Urban Transformation

Why Opportunity Zones could be key to transforming our cities

How do we build opportunities for everyone on our cities? Image: Christy Ash/Unsplash

Natalia Martinez-Kalinina
Organizational psychologist and strategist, Cambridge Innovation Center
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Cities and Urbanization

This article is part of: Sustainable Development Impact Summit

The promise of being the base for Amazon’s second headquarters was great — so great, in fact, 238 cities jumped into the intense, year-long competition. Contenders had so much faith in the impact they promised robust urban transit systems, tax breaks, talent pipelines and infrastructure support.

I saw this first-hand locally, where three counties in South Florida banded together to present a single proposal. They understood that, alone, none of them were a compelling contender. It worked, and they made the top 20 shortlist.

Ultimately, Amazon selected locations on the outskirts of well-established hubs, New York City and Washington, D.C. But the same questions for cities and states remain. How do we capitalize on the momentum generated by Amazon HQ2? What do we do with the long list of incentives? Can we generate the impact – or more – of the tech giant coming to town?

Cities across the United States face a host of challenges: job creation, building scalable enterprises, affordable housing, sustainability in the age of climate change, equity and inclusion. These priorities are as diverse as they are entangled.

No single individual – not the most brilliant inventor or revolutionary leader – can tackle any of these challenges alone. To make meaningful progress, we must collaborate on cross-institutional and cross-interest solutions.

Opportunity Zones as vehicles for equitable growth

Opportunity Zones (OZs) might just be the right vehicle. There are 8,700 such districts nationwide, which allow investors to defer their capital gains taxes if they invest in real estate, infrastructure and businesses in these designated low-income zones.

Opportunity Zones in the United States Image: ImpactAlpha & Economic Innovation Group

Used correctly, Opportunity Zones could deliver the promise of many Amazons. The problem is, cities are no longer fighting over media coverage for Jeff Bezos’ attention. As a result, they are not able to maximize the impact of such investments.

The time is ripe for OZs. Bruce Katz, Lab Director at Nowak Metro Finance and former Centennial Scholar at the Brookings Institution, points to a healthy real estate market, the rise of remote work and coworking spaces, and exponential technological progress as creating fertile ground for OZs.

Likewise, a recent New York Times article addressed how coworking spaces and OZs should intersect. If the numbers are any indication, secondary cities are on the rise. In St. Louis and Miami, for example, venture markets reached a record high in 2018 at $378 million and $1.3 billion, respectively.

Separately, impact investing – from sustainability to increased access – has started to outperform traditional investment, providing new outcome-driven investment strategies.

What’s more, research finds the benefit of locating in Silicon Valley has faded since 2001. Bloomberg columnist Noah Smith wrote: “Staking out virgin territory in the Midwest or the South might be exactly the thing many smaller [venture capitalists] need to strike gold.” To top things off, OZs are broad in scope, offer limited oversight, and are more flexible in terms of who and how assets are managed.

While all of this sounds promising, detractors point to the less-than-impressive results from the past three decades. In the 1980s, Republicans in more than 40 states created “enterprise zones” offering tax relief and job training. Democrats followed suit with “empowerment zones” during the Clinton era.

Unfortunately, most would agree that both were mostly real estate investment plays and benefits did not trickle down to small businesses, startups or residents. According to Timothy Weaver, professor of Urban Policy and Politics at the University at Albany, State University of New York, the “stubborn facts suggest that we need to break out of the Reagan-Bush-Clinton pro-market cage of tax-incentive-based urban policy”.

Poverty in Opportunity Zones Image: Economic Innovation Group

Weaver has a point. If you don’t make a plan for Opportunity Zones, you create opportunities for chaos: gerrymandering, corruption, collusion, private interests, or at best, limited benefits.

Research – collision theory, change theory, social capital theory – has documented the need for strong, aligned bonds in order to drive communities forward. In this context, much of my work at the Cambridge Innovation Center (CIC) has fundamentally been convening and connecting.

Four out of six of CIC’s US locations are inside designated OZs but for these zones to really yield their potential, stakeholders must find common ground, engage meaningfully and ultimately collaborate.

Where do we go from here?

To begin, such a universe should include a voluntary framework with shared principles, reporting guidelines and metrics for measuring impact. Regulatory frameworks and incentives can also help. For example, Texas introduced legislation to create a 25% tax credit for rural OZ investment, which would apply to the state insurance tax.

Qualified Opportunity Funds – which invest in real estate or businesses located in OZs – would be required to invest at least $100 million in non-public companies in OZs or rural cities and counties, with a $35 million annual cap.

Alabama, Kentucky and Rhode Island have taken similar approaches. Maryland Governor Larry Hogan forged partnerships going beyond tax credits and co-invested in workforce development grants and tech investments to support revitalization and affordable housing.

Perhaps most notably, there’s nearly $6 trillion of potential gains (realized and unrealized) that could be allocated to OZs. As such, Opportunity Funds have emerged as private-sector investment vehicles that invest 90% of their capital to drive impact within OZs. The 203 funds currently being tracked already represent more than $53 billion committed to community development investing – and the potential is huge.

Take Cleveland, a “best in class” example. The city developed legislative policy, created a fund to de-risk small business and leveraged a tech entrepreneur’s marketplace platform to submit and vet portfolios, ensuring transparency while defining social impact targets and support structures to provide technical assistance.

Rachel Reilly, Director of Impact Strategy at the Economic Innovation Group, said: “Opportunity zones offer a tax benefit to the investor, but you can create other benefits to the businesses in order to strengthen the investment.”

In addition, as The Knight Foundation notes, local philanthropies and foundations have a unique imperative to help cities coordinate efforts, map assets and, most importantly, help residents who live near the zones express how they want to see the quality of life improve in their neighbourhoods.

For communities to flourish, we must go beyond relocating businesses and creating jobs. Rather, we must look for holistic opportunities to create vibrancy across the board, from coding schools and talent retraining efforts, to funding the arts, to solving for large scale environmental risks, to supporting accessibility pipelines around existing inequality gaps.

OZs allow us to look at communities as systems to bring in thoughtful investments. By decreasing tax revenue, governments can partner with private capital and philanthropy to reduce systemic inequalities holding the entire city back.

Articulating an ecosystem with measurable opportunity at the centre is a bigger return on investment for cities – larger than any single corporate headquarters could ever deliver.

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