tracts. The zones are designed to be in areas that have a poverty rate of at least 20 percent or that have a median income that does not exceed 80 percent of the metropolitan area’s median income. The final designations were made in spring 2018. In total, 8,700 opportunity zones were chosen by state governors and approved by the U.S. Department of the Treasury. These zones range from a few blocks in large metro areas to entire municipalities in some rural states. The Treasury Department has indicated that no additional opportunity zones will be added. 

The expectation is that the added tax incentives will make investment in these disadvantaged areas just a little more enticing and add another option to the capital stack. Concerns exist that the investment capital that may come flooding in also has the potential to push out residents and achieve value primarily for investors. It is expected that states and local communities will provide guidelines to ensure that the objectives of affordable housing, strong neighborhoods, and vibrant, diverse, and sustainable communities are met. 

As of the third week in August 2018, final rules from the Treasury Department were still pending.

The Messy Complexity of Life

I’ve found  that buildings and communities are deceptively complex.  In their simplest form, buildings provide us with shelter and enable us to work productively. Communities link us together and provide the necessities of a civilized society - roads and schools, safety and security, systems of communication and infrastructure - energy, water and waste disposal,. But, beyond that they are also an eco-system that reflects the culture and values of the people that live, work and play within them. A unique matrix of individual parts that when put together in a thoughtful and intentional way create harmony and enable each of us to bring our best selves to the mix. Buildings play an important role in how easily and effectively we can do that. And the recognition of how people interact with each other is key to creating a resilient and vibrant community.

The best projects are ones in which we make the conscious choice to be mindful and think holistically and systemically about the solutions. The trans-disciplinary nature of the team and partnering with the community brings forth solutions that may not be obvious or expected, but in the end are more meaningful and durable. By sharing roles and crossing disciplines we learn from and challenge each other, ultimately pooling and integrating a wealth of expertise. Today’s world requires a vastly different analysis - one that looks at the total value of resiliency, sustainability and high performance. It includes the full range of economic, social and environmental impacts. Decisions around sustainability need to quickly move beyond neat rows of check boxes (and simple payback) to the messy complexity of real life.

There exists a quantifiable and integrated suite of payoffs at the property level that accrue to the owner and occupants, as well as at enterprise and community levels. Successful adaptation and change happens when we are able to articulate the benefits in the context of this complexity and make this the primary source of inspiration and the lever for action versus falling into the trap of easy black and white answers."