Stanford Social Innovation Review: How to Ensure Opportunity Zone Investments Strengthen Local Communities

By Kate Gasparro & David Weinberger Sep. 6, 2019

For two years, investors and neighborhood leaders in cities around the country have responded to economic Opportunity Zones (OZs) with hope and hesitation. The policy, part of the 2017 Tax Cuts and Jobs Act, provides tax incentives for long-term investments in low-income census tracts. These incentives are meant to help disinvested neighborhoods, hungry for economic growth, attract new financial opportunities. Heeding this call, nearly 90 OZ funds have dedicated more than $2 billion for investments in OZs.

The interest has highlighted the policy’s pitfalls. While investors set the terms of local investments in business, real estate, and infrastructure projects, they are not required to respond to community needs. Place-based investments, like those incentivized by the OZ policy, are increasingly vulnerable to local resistance, especially when investors do not attempt to understand the local context of their investments. This dynamic recently played out in Amazon’s plans for a second headquarters. Failure to solicit meaningful local input early in their planning process led to community opposition that ultimately thwarted their plans to build in New York City.

For OZs to achieve their purpose of strengthening communities, they must be aligned with investors, local intermediaries, and neighborhood leaders. Yet outsiders often fail to appreciate that neighborhoods have long and complex histories that intertwine with business, housing, and labor markets. Furthermore, it can be difficult to understand how to align stakeholders, even with the intention to do so.

Throughout our own work researching and supporting grassroots organizations, we have identified three ways in which developers and investors should approach new projects in neighborhoods to ensure the community's welfare and the investment's success.

1. LEARN FROM FOUNDATIONS THAT HAVE IDENTIFIED COMMUNITY-MINDED OZ FUNDS

Foundations working on community and economic issues at a national level are using new strategies, along with relationships grounded in previous engagements and existing partnerships, to guide geographically diverse investors to support OZ funds that benefit local residents. The foundations are playing critical roles in convening stakeholders, mapping investment opportunities, creating new markets, building community and institutional capacity, inducing innovation, and sharing information, according to a Knight Foundation report. They include Arthur M. Blank Family Foundation, Accelerator for America, Ewing Marion Kauffman Foundation, Abell Foundation, Bloomberg Philanthropies, and the Chan Zuckerberg Initiative.

The Rockefeller and Kresge Foundations in particular have stepped up. They certify OZ funds for their commitment to community welfare. Last year, they offered $25 million in grants and unfunded guarantees for community-minded OZ funds; out of nearly 150 applications, they decided to support 21 funds, about half of which are community-based. As part of the program, the Kresge Foundation will also launch incubators for funds that use community-impact metrics.

2. SEEK OUT STRONG GOVERNMENT INVOLVEMENT

While national-oriented frameworks can inform and improve investment strategies, investors are often inexperienced in working directly with local residents and leaders. To fill this need, city, county, and state governments have stepped into the role of intermediary, vetting and prioritizing investments that make the most sense for their communities. It is important to work with them—and risky to not.

In Boulder, Colorado, for example, a flood of investments in OZs threatened to dramatically reshape neighborhoods, worrying residents about changing living costs. The city council responded with a short-term moratorium. It stopped the demolition of multifamily homes or construction of non-residential buildings. However, officials made an exemption for any “community-serving Colorado nonprofit corporation” that presumably had a better understanding of what local people needed. The moratorium also ensured that city officials would discuss new policies and zoning regulations with local residents, so that changes brought about through OZ investments would benefit the community.

Local communities aren't always so reactive. In Erie, Michigan, Louisville, Kentucky, Oklahoma City, Oklahoma, South Bend, Indiana, and Stockton, California, mayors worked with  Accelerator for America to produce guidelines for community-minded investment opportunities.

In Arizona, Colorado, Illinois, Kentucky, Michigan, Missouri, New Jersey, and Oregon, a government employee oversees and manages OZ investments. In other states, government officials are forming partnerships with their peers in cities. California plans to award grants to mayors of small and mid-sized cities through its Opportunity Zone Partnership. In Kentucky, an initiative called KYOZ involves one website that acts as a central clearinghouse for all OZ investments. Opportunity Alabama, a nonprofit organization, is taking a similar approach to advertising new investment opportunities, with a special focus on projects in rural areas.

In New Jersey, state agencies— the Economic Development Authority, Department of Community Affairs, and Redevelopment Authority—are investing in building cities' capacity to support OZ investments. Building on this idea, the Rockefeller Foundation launched an initiative in May 2019 that will select six cities, starting with Newark, New Jersey, to receive additional help with identifying and tracking OZ investments.

Other states are taking a longer-term approach by building partnerships with higher education institutions, which is creating a talent pipeline for identifying and managing local investments. 

3. IDENTIFY GRASSROOT MOVEMENTS TO UNDERSTAND WHAT A NEIGHBORHOOD NEEDS

While national, state, and local governments have been offering support for large-scale and transformational projects in OZs, thousands of local residents and community-based organizations have used civic crowdfunding platforms—such as ioby.org and patronicity.com—to raise nearly $20 million for neighborhood projects. These offer an inside look at the kinds of investments a community needs. 

In 2015, Mayor Eric Garcetti of Los Angeles chose eight projects to support on ioby.org by providing grants and matching funds from the city. In northeast Georgia, a nonprofit organization used the same website to raise more than $60,000 to complete 39 miles of trail in collaboration with local and state governments. In Memphis, a crowdfunding campaign for a protected bicycle and walking lane was part of a push for greater place-based investment in local businesses. It attracted funding from the Hyde Family Foundation and FedEx. The Michigan Economic Development Corporation, in partnership with Patronicity, has matched funds for crowdfunding campaigns that improve public spaces throughout the state. Austin, Texas, is also supporting grassroots movements through its Neighborhood Partnership Program. It lets residents and community organizations get additional financial help from the city for projects that have already received local support.

OZ investors don’t have to rely solely on government plans and obvious real estate trends. Crowdfunding platforms and grassroots initiatives often reveal what a community needs and how investors can align their work with the will of the people. 

LIVING UP TO THE PROMISE OF OZS

Because only a fraction of OZ investors are based in the places they are putting money into, they may often be unaware of their projects' impact on local communities. And despite its intent to support communities, the OZ program lacks controls to prevent the displacement of locals in historically disinvested neighborhoods.

Thankfully, many governments, foundations, and neighborhood organizations have already shown the way forward. Their success in aligning the interests of neighborhoods and investors demonstrate that OZs can indeed live up to their promise: making money while helping struggling communities across the United States.

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