Data Gathering Is Crucial To The Success And Survival Of Opportunity Zones
Want to get a jump-start on upcoming deals? Meet the major players at one of our upcoming national events!
Since opportunity zones were introduced at the end of 2017, they have been touted by some as potential vehicles for transformative change in underserved communities. How one might measure such change remains painfully unclear.
When the IRS and Treasury Department held the second public hearing about opportunity zone regulations in early July, multiple speakers, including U.S. Impact Investing Alliance Executive Director Fran Seegull, requested that the agencies implement a mechanism for data collection, analysis and disclosure.
“Folks are already looking to extend and re-up elements of the program, since some of them are time-bound, and we need to be able to make the case to continue or optimize the program,” Seegull told Bisnow in a phone interview after the hearing. "But we won’t know how effective this policy is, beyond how many people got a tax break, without data.”
The opportunity zone legislation's initial form, before it was folded into the sweeping U.S. Tax Cuts and Jobs Act, included a requirement that the Treasury Department deliver a report to Congress five years into the program's life span. That provision was removed before passage and was not replaced with any reporting framework.
Republican Sen. Tim Scott, who co-sponsored the bill with Democrat Cory Booker, expressed regret for having to remove the data provision when speaking at Bisnow's Opportunity Zones Summit in Washington, D.C., in June.
"I’m working with [Booker] to put that legislation back in, because the only way to make sure we know whether the program is succeeding is to find out what’s happening in those 8,700 or so opportunity zones," Scott said.
Defining "what's happening" means establishing what sort of information is useful in charting a neighborhood's growth and health. Opportunity zones were established based on income data from the 2010 census, but average income in a census tract is insufficient as a continuous metric due to its inability to account for potential gentrification.
"Opportunity zone eligibility was based on median income and poverty levels," said Sharon Carney, the D.C. Office of Public-Private Partnerships deputy director of community engagement. "There are people in those [census] tracts we’re talking about, so 10 years down the line ... we’d want to think about, 'How are those people doing?' And that’s hard to do.”
Earlier this year, the U.S. Impact Investing Alliance, the Federal Reserve Bank of New York and the Beeck Center for Social Impact + Innovation at Georgetown University released a reporting framework for the private sector to use, with the hope that it could assist Treasury and the IRS in conceiving a less onerous system that would be mandatory.
“The kinds of things we would hope Treasury would include in a mandatory reporting standard would be things like amount of investment capital in a qualified opportunity fund, a high-level summary of transactions — the type of property acquired, the amount of investment in each deal, the type of [qualified opportunity zone] business and the business' location — as well as other data points,” Seegull said.
Down the line, data surrounding a QOF's exit from the fund would be at least as important to the program as data regarding its initial investment, Seegull added.
Beyond checking that investors are delivering on their initial promises, an exit report could include data on who buys an investment from a QOF in order to prevent a cycle that is "extractive of wealth in a community," Seagull said.
The idea of neighborhood growth that benefits, rather than displaces, longtime residents is among the most challenging elements of economic development and urban planning. Judging one tax break for its effectiveness on that basis is reductive, Goldman Sachs Urban Investment Group Managing Director Margaret Anadu said at Bisnow's Opportunity Zones summit.
“In discussing whether to renew this program, there are a number of important factors: job creation, education outcomes, health outcomes, safety, etc.," Anadu said. "How can you assign the impact of one [real estate] development on all that? So for all this talk of opportunity zones, we can’t forget about all the other issues in these communities, and we can’t act ahistorically about the factors affecting a community.”
While Seegull believes that opportunity fund managers have already gathered virtually all data the government could require for potential investors, others worry that accounting for the myriad possible effects of an OZ development could prove difficult enough to deter potential investors.
"If you’re a well-capitalized nonprofit or foundation, having this conversation about data collection is not a significant burden," Javelin 19 Investments President Jill Homan said. "If you’re thinking about wanting to start a restaurant in a low-income community ... This is 244 pages of regulations, it’s complicated, so now you add an additional requirement. I’m just very concerned that those folks are going to be priced out and not be able to use this incentive at all."
Homan also pointed out that, since the opportunity zones are based on census tracts, the federal government already collects tract-level data — including employment, insured rates, poverty levels and education — through its annual American Community Survey in between censuses.
But to measure effectiveness of the overall program across the 8,700 zones would take many more resources than the U.S. Census Bureau's website.
In order to even get to that point, Scott and Booker will need to get Congress to pass the reporting requirements that Seegull and others are calling for. As IRS Special Counsel Julie Hanlon Bolton told Seegull at the July hearing, the federal agencies' hands are tied until that happens.
"Our members feel that in exchange for the tax advantage that opportunity zones represents, the disclosure of data so we can ascertain the efficacy of the policy would be a fair trade," Seegull said to the six IRS and Treasury representatives sitting on the panel.
"For that, you’d need to go somewhere else, because it’s not in the statute," Hanlon Bolton said.