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Can Opportunity Zones Reverse Neighborhood Disinvestment? (with Jimmy Atkinson) · Building Better Cities

• Kate Gasparro: Across the country, neighborhoods have experienced dramatically different economic trajectories. Decades of redlining, discrimination, and disinvestment have shaped where capital flows. And once those patterns are established, they become self-reinforcing. Capital follows capital, while communities that have been historically overlooked struggle to attract the investment needed to grow. In the wake of the Great Recession, bipartisan lawmakers envisioned a new tool that would interrupt that cycle: opportunity zones. The idea was to make it more attractive for private investors to put long-term capital into economically distressed communities and to reward investors for staying invested. Today I'm joined by Jimmy Atkinson, founder of OpportunityZones.com and author of the Opportunity Zones Playbook, to explore whether Opportunity Zones can help us build better cities. Through his work, he's become one of the pre-eminent voices on the tool, connecting developers and project sponsors with the lawyers, accountants, and policymakers working to ensure. Its intent comes to fruition. Opportunity zones are having a moment this summer. The incentive is now permanent, governors are redrawing the map, and over $112 billion has already poured into these communities. So today's question: is that capital actually reversing disinvestment or finding its way to wherever it was already headed? I'm Kate Gasparrow, and this is Building Better Cities. I was first introduced to Opportunity Zones in 2016 because I I have a connection to South Carolina. ⁓ I went to school at Clemson. So when Tim Scott was authoring this legislation with Corey Booker, I took a real interest in it because it is a place based investment tool to help bring investment to neighborhoods that have been historically disinvested in and disadvantaged over time. And that's sort of how I read the impetus of this program. But I was curious why in twenty sixteen Did this become a bipartisan effort to help increase place-based investment in the United States? It was in twenty fifteen when the seeds were first sown for opportunity zones. That's when ⁓ a white paper was written by the Economic Innovation Group ⁓ that first conceptualized opportunity zones, and then it did get picked up by some on Capitol Hill, notably Senator Tim Scott, Republican from South Carolina. And Senator Corey Book Booker, Democrat from New Jersey, teamed up to take the concept to Washington, DC and package it up into legislation. That did happen around 2016 or so was when ⁓ legislation was first introduced that that brought this idea to Washington and and why it came about was after the Great Recession, the country recovered pretty quickly. and Our economy has grown tremendously since then. It was a it was a pretty steep. Yes. Yeah, pretty steep and dismal couple of years, but we well but but the country as a whole rebounded quite nicely. Unfortunately, the recovery wasn't even. Wealthy zip codes outpaced the bottom quartile c quartile of zip codes nationwide. ⁓ a lot of our nation's poorest communities got left behind and not just left behind, but left further behind than they were. ⁓ pre-recession. So that's what really catalyzed this idea of how do we incentivize residents in these wealthy neighborhoods, these wealthier people all across our country to deploy private capital into these poorer, more economically distressed neighborhoods. And that's that idea is where opportunity zones came from. I think a lot of people have in their mind, okay, this seems like a wealthy community. This seems like a community that is not as wealthy. So what are the criteria that sort of define what these disadvantaged zip codes are that really are well suited for opportunity zones? These neighborhoods, these census tracts were designated at the census tract level in the middle of twenty eighteen, ⁓ which is when I first found out about opportunity zones. Kate was already a couple years ahead of me. ⁓ and in order to qualify as an eligible tract worthy of being designated as an opportunity zone, the it had to meet one of a few different economic distress metrics. One such metric that it could hit is if its poverty rate was greater than 25%, ⁓ then it could be designated as an opportunity zone. The other criterion that it could also be ⁓ make it eligible is if the median family income of the census tract was eighty percent or less of the wider areas media f median family income. If it failed to meet either of those two ⁓ l low economic numbers, it could It could also be designated as an opportunity zone if it wasn't a low income community. If it was a non-low income community that was adjacent to a low income community that was designated as an opportunity zone and that didn't exceed 125% of its area's median family income. So that's the non-low income community loophole a lot of people referred to it as. ⁓ so that's that's what those were some of the criteria for ⁓ being opportunity zone eligible the first time around. And now that the opportunity zones have now become like a I don't want to say like a legacy tool, but the the legislation is in place for them to be permanent. And OZ two point ⁓ has amended some of these criteria a little bit and I believe it got rid of this loophole. ⁓ could you clarify a little bit of of that for us? It did get rid of the loophole. So now under OZ two point ⁓ and as we're recording this in August of twenty twenty six, governors from all across the country are nominating their low-income census tracts for opportunity zone designation to the United States Department of the Treasury. ⁓ one thing that I skipped over before is that being Opportunity Zone eligible, meeting one of these ⁓ low income metrics doesn't automatically make the tract an opportunity zone. In fact, each state is only able to designate up to 25% of their eligible tracts as opportunity zones. ⁓ with with a few exceptions, which I can get to in a few minutes. Moving to Oz 2.0, one of the knocks on OZ one point ⁓ was that a lot of tracts got designated that you look at it and you think how is this an opportunity zone? So Congress tightened the criteria. They narrowed the definition of low-income community. So now in order to be l o OZ eligible, a census tracked, first of all, the non-low-income community loophole has been closed completely. You have to qualify in your own merits. And those merits are not 80% of the area's median family income, but now it's 70% or less of the area's median family income in order to be OZ eligible. And then still that same 20% or greater poverty level, ⁓ but there's a guardrail on that. And the guardrail is the census tract has to have median family income less than 125% of the area's median family income. ⁓ so what what that is designed to do is there are in OZ 1.0 quite a few opportunity zones that are adjacent to a college campus, is one good example I like to bring up where. you know, one end of the opportunity zone will have a lot of student housing in it and those students are reporting zero income. So the poverty rate of the tract looks really high. But then if you go a a couple blocks outside of where the students are living, it's a wealthier enclave where the median family income might be a hundred and fifty percent of the of the MSA's median family income. So you look at that opportunity zone and it's probably a bunch of wealthy families sending their kids to this school. And the kids living in the student housing aren't producing any income, so the poverty rate is artificially high, even though the census tract ⁓ has a pretty wealthy population base. And so that that's helped smooth out ⁓ some of those, some of those exceptions. Yeah. So as we think about where these opportunity zones are and who the legislation is set up to benefit ⁓ in the short term and the long term. I was hoping you could talk about the mechanics of opportunity zones and who are the investors and what are the types of investments they're making. Yeah. So who are opportunity zones designed to benefit? I would say they're designed to benefit two different groups. One is the wealthy taxpayer or investor who takes their private capital and places it into these distressed communities. ⁓ they are getting rewarded for doing so via this tax incentive. And the other group is the area itself, the community itself, the residents there. I should note though that opportunity zones are a blunt market-driven tool. They're not a substitute for for zoning, for planning, ⁓ they're not a substitute for subsidized housing. They can make private capital indifferent between investing in a distress tract. And an economically prosperous one, whereas before a private investor wouldn't even necessarily look at a distress track. It would it it wouldn't be worthwhile for him as a market rate investor per se to even look at economically distressed communities. They're looking at economically affluent communities to invest in most of time. Then the tax incentive, the the mechanism of the tax incentive flows to the investor, and here's how it works. And it all starts with a capital gain. So an investor has a transaction. They sell something, they sell their business, or they sell NVIDIA stock, or they sell ⁓ real estate, and they sell it at a gain. Within 180 days, that taxpayer rolls that gain into an opportunity zone project, and then that investor gets three main. Tax incentives for doing so. One is that gain that the taxpayer received from selling whatever it was, the NVIDIA stock, let's say, that gain doesn't have to be recognized for a period of time. Benefit number two is when that gain is recognized, the amount of gain that's recognized isn't all of the gain. Only a portion of that gain gets recognized ⁓ for tax purposes. And then benefit number three, and this is the big one, this is the one. ⁓ that's getting all the attention, and why I'm talking to you today is that if that taxpayer who sold NVIDIA stock and then rolled the gain into the Opportunity Zone Project remains invested in the Opportunity Zone Project for at least 10 years, that taxpayer can sell that stake in the Opportunity Zone Project 10 plus years later 100% tax-free, never pay any capital gains tax on that investment. Let's say the taxpayer has a million dollar gain, rolls it into an opportunity zone project. That opportunity zone project grows over a period of a decade. And then that investor is able to sell that opportunity zone project for two and a half million dollars 10 years later. It's a one and a half million dollar capital gain, which would normally be taxed at a rate of twenty to twenty-five percent federally. So let's let's call it that's gonna be ordinarily maybe a $400,000 tax bill in that case? I don't know, my math's not that great, but that seems directionally correct. Instead, the tax bill's zero. So that's why it's such a powerful tool for wealth building for that investor who probably otherwise before this program existed, might have taken that $1 million gain from selling NVIDIA stock and put it in savings or put it into a different investment in a wealthy area. or a different business located in a wealthy area or maybe reinvested it in the the stock market in some other stock. Instead it's taking those dollars out of where it otherwise would have been invested and driving it into an economically distressed community that otherwise wouldn't have gotten any looks from that type of investor in the first place. Yeah. I thought that the way that this is set up to reward patient long term capital is really what drew me to opportunity zones because a lot of the developers we bring onto the show, impact investors, are working in communities where flipping would be more extractive to a community than the long term ⁓ investment that's needed to really turn around economically distressed areas. Because now we have data from the Treasury that speaks to how large these opportunity zones investments have been. How widespread they are and some of the program's success, looking at long term investment as opposed to and saying, Hey, I want to flip in this community because I think there's short term gains to be made, which could possibly increase the rate of displacement or gentrification as opposed to long term investments that are more intentional over time. The headline number from that Treasury working paper that you just mentioned is $112 billion of opportunity zone investments have flowed into these communities all over the country. These these over 8,700 census tracts that have been designated as opportunity zones, $112 billion of investment has flowed into them, ⁓ since program inception through year end 2024. ⁓ which is incredible. And it exceeds expectations. ⁓ I remember the ⁓ Secretary of the Treasury at the time when opportunity zones were first enacted, it was ⁓ Secretary Stephen Minuchin back then in twenty eighteen. He was quoted as saying that this would be a hundred billion dollar program. and ⁓ I I think a lot of people were kind of raising their eyebrows at that and wondering, I don't think it's gonna be that big. That's that's enormous. It ended up it's over a hundred billion dollars here through year end twenty twenty four, a hundred and twelve billion dollars. It's exceeded I think everybody's expectation in the first ⁓ six or seven years of the program. But I I I would say that that number is a capital flow number. It's it's reporting how much investment has flowed into opportunity zones since program inception. It doesn't really talk about outcomes. The the report doesn't talk about ⁓ what's happened to the residents there, it doesn't talk about what's happened to employment numbers, what's happened to wages, what's happened with affordable housing, you know, all of these metrics that might be more important to individual communities, it's it's more of a a 30,000 foot view of where the capital has flowed. And by that measure, how much capital has flowed in, it's been tremendously successful. Maybe you can speak a little bit about how OZ two point ⁓ is going to start readjusting what that self-reporting metric looks like so that this analysis is more robust and tells a more complete picture of how these neighborhoods are changing over time. Yeah. Yeah, absolutely. Well, you know, one of the knocks on the first Opportunity Zones program, the one that is currently winding down, is that it's not very transparent. ⁓ yes, we have these this this new treasury report that shows how much capital has flowed in. but There hasn't been a lot of reporting required of the funds that investors put their money into, the qualified opportunity funds, are really required only to report on some very basic compliance metrics that they're complying with the program and some top line numbers, how much how much capital do they have in them at certain dates? ⁓ the the IRS form that they're required to fill out every year is is is fairly basic, doesn't provide a lot of meat on the bone for the Treasury Department or others to study. ⁓ so that's changing going forward. ⁓ there's there's at least three new metrics that qualified opportunity funds are going to need to begin reporting on, actually starting this tax year 2026. one is they'll have to start reporting on number of housing units that their fund creates. By the way, we do have some housing data from the economic innovation group, but now we're going to get it more transparent through the Treasury Department, housing data from each qualified opportunity fund. They'll also be required these qualified opportunity funds that are raising capital from Opportunity Zone investors and deploying into Opportunity Zone projects will be required to report on the number of employees that they employ. So head count stats. So we'll get some more ⁓ transparency into the types of jobs that opportunity zones are creating and then also some ⁓ reporting on the types of businesses that they're investing in as well. And I know that because you sort of sit at this fulcrum between investors and sponsors or developers and other people who help support Opportunity Zone work. that you probably have some first hand insight into what these projects look like. And I was hoping you could speak anecdotally about some of them that you've been impressed by and some that you see are really leading the way in terms of how they're helping benefit these disadvantaged neighborhoods. Yeah, absolutely. well just zooming out like the thirty thousand foot view is that the Opportunity Zone program was first conceptualized in large part to help Catalyze more entrepreneurship in these opportunity zone locations all over the country. ⁓ that hasn't really played out that way. It's largely been a real estate investing program, is how it's kind of evolved into. ⁓ the it's always been a little bit difficult for operating businesses and entrepreneurs to leverage the opportunity zone tax incentive. I think that's changing as more awareness of the program seeps into the public's consciousness and as regulations and best practices get finalized, there's a couple other things that the industry would love for our lawmakers on Capitol Hill to put into law to make the program more flexible for operating business. But this that that's one thing I just wanted to mention at the top here. But yeah, I guess a few ⁓ Anecdotes that I can pull from. You know, one project that ⁓ I think I'll I'll highlight, and full disclosure, this project is a client of mine, but it's called Launchpad, and it's located in San Bernardino, California, in a distressed neighborhood there. And it is a it's it's it's currently under development. It's a mixed-use ⁓ retail and ⁓ multifamily. complex that is being developed right now. It has a nonprofit arm to it. And a lot of the units in the ⁓ multifamily building that's being developed are not going to be market rate. They're going to be affordable housing set aside for ⁓ juvenile offenders who are who are coming out ⁓ and and kind of reintegrating into society. their founder is very passionate about this and and he wants he's using the opportunity zone incentive because it's located in an opportunity zone to help raise capital ⁓ for for the development here. ⁓ so that's that's one really unique one. I would say that's kind of an outlier. ⁓ the the the vast majority of these ⁓ investments are multifamily buildings. ⁓ and they're not always affordable or workforce housing. Oftentimes They can be just market rate housing. And the program gets criticized for that, that it's building market rate housing, that it's building even luxury housing in these economic formerly economically distressed communities that are now kind of gentrifying. ⁓ and there is a lot of that going on. And the the the the tax incentive itself, like I mentioned, it's kind of a blunt market instrument. It's not gonna fix everything. It's not as it it's it's one tool that then local communities need to kind of focus with with planning and zoning and getting their pipeline together and making sure that they have marketable projects. I I'm curious you talked a little bit about the criticism here around places that are gentrifying because of luxury or market rate housing coming in, regardless of their sub subsequent benefits. What Are some other criticisms the program is facing in terms of how we're allocating capital to economically disadvantaged neighborhoods? Understanding that we started off with saying the data isn't perfect and that this is a blunt instrument. So can you, using those two caveats, help us understand what other criticisms there are of this program and how ⁓ OZ2.0 is trying to rectify some of that, and maybe how it's not being rectified in other ways. Yeah, I think you know, one one of the biggest criticisms of the program early on, especially, was that a lot of the areas that were designated as opportunity zones probably shouldn't have. and I think that criticism was warranted in a lot of cases. There was a big New York Times article in I think it was twenty eighteen or maybe twenty nineteen about Story County, Nevada. You can you can Google it. Opportunity zone, story county, Nevada, New York Times, you'll find it. ⁓ about this. This tract in in in Nevada that got designated ⁓ because some political favors were called in. And technically it did it did qualify, right? So by the letter of the law, it qualified as an opportunity zone. ⁓ they didn't break any rules there. But if you look at it, it probably shouldn't have ever been eligible in the first place, is what some might say. I think that's been addressed in the new legislation. They they eliminated that non-low-income technology. adjacent or contiguous tracked loophole that's been closed and they tightened the definition of what is a low-income community. So that's that's that's the first criticism. I think that's been that's been addressed. Second criticism is the type of stuff that's being built. You know, we we want to be able to subsidize or or create an incentive for the creation of particular types of projects And maybe not for these types of projects, depending on what your values are and and what you want to see and what what your policy goals are. Do you want to see a lot of luxury housing being built that's displacing residents? There's pros and cons to that. Or do you want to see community centers being built, affordable housing being built, ⁓ workforce housing being built? That's really a values-based question that local communities need to decide on their own. ⁓ the Opportunity Zone tool itself. doesn't really dis distinguish between those two far ends of the spectrum, let's say. It just provides the tool, and then it's up to local communities, their developers, their entrepreneurs, their investors to decide how that tool then gets applied. Well, I know that you, well before we even start recording, you you talked a little bit about how your current book, which came out in June, very exciting. ⁓ about the opportunity zone mechanism and how different parts of the stakeholder network can make use of opportunity zones. In releasing that book, you've been having a lot of conversations with local governments and I suppose some state governments as they're going through the selection process of which eligible tracts they should put forward as opportunity zones. In those conversations, how do cities, municipalities, agencies, states feel about OZs? Do they feel like they are a victim of them? That all this outside capital is coming in and driving projects to move forward and res resources to be directed in that direction? Or do they feel empowered by them? They see this outside capital coming in as a tool to move forward projects that are in their pipelines. So wonder if you could talk about that tension a bit. Yeah, it's might be a somewhat self-selecting population, but most of the people coming to me at least are coming to me not to complain about OZs, but because they want to learn more about OZs. So, take what I say here with a grain of salt, because I'm the founder of OpportunityZones.com, but the local governments and the state governments that I'm hearing from, they want to use opportunity zones. They want to learn how to use opportunity zones as a tool to attract more capital. They love the program, by and large, because it's bringing more capital. Into their communities or into their states. the people I'm hearing from at least, that's a good thing. They want more of that. They want to know, or maybe their the neighboring communities bring in some capital. They want to find out how they can do so as well. And then that really there that there there's there's kind of a two-step process to the whole getting nominated as an opportunity zone census tract. Under the OZ 2.0 program. Step one happens locally. Local county, local economic development office, local city, or maybe a regional, depending on where you are in the country. They need to identify which of their communities, which of their census tracts are eligible for opportunities of designation, first of all. And then they need to identify: okay, of these eligible tracts, Which ones would probably have a good chance of succeeding if it was designated as an opportunity zone? ⁓ and also maybe we don't want to nominate an already gentrifying tract or an or a tract that's already on an epic economic upswing as an opportunity zone, because maybe then we're wasting one of our nominations because it's gonna receive capital anyway. We really want kind of that. Goldie locks where the porridge isn't too hot, the porridge isn't too cold, it's just right. Right? We want to find a tract that's eligible, yes, but also kind of teetering on the edge of is it developable, is it investable, or is it not? ⁓ those are the types of tracts that most local communities and most states are looking at, I think. So as listeners are digesting all of this information, understanding how this applies to the work that they're doing. I know we have a lot of listeners that are active advocates for urban infrastructure and housing programs. There are lots of that are practitioners in the space. How do they better learn about opportunity zones and maybe engage as possible investors, but also possible advocates for the neighborhoods that they feel like are eligible or at least good candidates for eligibility. If You want to advocate for inclusion of your census tract, or maybe ⁓ multiple census tracts, for inclusion in this Opportunity Zone 2.0 program. ⁓ hopefully you're not too late, but call your local officials now, or call your state's governor's office or economic development office at the state level now and figure out what's the process by which I can make sure that. this census tract or set of census tracts as part of the conversation at the state level that it gets nominated up to the the Treasury Department at the federal level. ⁓ because for some states that process is already closed and you might be out of luck. Some states haven't begun yet, some states they're currently open, but make that phone call now or send that email now, try to figure that out. And I have a great tool on my website at opportunityzones.com that kind of shows you our OZ 2.0 state tracker. It'll show you where each state currently is. in the process ⁓ and w with the hopes of all the states getting across the finish line by October twenty eighth, and then we're gonna hear the final word from the the federal department of the treasury ⁓ in November or December before we turn the calendar to 2027. The first part of your question, how do I learn more about Opportunity Zones, especially if I want to ⁓ possibly be an investor in Opportunity Zones? Shameless plug, head to OpportunityZones.com ⁓ or buy my book, The Opportunity Zones Playbook. I think either one of those resources would get you up to speed on ⁓ exactly what the program is and depending on what you want to do with it, if you want to be an investor, if you have a capital gain sitting on the sidelines or you're about to have a transaction that's going to result in a capital gain, how do you take that gain and put it to work in an opportunity zone so you can take advantage of this incredible tax incentive? But if you're sitting on the other side and maybe you're an entrepreneur or a developer and you want to use the tax incentive to raise capital, you know, the book and my website, opportunityzones.com has a lot of tools in it for helping you raise capital as well. And I'm always trying to ask myself like how do I find projects that are going to have the most impact? And how can I participate in that impact? Because it aligns with a lot of what is the building better cities ethos. And I think Opportunity Zones is a nice pipeline to find those projects that have high impact. And so I guess like my last question for you, Jimmy, is if you had a magic wand and you can see into the future with a crystal ball, like how do you see Opportunity Zones building better cities in the next 10 years? I would say first of all, I want to see more from Opportunity Zones. So in the first round of the program, according to that Treasury report that we've discussed once or twice, During the course of this interview, $112 billion has flowed in. I want to see that number go up. ⁓ but maybe maybe two hundred billion, maybe three hundred billion ⁓ over the same time period this second time around. And I think, you know, the the tax incentive, the mechanism has been improved, by the way, from one point zero to two point zero. It's it's conceptually the same thing: deferral, reduction, and then exclusion after ten years, but the ways in which it works, I think investors will ⁓ will like more in OZ two point ⁓ than they did in Oz one point ⁓ so I think we'll get more dollars in. And now the program's also permanent. But that that two hundred billion dollars, that three hundred billion dollars that gets raised over the same time period, again that's just a capital flow number being reported. So how does it actually build better cities? I think it puts more homes in those cities. It increases the tax base of those cities and it builds more businesses in those cities. And, you know, so far opportunity zones in round one, it's done a really good job of those first two things, I think. It's it's it's definitely built more homes. It's definitely increased the tax base. I don't know if it's increased the business activity in these cities just yet. It's still early, by the way, too. ⁓ I don't know if it's the first inning. ⁓ but you know, I think I think we're kind of early inning still, even to really render a verdict on OZ one point The the first dollars flowed into opportunity zones in July of 2018 is when the zones were were designated. So no dollars could have possibly flowed in earlier than July of 2018. So we haven't even reached that 10-year exit point yet. That we won't be hitting that for two more years from now still. I think at that point, maybe we'll have a little bit more. Of a view of how did Opportunity Zones 1.0 do both for the investors and for the local communities? and of course, I'd love to see more more of the local residents benefit in one way or another, but that's hard to measure. And it's hard for any policy tool to really affect that type of outcome, I think. But at the very least, I know that OZ two point ⁓ will be more focused, more investor-friendly, and should be a much more transparent than O Z one point ⁓ was. What stuck with me the most about Opportunity Zones is that they reward patience, capital that stays put for a decade rather than capital that is looking for a quick win. And that's a meaningfully different posture when we consider the amount of time it takes for disinvested communities to turn and why this tool has the potential to build something more durable. If you want to go deeper, Jimmy's book, The Opportunity Zones Playbook, and his site OpportunityZones.com. are both wonderful resources, whether you're an investor sitting on capital or a developer trying to raise it. If you enjoyed this conversation, subscribe to Building Better Cities, leave a review or share it with someone who might find it useful. It's the best way to help these conversations reach more people. And until next time, let's keep building better cities together.