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A Greater Social Purpose: Opportunity Zones Are Not Just For Tax Benefits But To Uplift Low-Income Neighborhoods

As real estate investors nationwide continue to dig into the Opportunity Zone program and how it could benefit their firms, University of Southern California professor Gary Painter wants to remind them of the bigger picture.

Opportunity zones create a chance to transform and uplift low-income neighborhoods, said Painter, who serves as the director of the USC Sol Price Center for Social Innovation, which examines ways to improve quality of life in low-income areas.

A building in one of the designated opportunity zone tracts in Long Beach

“The reality is these [distressed] communities have not had the same levels of private investments [as] other communities for various reasons,” Painter said, referring to redlining and other forms of historically racially discriminatory housing practices. Redlining was the practice by the government to deny mortgages in predominantly African-American neighborhoods and surrounding areas.

Opportunity zones, he said, could provide a greater social purpose, if investors and real estate developers engage the community early.

“This could be a tremendous opportunity to create that vision,” Painter said after Bisnow’s Evolution of LA's Submarkets & The Impact of Opportunity Zones event earlier this month at the JW Marriott in downtown Los Angeles. “You are more likely to see YIMBYs than NIMBYs in these places because these people want investments in their communities and they are ready to go and will probably be supportive." 

Passed as part of President Donald Trump’s Tax Cuts and Jobs Acts, the Opportunity Zone program gives a hefty tax benefit to investors who invest through an opportunity fund in designated opportunity zones. 

The program’s goal is to spur economic development in economically distressed communities that were chosen earlier this year by each state’s governor based on census information. 

Since the announcement of the program, there has been a lot of excitement from the investment community about the dangled carrot of tax benefits and the ability to defer or eliminate capital gains depending on how long the investment is held. There are also concerns.

To get those tax breaks, many investors will have to do something they might have never done before — invest in and engage residents in low-income neighborhoods.

Because of past housing discrimination, many of the designated opportunity zones are in areas that have historically been bereft of investments and may have fallen into disrepair.

Sheppard Mullin’s Pam Westhoff, CohnReznick’s Rony Rodriguez, USC Sol Price Center for Social Innovation's Gary Painter, Strategic Realty Holdings' Eddie Lorin and Kosmont Cos.' Larry Kosmont

This risk poses a challenge for investors who have traditionally invested in a specific area of a city or neighborhood.

It is going to be a learning curve and some may not be willing to take that risk, Painter said.

“If they are a Class-A office developer, they are just going to develop in certain Class-A markets and not ever deviate from that model,” Painter said. “They know the model. They know the numbers will pencil out. It’s less risk but there’s also less return.”

Nonprofit organization Los Angeles LDC President and CEO Michael Banner said there are other challenges investors face, including within their own companies over whether they should invest in opportunity zone areas, as well as engaging the community.  

“These communities tend to lack access to capital and investment because people don’t believe they can make money there or the risk outweighs the reward,” said Banner, who has worked to lure investments in these neighborhoods for more than 30 years.

Residents might not believe these opportunity zone investments might benefit them, Banner said. Rather they could feel threatened that it may lead to higher rents or eviction. 

"Opportunity zones in some folks’ minds is code for me leaving,” Banner said. "If you are going to create value, value means that somebody is going to pay for that value — does that mean higher cost and more rent?"

"Things need to be balanced in the public policy perspective for this to become effective," Banner said. "But I have long been a proponent to find all kinds of ways to increase investments in these areas."

A retail building in one of the opportunity zone designated tracts in Long Beach

USC's Painter said fear of displacement and gentrification and other issues are always going to be on residents' minds.

"They have seen the process disadvantage them in the past and, rightfully so, they are going to have some skepticism,” Painter said. 

This is the big reason why Painter is urging opportunity zone investors and real estate developers targeting low-income neighborhoods to get the city and community involved early in the process to rally behind the project.

"If you come in with your shovel-ready project that would work in Marina Del Rey and believe you are just going to pop it in one of these opportunity zones without engaging the nonprofits and community groups, you are actually setting yourself up for failure that doesn’t have to be," Painter said, adding that cities, neighborhood groups and nonprofits have tried for decades to improve the lives of those in these distressed neighborhoods.

"But if you engage right now, or better a few months ago, you could actually shape [what] that investment is going to look like and you are going to get an amazing amount of support," Painter said. "You are already aligning yourself with the vision and not forgetting about all of the work that has already happened in those places."