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Republican Or Democrat, The Opportunity Zone Program Will Likely Change Next Administration

With bipartisan support in place since its inception, the federal Opportunity Zone program frequently touted by the Trump administration appears likely to last another presidential term, although perhaps in a modified form.

Opportunity zones have been a particularly divisive issue in cities like Los Angeles, where CIM Group, a prolific opportunity zone investor, backed out of a deal to buy Baldwin Hills Crenshaw Mall after backlash from community groups over its lack of plans for services for existing residents.

A new group led by the Crenshaw Subway Coalition is raising funds to buy the mall in what CSC Executive Director Damien Goodmon said could be an all-too-rare example of the opportunity zone program being used for its stated purpose of benefiting underserved communities.

“There’s a real need for reform or repeal given that its current implementation has been disadvantageous for communities of color," Goodmon said. "It’s actually made it worse.”

Goodmon said a much better alternative to the current opportunity zone program would be one in which community wealth is built and maintained through projects. Some iteration of the program that addresses those concerns could be in the works from both Democrats and Republicans.

Former Vice President Joe Biden at a community event on the campaign trail in Iowa.

On the legislative front, a bill by U.S. Sen. Tim Scott, a Republican from South Carolina, and one of the opportunity zone bill’s original sponsors, would put reporting requirements in place and has a good chance of becoming law, experts say.

Opportunity zone proponents like Hayden and Develop CEO Steve Glickman, an original architect of the program, cite its bipartisan and local-level support as keys to its endurance. 

“The most viable basis is Tim Scott’s IMPACT Act that was introduced earlier this year,” Glickman said. “That has bipartisan support and has laid out a regime for the type of information being collected by funds, and this is largely a set of information that funds will have or should have anyhow at their disposal.”

Scott notably said last year he will "kill the program" if it doesn't provide intended social benefits.

Without providing many specifics, the Biden campaign last month announced plans to develop a reformed opportunity zone program as part of the presidential candidate’s plan to revive the economy while improving racial equity.

The outline of Biden’s agenda, which includes the detailed reporting and public disclosure of opportunity fund investments, confirms predictions made by some of the tax program’s biggest supporters: that it would last in roughly the same form, regardless of the president. 

“If a Democratic president is elected, I don’t see that changing the overall program,” Erik Hayden, managing partner of Urban Catalyst, a Silicon Valley opportunity zone fund, told Bisnow in an interview the same day as the Biden campaign’s announcement. “This program has barely gotten off the ground. We have hardly even started.”

Even so, how stringently a Biden administration would come down on the opportunity zone program, which has been the subject of criticism for tax breaks it has afforded developers of projects like luxury condos and hotels, is still an open question.

Ostensibly on the table are significant reforms like the ones laid out by the Urban Institute, which concluded in a June report that opportunity zones are not living up to their community development goals. After interviews with 70 leaders of opportunity zone projects, it proposed a list of changes that includes sizing an opportunity investment’s tax incentive by the strength of its social impact.

By its nature, that particular goal requires tracking investment impact in the first place, something that the opportunity zone program notoriously lacks but that the Biden campaign has called for this summer. That change alone could potentially have drastic effects on opportunity zone investments going forward: The program’s most lucrative tax benefit is currently being able to exit an investment after 10 years without being taxed on profits, regardless of the nature of the investment.

Whether a Biden administration would go that far is unclear. The campaign also calls for other potential reforms to the program, like incentivizing opportunity fund partnerships with nonprofits and other community-based organizations, but it doesn’t go into greater detail beyond those goals and did not respond to requests for comment. 

“We’re still kind of waiting on the details of what that actually means in practice,” said Brady Meixell, one of the Urban Institute report's co-authors and a research analyst in the think tank’s Metropolitan Housing and Communities Policy Center. 

Reform of the federal opportunity zone program would have widespread implications. Across the U.S., there are over 8,760 opportunity zones. The first were designated in 2018. 

In practice, a Biden administration’s handling of the opportunity zone program could fall well short of what some of the more vehement critics of the program say they want. Progressive U.S. Reps. Alexandria Ocasio-Cortez, a Democrat from New York, and Rashida Tlaib, a Democrat from Michigan, have proposed an amendment that would prevent IRS administration of the program. In November, Tlaib introduced a bill to repeal the program outright.

The offices of Ocasio-Cortez and Tlaib did not respond to request for comment on the future of the OZ program or the Biden campaign's plans. 

2019 Menino Survey of Mayors led by Boston University reported that nearly three-quarters of mayors surveyed said that they were pleased with the opportunity zones selected in their cities, six in 10 because they believe the program will have a large, positive impact on their city’s economy and less than 25% saying it will lead to gentrification and displacement. 

Urban Catalyst CEO Joshua Burroughs, Aedis Architects CEO Thang Do, Urban Catalyst Managing Partner Erik Hayden and Urban Catalyst Executive Vice President of Development and Construction Paul Ring

Consistent with the Biden campaign’s talk of the opportunity zone program’s continued potential as an economic catalyst, Glickman said the dismal state of the economy is a notably strong argument for the continuation of the program in its current form.

“At a time when we’re in a recession, you want all tools at the table, including, if not particularly, private sector equity, and this is one of the few tools we have that address geographic inequality,” Glickman said.

Opportunity zone defenders also argue that a much smaller percentage of funds are resulting in luxury residential and high-end commercial properties, now that more funds have had a chance to come about and deals in more untested markets have had time to be structured. 

Reid Thomas, managing director with NES Financial, a tech company providing back-office software for opportunity fund managers, said many initial funds were massive and often exclusively focused on commercial real estate. NES Financial has about 90 opportunity funds under contract and is in contact with another 200 to 300, giving it a good overview of fund activity, according to Thomas.

Now, an increasing number are smaller, more mission-driven and either solely focused or half-focused on operating business since the tax program’s rules were finalized in December. Almost 50% of funds they see come about now are either fully or partly dedicated to operating businesses, Thomas said.

“As the regulations have clarified and things have become better understood and people have had time to figure out how to take advantage of this tax initiative to do good things, we’ve seen the activity in the industry consistently march towards the kinds of things that I think are consistent with the spirit of the program,” Thomas said.

The Urban Institute highlighted funds in its study that it identified as delivering notable community benefits.

MetroHealth, the public health system in Cleveland, is finalizing financing for an up to 190-unit workforce and affordable housing project in the city’s Clark–Fulton neighborhood. Elsewhere, investors in Fredericksburg, Virginia, had trouble accessing commercial debt from banks unused to their food co-op idea and have created a $1.5M qualified opportunity fund (with a $10K investment minimum), according to Urban Institute.

Even so, the think tank’s report found such projects to be exceptions to the rule, Meixell said.

“While the program can be used to finance projects that can yield substantial community benefit, it provides neither the depth of subsidy nor the use restriction to best incentivize the private market to prioritize these types of projects,” he said.

Instead of repeal and replacement of the program, or the status quo of the program persisting, better reporting of the social impacts of opportunity zone investing is what most proponents and critics of the program say is very likely to come by the end of next year, especially if Biden is elected.

The Trump campaign, meanwhile, directed a request for comment on its stance on the state of the Opportunity Zone program to the White House, which did not respond to a request for comment.

Develop founder and CEO Steve Glickman and Sen. Tim Scott, who worked together in forming the legislation that became opportunity zones, discuss the program at Bisnow's Opportunity Zones Summit in Washington, D.C., on June 26, 2019.

Urban Catalyst’s Hayden said he and the opportunity fund’s partners “are 100% in support” of reporting any community benefits associated with opportunity funds being required. He cited the size of their residential development plans (900 units) and compliance with San Jose's affordable housing requirements, which in Urban Catalyst's case will result in up to $22.5M in fees and 100 affordable housing units, as an important social impact.

For its part, NES Financial said it offers fund managers an “impact rate of return” figure (an algorithm first developed by Howard W. Buffett, a Columbia University professor and grandson of billionaire Warren Buffett) that pairs census tract data on poverty, education and other metrics with investment details like size and project type, giving customers an idea of their social impact.

Current opportunity zones census tracts were first nominated as such by state governments before being designated as such by the Department of the Treasury and the IRS. Exactly 8,762 census tracts were ultimately designated, with 8,532 of such being low-income communities based on 2010 census data. (The other 200 are non-low-income census tracts contiguous with low-income census tracts.)

A low-income census tract is designated as such if thresholds for certain metrics similar to those tracked by NES Financial are met. Such communities will have a 20% or higher poverty rate or 80% or below the surrounding median family income.

NES Financial is still working on improvements providing customers with their fund’s real-time internal rate of return as investments in it are made, Thomas said. He said he hasn’t seen any cases of a project providing negative IRR but supposes it is possible.

Other debates, such as how much information is reported in the aggregate versus being tied to specific funds, and whether the program is extended past 2027 to give more investors the incentive's intended 10-year investment window, are still being worked out.

In May, the Trump administration announced plans to extend the program. Similarly, there is a bill led by Rep. Scott Tipton, a Republican from Colorado, and others in the House of Representatives that would extend the program to 2030.

On the nature of investment impact reporting, Scott's bill, which is in the Committee on Finance, would require the Department of the Treasury to issue aggregate reports on the impacts of the program. Another by Rep. Ron Kind, a Democrat from Wisconsin, would require the Department of the Treasury "to collect data and report to Congress on investments held by qualified opportunity funds" and "make certain information regarding the investments publicly available." That bill is currently before the House Committee on Ways and Means.

Glickman said he thinks the program’s extension might be paired with something Democrats have pushed for already, like the elimination of many zones above certain thresholds of national median income, in a larger deal.

“I think that the long-term viability of this initiative will be determined by whether it’s perceived to have done the good it is intended to do or not,” Thomas said.

Better information on the impacts of the program is key to knowing more about what’s potentially being extended or modified, and it would inform legislators about necessary subsequent improvements, Thomas and others say.

“The data collection and transparency of information I think helps everybody keep their eyes on what the fundamental goals of the program are about,” said Michael Banner, president and CEO of nonprofit community development investor Los Angeles LDC. “If you don’t have the data and you don’t tell people, you have no idea what’s going on, and it’s like everything is done underground and back door."

Even before last week’s announcement by the Biden campaign, Banner said he knew Biden would at least approach the program with the aim of making it much more transparent.

“Folks that are in these communities feel like they never know what’s going on until it’s already done, and I feel like that’s part of the dynamic you have to try and change,” he added

Contact Dean Boerner at dean.boerner@bisnow.com.