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Opportunity Zones and shared prosperity: Emerging principles from Cleveland

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Since their enactment in the 2017 Tax Cuts and Jobs Act, Opportunity Zones have attracted significant interest as a potential major source of untapped capital to revitalize America’s struggling neighborhoods and communities. A growing number of local leaders are eager to turn this buzz into investment that delivers economically inclusive and racially equitable outcomes.

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Yet those leaders face an important challenge: how can they ensure that private funds deliver sustainable investment in lower-income communities that truly need it, rather than simply accelerate real estate development in neighborhoods where market forces are already strong?

While cities await further guidance from the U.S. Department of Treasury—a crucial step in determining how the Zones actually function—a group of community leaders in Cleveland recently convened to address these questions. Organized as part of the Shared Prosperity Partnership, a national collaboration between the Kresge Foundation, Brookings, the Urban Institute, and Living Cities, the discussion drew on national and local expertise in community and economic development and finance. The discussion highlighted three principles that can inform cities’ efforts to use Opportunity Zones to spur equitable community revitalization:

Intentionality is essential.

As one participant noted, one reason Opportunity Zones have generated so much excitement is that they represent a major new community development tool. Private investors can receive tax breaks by investing unrealized capital gains in Opportunity Funds that, in turn, may back a wide range of projects in low-income neighborhoods. On balance, investors will seek projects that provide higher projected rates of financial return. And states have typically designated a range of neighborhoods as Opportunity Zones, many of which are already benefiting from significant investment activity. In Cleveland, for example, the typical home value in Opportunity Zone communities ranges from just $52,000 in the Opportunity Corridor, to $137,000 in Ohio City/Tremont/West 25th Corridor. As one expert noted, this dynamic could lead to just 10 to 15 percent of the “hottest” Opportunity Zones capturing the lion’s share of investment. Preventing this outcome, and ensuring that Opportunity Zones deliver a social benefit commensurate with the revenues that the U.S. Treasury foregoes, won’t happen by chance.

Public sector and economic development leaders have tools to promote good outcomes.

Over the course of 2018, city leaders have worked with their governors to designate Opportunity Zones, and collaborated with peers to strategize about how best to harness the program. As Opportunity Zones are implemented, those leaders can deploy additional tools to help channel investments toward economically and racially equitable outcomes. For instance, they can: develop marketing prospectuses that identify priority neighborhood investments; layer other public investments and supports to incentivize and leverage Opportunity Zone investment; use permitting and zoning powers as carrots and sticks to encourage desired outcomes; and organize Opportunity Funds themselves that aggregate capital for investment opportunities that could drive more equitable outcomes. All of these strategies might focus on steering investment to more economically challenged Opportunity Zones, equity for small businesses, or industrial real estate development that generates high-quality, accessible jobs for community residents.

They can’t go it alone.

Engaging a broader coalition beyond traditional public sector and economic development actors is critical to achieving inclusive outcomes. The Kresge Foundation and the Rockefeller Foundation have announced a joint effort that, through grants and guarantees, aims to support Opportunity Funds committed to truly inclusive economic development. In this way, philanthropy can help provide patient capital and create more of the certainty needed to unlock private investment. Community organizations and their allies, meanwhile, are uniquely positioned to identify and market neighborhood assets. Their engagement can help shift narratives and assumptions about investment viability, helping to develop a compelling case to fund managers (particularly at large financial institutions) who will influence large capital flows. A broader array of community and national partners could also help shape metrics and drive greater transparency around Opportunity Fund activities to ensure more equitable investment.

Whether Opportunity Zones succeed in creating real opportunity will likely rely less on the goodwill of private investors, and more on the ability and dedication of local actors to focus and harness their investments in ways that support and sustain inclusive growth in diverse, low-income communities. As a city with the organizational know-how, commitment, and imperative to achieve true equity through this new program, Cleveland bears watching.

The Kresge Foundation provides financial support to the Brookings Metropolitan Policy Program.

 

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