Backers Had High Hopes for Opportunity Zones. Research Shows They Aren’t Delivering

When defending its record with communities of color, the Trump administration quickly points to the Investing in Opportunity Act, which created significant tax breaks for private investments in low-income areas, or Opportunity Zones (OZs). Capital was intended to equalize economic development, reduce geographical disparities, and spur job creation in distressed communities nationwide.

Addressing racial inequity was a key goal, along with lifting the everyday lives of the poorest Americans.

Three years in, new data funded by a grant from JPMorgan Chase shows that the program has largely failed to deliver. The report issued by the Urban Institute is just the latest example of philanthropy’s efforts to help OZs work as intended, against rising evidence of misuse.

Game Changer?

Created as part of the 2017 Tax Cuts and Jobs Act, the Investing in Opportunity Act always had the potential to be a game changer, connecting untapped wealth to areas of poverty. A market of up to $6 trillion in unrealized capital gains became eligible for investment in certified low-income, high-poverty census tracts called Opportunity Zones.

The idea was seen as a rare legislative success story, and launched with keen bipartisan support. Senators Cory Booker, a Democrat, and Tim Scott, a Republican, joined to introduce the act, along with 100 geographically and politically diverse congressional co-sponsors. In short order, the U.S. Treasury certified nearly 9,000 Opportunity Zones in all 50 states, home to more than 30 million Americans.

Devil in the Details

Problems were quickly apparent when things started playing out on ground. In the rush to push the act into law, checks and balances received short shrift. Markets were active before guardrails were put in place to ensure investments followed intent. Goals of racial and economic equity weren’t codified or incentivized. And assigning the U.S. Treasury to administer the program made investments a matter between two parties: investors and the IRS. Governors, mayors and local residents remain blind to who’s investing and why.

Reporters were soon sharing stories of benefits mostly accruing to wealthy Americans rather than residents. Instead of affordable housing, bold face names were pouring untaxed profits into projects like long-planned luxury hotels, advancing gentrification that only further divides the haves and the have-nots. Other projects like storage facilities employ few, while expanding food and retail deserts.

Bipartisan support soon fractured. Cory Booker penned a public letter to the Treasury last fall, outlining the need for transparency and public-level reporting, saying the administration had “a long way to go.” The House Oversight Subcommittee on Economic and Consumer Policy launched an investigation into possible abuses of Treasury designations. Meanwhile, the president was claiming, without evidence, that $100 billion was at work addressing inequities in zones across the country.

Missing the Mark

Evidence that the act is largely missing the mark for communities of color came in June, when a leading nonprofit research group, the Urban Institute, issued a report that delivered nine observations on early efficacy. The report was funded by a grant from JPMorgan Chase, which is deploying $1.75 billion over five years to drive inclusive growth.

The research process involved roughly 70 in-depth interviews with a range of stakeholders including developers, philanthropies, project sponsors, nonprofits and community development intermediaries.

Findings showed that while opportunity zones may help new community development ecosystems evolve, mission-based sponsors are struggling to find investors. Without incentives, they’re also unable to deliver the kind of ROI investors seek. Rather than spurring job creation, capital is largely accruing to real estate. Research concludes that market-rate private equity is “unlikely to unlock” growth in the kind of small businesses, local institutions and amenities that deliver sustainable equity.

Failing the Black Community

That’s particularly bad news for Black communities that have yet to reap significant benefits from a program with a key goal of addressing racial inequity.

The breakdown isn’t through lack of engagement. Six NBA players mounted an “Our Opportunity” project to raise $300 million for the Opportunity Zones in Chicago and Cleveland, where many of them grew up. Interviews included several Black entrepreneurs from outside the community development industry who sought project funding, and identified a number of projects benefiting the Black community, from a group looking to increase access to Small Business Administration funding for Black-owned businesses in North Carolina, to a real estate developer raising Opportunity Zone equity for mixed-use projects near historically black colleges and universities (HBCUs).

While some projects found success, others described a pattern of discrimination that made connecting with investors difficult. One experienced developer looking to build green workforce housing in the Midwest failed to land a single meeting with a family office, despite promising market rate returns.

Philanthropy Steps In

As previously reported in Inside Philanthropy, private and corporate philanthropies have leveraged their areas of expertise to make the zones work as intended.

The Rockefeller Foundation acted early, launching its $5.5 million Opportunity Zone Community Capacity Building Initiative in six cities that deployed dedicated local teams to attract responsible private investment and attach capital to the kinds of projects and people the zones were intended to help. It also partnered with Smart Growth America to create the National Opportunity Zones Academy to drive sustainable growth in Chicago, Greater Miami, Pittsburgh, Seattle and Norfolk.

Other leaders stepped up to balance ROI with social investing. The Kresge Foundation provided $22 million in investments to two Opportunity Zone funds after managers agreed to voluntary reporting and transparency measures that center on community. And the MasterCard Center for Inclusive Growth launched a million-dollar partnership with Accelerator for America to arm city leaders with data to attract investments.

To help shape the market, the Beeck Center for Social Impact and Innovation at Georgetown and the U.S. Impact Investing Alliance developed a shared impact and reporting framework. And impact investors pushed for mandatory reporting requirements through the President’s Council on Impact Investing, a network of 20 leading private foundations within the Alliance, by publishing an open letter to legislators.

With COVID-19 stalling projects across the country, and only months to go before a national presidential election, the Invest in Opportunity Act is at a crossroads. But all parties applying the lens of racial equity to their work have now heard from diverse voices on the ground, sending the clear message that OZs aren’t living up to the promise of remedying what one interviewee called a “shameful level” of under-capitalization for Black developers.

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