This is a guest post by Steve Glickman and John Lettieri, co-founders of the Economic Innovation Group.
Opportunity Zones is a new community development initiative established by Congress in the Tax Cuts and Jobs Act of 2017 designed to spur long-term private investment in low-income communities nationwide. The program offers a federal tax incentive for reinvesting capital gains into “Opportunity Funds,” which are specialized vehicles dedicated to investing in low-income areas called “Opportunity Zones.”
The potential is huge: U.S. households and businesses currently hold over $6 trillion in unrealized capital gains in stocks and mutual funds alone. Only a small fraction of that would have to flow into Opportunity Zones to be transformative.
Although mayors are not given a formal role in the statute, city leaders will play a critical role in making sure it delivers on its potential of meaningful, inclusive economic development in distressed communities. Here are five things city leaders need to know.
The window for nominating Opportunity Zones is closing. Each state and territory may nominate up to 25 percent of its eligible low-income community census tracts for designation as Opportunity Zones. Governors have until March 21, 2018, to submit their nominations to the U.S. Treasury, or to request a 30-day extension. That means the selection process is well underway in most states, and the time for local leaders’ input is now. Several states have already established procedures for soliciting input from cities and counties, so coordinate ASAP with whomever is in charge of your state’s nomination process.
Role for city leaders: Work with your governor’s office to ensure your city’s highest potential, highest need, and highest priority census tracts are included in your state’s Opportunity Zone nominations.
This flexible incentive should generate many different types of investments. The program is designed to be place-based and responsive to the unique needs and opportunities of different communities. Opportunity Funds can invest in a wide variety of assets, from the stocks of new companies to real estate, infrastructure, affordable housing and more. A single fund can invest in all aspects of a mixed-use neighborhood redevelopment plan, for example, including the transit extensions. The program should unlock new capital for brownfield redevelopment at the same time it enables CDFIs to offer equity financing for local businesses.
Role for city leaders: Think through how you and your partners can work together to tap into this new pot of financing to support your affordable housing, infrastructure, and community and economic development goals.
It is not your typical economic development incentive. The program is built to influence investor behavior, rather than that of individual companies. It aims to draw some of the capital currently tied up in financial markets and on the sidelines of the real economy into the business of rebuilding distressed communities. There are no up-front tax credits or subsidies, only graduated incentives tied to long-term holdings and patient capital. City leaders have less of a project-by-project, transactional role to play here and more of an on-going ecosystem building one. City leaders must be proactive in galvanizing the organizational infrastructure to make local Opportunity Zones successful. After zones are nominated and Treasury releases its draft rules later this year, funds will start to form and phase two of local leaders’ engagement should begin.
Role of city leaders: Work with your banks, business groups, nonprofits, philanthropies, and community development entities to make sure that Opportunity Funds dedicated to your city and its potential are established.
Investment is not guaranteed. Being designated a zone is only the first step, but it doesn’t guarantee that investment will take place. For capital to flow, investors must find investable opportunities in eligible communities. Once that happens, there is no cap to how much investment can occur. Mayors and their staffs can raise awareness in the local business community about the program, and they can also be sure their communities get on the radar of Opportunity Funds based regionally or nationally.
Role for city leaders: Prepare a point person or agency to play a coordinating/support role to connect investors and local needs, be they development projects or exciting new startups, on an ongoing basis.
Plan to integrate this program with other community development initiatives. Capital inflows are often a necessary but insufficient condition to fully unlock community potential. By combining this new federal incentive with local strategies, smart programs, and other public investments, cities can shape its impact. States and localities remain on the hook for education, training, and workforce development; for zoning; for entrepreneurship support and ecosystem building; and for so much else at the intersection of community and economy. City leaders must establish the supporting social and civic infrastructure that will help ensure the program lives up to its potential.
Role for city leaders: Couple this infusion of capital with redoubled efforts to build an inclusive economy. Use the momentum provided by Opportunity Zones to pilot new initiatives, experiment, innovate, and learn.
The Economic Innovation Group is a bipartisan public policy organization combining innovative research and data-driven advocacy to address America’s most pressing economic challenges. For more information about the Opportunity Zones program, visit eig.org/opportunityzones.