The Urban Institute released a research report suggesting that Opportunity Zones will continue to struggle to achieve equitable economic development goals and will face challenges financing mission-oriented investments. Changing this trajectory will require addressing structural impediments within the Opportunity Zone program that hinder the ability to generate outcomes for both people and place.
The report also describes several marketplace hurdles that seem to require significant community development resources and workarounds.
Notably, the report explains how additional incentives or subsidies are often needed to make the Opportunity Zone (OZ) program work. Investors seek more financial support because “many mission-oriented projects yield below-market returns that most OZ investors appear unwilling to accept.” Further, the program’s 10-year time horizon is neither long enough for financing long-term community assets nor short enough and sufficiently liquid to be useful for non-real estate business investments. As a result, the authors found that these types of projects are more likely to move forward when “the capital stack also layered in significant other subsidy sources.”
Several examples are provided of state and federal incentives or subsidies that have been offered in combination with Opportunity Zones. At the state level:
- Alabama’s Incentives Modernization Act created a series of benefits for state-certified Qualified Opportunity Funds that meet specific impact investing standards. These funds receive the state capital gains tax benefits on OZ investments, can seek investment from 10 state pension funds, and are eligible for a $50 million tax credit pool to offset losses and guarantee returns on mission-oriented projects.
- Maryland offers enhancements to other state tax credit programs for qualified OZ businesses if they agree to provide the state with transaction-level reporting, and additional enhancement for projects that have a community benefits agreement or community residents on their governing/advisory board and provide a resolution/letter from their locality or county.
- Louisiana has expanded its Restoration Tax Abatement program to all Opportunity Zones within the state. This program allows for an up to 10-year abatement of property taxes for renovations and improvements to commercial structures or owner-occupied residences.
- Other states, such as New Jersey through its OZ Challenge Program, have provided technical assistance grants for smaller cities to help prepare economic development strategies around OZs.
At the federal level the OZ may be combined with primarily with the New Markets Tax Credit or Low-Income Housing Tax Credit, but also CDBG funds, the Section 108 Loan Guarantee Program, the SBA 504 loan guarantee, or the Solar Investment Tax Credit.
When mission-oriented OZ projects have been successful, it is typically only after substantial wrangling: searching for partners who will prioritize mission over profits, pairing OZ finance with other subsidy sources, and making concessions on issues like 10-year exits. As we have learned, the program can be used to finance projects that yield substantial community benefit, but it provides neither the depth of subsidy nor the use restrictions to incentivize the private market to prioritize such projects. (31)
The full report is well worth reading. It offers nine observations on how the program has been deployed to support equitable development projects and concludes with four principles for redesigning the program itself to more effectively allocate government dollars to foster outcomes that support quality jobs, affordable housing, and community amenities.