Two significant reports on Opportunity Zones were issued within hours of each other by two important organizations, the White House Opportunity and Revitalization Council and the Urban Institute, on June 17. These reports examine the implementation of the OZ legislation to date. Code Section 1400Z-2 (OZ act), and the efforts so far to turn the OZ act into tangible and successful business projects located in economically challenged communities.
The two reports address different aspects of the OZ efforts and draw significantly different conclusions about how successful the legislation has been in achieving its policy goals of promoting long-term equity investments in low-income communities.
THE COUNCIL REPORT
The first report, titled “Opportunity Zones Best Practices Report to the president,” was issued by White House Opportunity and Revitalization Council (the “council”). The council was formed by the president to support the administration’s pledge to encourage public and private investment in economically distressed areas, including OZs.
The Council is comprised of 17 federal agencies and federal-state partnerships representing relevant departments of the federal government and is tasked with coordinating their efforts to help complement the OZ tax incentive and with helping taxpayers and investors as they try to spur economic development in economically distressed areas.
The report looks into best practices sections of local governments and states, foundations and other nonprofits, qualified opportunity funds, and how to leverage federal resources for OZs. There is also a detailed section on case studies that discusses the important efforts to collect and track data.
The council report is perhaps the most comprehensive compilation of data on OZs and the accomplishments thus far in implementing the OZ incentive. When the report was issued, Alfonso Costa, Jr., Deputy Chief of Staff of Housing and Urban Development, in a presentation emphasized that there are evolving and continuing best practices at the various levels of government. He provided the City of Erie, Pennsylvania as a strong example with its OZ efforts. The report discusses the Erie Downtown Development Corporation (EDDC) and its early efforts to bring together leaders in the business, philanthropy and government sectors, and their work to move quickly to take advantage of the OZ legislation.
Costa pointed to their mission to “transform the City of Erie and revitalize its downtown areas.”
He also cited that Erie played a helpful role in interacting with the efforts of the city of Birmingham, AL. It was striking that a city from the NW corner of Pennsylvania and a city in the heart of Alabama were coordinating efforts and exchanging ideas and experiences on how best to take advantage of resources from the federal government and incentives under the OZ program.
Costa noted that the residents of Alabama, in particular, have benefitted from the efforts to coordinate the OZ work in the state under the umbrella of an organization called Opportunity Alabama (OPAL). OPAL has provided resources to cities and towns throughout the state to help them understand how to best to promote and utilize the incentives under the OZ program and take advantage of the resources available through the federal government.
The best practice report contains 12 pages of relevant examples of projects that have been created and many even funded thus far in OZs, spanning a range of activities from real estate and clean energy to technology and agricultural projects, and spanning geographic regions from small rural communities in Maine to Stockton, CA, and beyond.
The listing of projects that are already funded and under construction (and in some cases nearing completion or already completed) gives a sense that there is a lot of success that has already been achieved in providing significant benefits to residents of economically distressed areas, including OZs. This report identifies these successes, looks at the common factors and strategies that helped make the projects successful, and provides best practices with guidance on how to take the lore and the learning from these communities and share it throughout the country.
For leaders or residents in a city or town that has OZs and is seeking to take maximum advantage of these incentives, this Best Practices Report offers an advanced education on how to go about doing it the right way and is a must read.
THE URBAN INSTITUTE REPORT
By contrast, the Urban Institute (UI), in its report entitled “An Early Assessment of Opportunity Zones for Equitable Development Projects, used a very different methodological approach and reached a variety of initial conclusions on the early implementation of the OZ program. Some of these conclusions are positive, other are critical, some are accurate and realistic and some seem either gratuitously negative or simply naïve.
Importantly, the UI report creates a new metric called equitable development and judges the success of the OZ tax incentive against this self-styled standard -- which was not the policy intent of the legislation. Moreover, it is very difficult to determine the outcome (even under this new standard) of the OZ tax incentive just two and one half years after the legislation passed and just six months after the issuance of the Final Regulations, three months of which were spent in a COVID-induced economic shutdown. Tellingly, the positive outcomes as described and documented in the council report do not receive in the UI report either the credit or attention that arguably is warranted.
The UI report was based on approximately 70 “in depth interviews” with project sponsors, fund managers, investors and other parties actively involved in OZs. The methodology was presumably selected in an effort to dig deeply into the practical realities of developing an OZ project during the initial period since the passage of the OZ incentive, and to address in useful detail the specifics of how OZ projects have been progressing (or not progressing) to date.
UI acknowledges that at least $10 billion – and likely far more – has been raised thus far and invested prior to the COVID pandemic. On the positive side, the UI report found that OZs “are helping spur the evolution of a new community development eco-system, engaging both project developers and investors who have limited historical engagement in community development work.”
On the negative side, the UI report found, “despite this catalytic effect, however, we also see that many mission-oriented actors are struggling to access capital. Many project sponsors are struggling to access the class of investors …for whom the OZ incentives are tailored. Additionally, many mission-critical projects yield below-market returns that most OZ investors appear unwilling to accept. As OZ incentives are not structured to encourage resident or community engagement, mission-oriented projects struggle to compete for attention with higher-return projects -- for which OZs provide much larger subsidies because of the design of the incentives.”
The information identified by the UI in its report, including some of its criticisms which can be taken as constructive, the UI’s comments probably require some leavening with pragmatic observations based on practical realities.
The fact that small, inexperienced sponsors with limited track records have difficulty raising capital – however well-intentioned their projects – is hardly surprising. Inexperienced sponsors without a solid track record will inevitably struggle to raise capital regardless of the incentives being offered, if investors do not fundamentally believe in the economic prospects of a particular project. This reality is not unique to the OZ tax