Pressure To Change OZ Reporting Requirements Amps Up As Election Looms
After the election, the political will to keep the Opportunity Zone program in place seems to exist, regardless of who wins the White House and Congress.
Yet it is also just as likely that changes will be made, either in the program's fundamental goals, or maybe just some tinkering at the edges. There is a wide spectrum of opinion on what should be done about OZs, a possibility Bisnow covered in the first section of this series last week.
Monge Capital Managing Partner Jeff Monge said regardless of who is in power, tweaks are needed in the program if it truly wants to achieve its mission of uplifting neighborhoods that need it. Monge said the program has plenty of flaws, but chief among them is that there is no reporting requirement for OZ fund managers to report how much and where they are investing.
“You had the ability to bring capital to low-income communities, but no obligation or reporting mechanism to be able to prove that the program is creating community development,” Monge said. “Investing in low-income communities is not defined as community development. There’s a fine line between community development and gentrification.”
The lack of reporting does more than obscure where OZ investments are going. It also makes a definite understanding of the impact of the program hard, if not impossible, because aggregated data simply doesn't exist.
Without that kind of data, finding meaningful patterns about OZ impact on the places they are supposed to help is elusive, though it is certainly possible to point to anecdotal abuses, the program's worst examples have gotten a lot of press, as well as success stories.
"From the standpoint of data science, it's frustrating because it's very challenging to study impacts when you don't know where the money is flowing or have detailed information about projects and their locations," said Chelsea Garber, who recently completed a doctorate in public and urban economies at Duke University, and co-authored a 2020 paper on how opportunity zones have been selected.
That makes the Opportunity Zone program very different from the New Market Tax Credit program, she said, where there is a centralized application process, and organizations receiving the credits have to be certified as community development entities, which are assessed on community-based merits. That generates a lot of data, but there is nothing like it in the OZ program.
Efforts have been made to rectify the dearth of OZ data, but as yet have gone nowhere.
Sen. Tim Scott, a Republican from South Carolina who co-sponsored the bill creating OZs, has urged his colleagues to support and pass the IMPACT Act (Improving and Reinstating the Monitoring, Prevention, Accountability, Certification, and Transparency Provisions of Opportunity Zones), which he introduced in December.
The bill would require opportunity zone fund managers to report the total value of each OZ investments and locations; adds penalties to those that don’t file returns; and would require the Treasury Department to track funds and where the dollars flow. The original opportunity zone program had a reporting requirement, but it was removed for procedural reasons in the Senate during the run-up of the Tax Cuts and Jobs Act in late 2017.
"Sen. Scott has received bipartisan support from his colleagues in Congress, in addition to lawmakers across the country — even Joe Biden has showed support for Opportunity Zones," Scott spokeswoman Patrice Smith told Bisnow via email. "The program’s growing popularity among elected officials on both sides confirms that the law will continue to serve communities of color, small businesses and homeowners."
For its part, the Biden campaign has released language supporting opportunity zones that isn't overly specific about any changes he would push for as president. But like Scott, the campaign document supports greater reporting by requiring recipients of the tax break to provide detailed reporting on their investments and the impact on local communities.
The Biden document also asserts that Treasury Department oversight would "ensure these tax benefits are only being allowed where there are clear economic, social and environmental benefits to a community, and not just high returns — like those from luxury apartments or luxury hotels — to investors."
One of the other setbacks the program has faced is its backing by its loudest supporter, President Donald Trump. Trump has hailed the program as a way to bring much-needed capital to distressed areas. But Trump’s fireball demeanor has discouraged the support of some minority and smaller investors, wary of aligning themselves with a program supported by the president, CitiHousing Real Estate Services President Carmen Hill said.
“This program would be an economic boom in low-income neighborhoods if it didn’t have such a bad reputation and bad press,” Hill said. “The average investor feels that it’s a Trump program and that it’s bad for the community. But it’s not like that. It’s an innovative way to provide capital in distressed areas without it coming out of the federal government’s pocket.”
Hill said she doesn’t believe that a new administration could change that perception or that a new president would get rid of the program. “There’s too much money coming in,” Hill said.
Congress might also choose to address the way zones are selected, Garber said. Under the present system, selecting census tracts for inclusion in an OZ has been entirely at the discretion of state governors. Garber's paper details how that has led to political considerations being a factor in the selection of tracts, rather than strictly economic ones.
"All else equal, tracts that supported the governor in the last election were more likely to be selected as opportunity zones," she said. "Also, and all else equal, when executives or firms with an economic interest in a tract donated to the governor’s campaign, those were more likely to be picked as well."
The governors’ discretion in this process hasn't been subject to any meaningful review, Garber noted. It is a sweet deal for any governor: He or she is empowered to distribute largesse provided by the federal government but without any scrutiny within the state.
That discretionary power seems to have been a factor in the program's excesses.
Garber's paper found an OZ tract in Manhattan that is the new home of a prominent hedge fund; four tracts in Downtown Portland, Oregon, that were at least in the 93rd percentile in terms of median family income, including one that experienced 600% growth in median family income between 2010 and 2017; and a tract in Houston that marginally qualified for selection in 2015 based on poverty rates but would not have qualified as of 2017, with a median family income of $250K.
Most of Downtown Napa, in California's posh Wine Country, is also designated an opportunity zone.
Considering the program's apparent flaws, questions have arisen over whether it should survive at all. Inside and outside of Congress, there are strong opinions on the matter.
PHT Opportunity Fund Chairman Jim White said that the program has a lot of momentum, and should survive in some form, but that it is up to the commercial real estate industry to push for its continuation since it isn't guaranteed.
"Any new administration will have the impulse to repeal whatever the previous administration did, so it's up to us to keep pressure on politicians," White said. "Investment into the zones are becoming more diversified and I believe it's creating jobs. If the industry can demonstrate to Congress it's working, the program is more likely to survive."
On the other hand, there are plenty of OZ skeptics, such as Rep. Rashida Tlaib, a Democrat from Michigan, who introduced a bill in November to repeal the whole kit and caboodle.
The policy itself is fundamentally flawed, according to Assistant Professor Timothy Weaver in the political science department of the Rockefeller College of Public Affairs and Policy at the University at Albany.
"Reporting requirements would make it a bit less bad," he said. "But it isn't going to do what proponents say it is going to do, namely reduce unemployment or poverty in poor neighborhoods. Capital gains tax breaks benefit those who can pay capital gains taxes."
Beginning in the 1980s, Republicans came out with the Enterprise Zone program, and over time, evidence accumulated that it didn't work well, Weaver said, adding that despite that evidence, Democrats increasingly signed on to it.
"That kind of history is repeating itself in opportunity zones," he said. "That's my concern and the concern of a lot of opportunity zone skeptics.
"I fear we're in lipstick on a pig territory," Weaver said, regarding whether reform is a worthwhile ambition for the program. "While you can get rid of some of the most egregious abuses, we're still going to be left with the problem that a capital gains approach to helping poor people is a bad way to go about it. "