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REPORT: Opportunity Zones Are Not Generating The Benefits That Underfunded Communities Were Promised

A map that outlines the opportunity zones, tax increment reinvestment zones and management zones in Houston.

Opportunity zones are not providing the economic and community development benefits to underfunded neighborhoods that the program was intended for, according to a new report from the Urban Institute.

The report was based on anecdotal evidence rather than hard data. Researchers conducted interviews with 70 stakeholders in opportunity zone investing around the U.S., including project sponsors, fund managers, investors, wealth managers, developers, philanthropies, and public and nonprofit agencies working with opportunity zones. The study was funded by a grant from JPMorgan Chase.

The majority of opportunity zone capital appears to be flowing into real estate, not into operating businesses, the report found. Interviewees attributed this to various program design constraints and the undesirability of selling equity from both the business owners’ and the investors’ perspective.

Feedback from interviewees also suggested that most developers and investors view opportunity zone incentives as providing a relatively small boost to overall returns. Some developers reported that their projects would have proceeded without any opportunity zone equity.

The research found that one of the primary benefits opportunity zones have are their ability to elevate the visibility of neighborhoods and deals that investors might not have considered otherwise.

The opportunity zone program, created by the Tax Cuts and Jobs Act of 2017, aimed to establish an economic development tool that would foster equitable development outcomes in undercapitalized communities. Those equitable outcomes include quality jobs, affordable housing, community-oriented amenities like grocery stores and improved quality of life for low-income people.

Evidence gathered from industry players suggests that opportunity zone incentives need to be redesigned more effectively to allocate government dollars to help project sponsors achieve those outcomes, the report said.

In the report and a subsequent blog post, Urban Institute researchers proposed four main principles to guide federal policymakers to redesign opportunity zone incentives to meet the program’s stated objectives. 

The first principle is to redesign the incentive to better support investments in small businesses, as the report determined the program’s biggest failure is that very few investment dollars actually go to that cohort.

Opportunity zones should also size the incentive, based on the impact of a project. By targeting incentives to investments with the greatest impacts, those projects could be more deeply subsidized while more efficiently using total federal tax expenditures.

The researchers also called for the opportunity zone program to broaden the pool of people who can invest, and support mission-driven funds that are accountable to the community.

The Treasury Department and the IRS released the final round of opportunity zone regulations in December.