Note: For a primer on Opportunity Zones, see our earlier post that outlined the spirit of the legislation, California’s strategy to designate eligible census tracts, and what issues we all should be sensitive to moving forward.
Last week I had the opportunity to be one of the speakers at the Los Angeles Opportunity Zones Forum: Community-Centric Investments organized by the Federal Reserve Bank of San Francisco, along with HUD, USC, and the California Community Foundation.
The headlining speakers included:
- John Kobara, California Community Foundation
- Rachel Reilly, Enterprise Community Partners
- Greg Nelson, Parker Foundation
- Gary Painter, USC Price Center
My notable takeaways:
Community context matters
- Los Angeles is the most underfunded county in the US when accounting for philanthropic, state, and federal support per capita. As much as we in San Diego often look to LA as having so much funding and large foundations, they’re actually a bit jealous of what we have going on in San Diego – the grass always seems greener!
- The room was majority-minority which was nice to see. Most were players focused on inclusive economic development and community benefit as opposed to a room full of purely financially-motivated investors like some Opportunity Zone sessions.
- In this room of community institutions, the tenor of the conversation moved from high optimism to high concern. There were many questions from nonprofits and community development organizations about how their voice would be heard or how their project would make it on the list.
Room for improvement in regulations
- There is a push to have more transparency built into the regulations, and perhaps tighter guidelines to ensure impact and minimize displacement. However, that may be a losing battle. The timeline is still expected to have regulations solidifed in 2019Q1. Per Greg, this may feel slow to those of us outside the beltway, but it’s blisteringly fast for Treasury. There is currently no outcome requirement built into these regulations at all.
How do we move forward?
- Some cities and regions are coming together to develop full prospectuses or marketing materials about the opportunities in their geography, with varying (often low) degrees of community input. In conversations at SOCAP, we noted that San Diego has exceptionally diverse neighborhoods in our Opportunity Zones. As such, we will need materials that are accessible in different formats and languages.
- Despite many concerns, we must acknowledge that Opportunity Zones are getting investors to look at areas that would never otherwise make it on their radar. However, that means there is significant need to generate high quality deal flow in a short timeframe. Tight timelines rarely match with community stakeholder engagement or local government processes though. Gary summarized it well: there are many reasons capital has not been flowing to these communities in the past, and OZ’s have not removed those barriers.
- Many folks creating Opportunity Zone funds have never worked in these communities before. This is a concern both for hearing community voice and also their capacity to bring deals forward. This is a sign of a mismatch of capital and opportunity, not a fit. Additionally, investors coming into these deals often have no experience with these types of investments and it may take significant effort to get them comfortable with the risk profile of a small business in a low-income census tract.
- Enterprise follows our definition of market: the market will determine the appropriate rate necessary to move capital. With Opportunity Zones, the benefit is on the investor side and not built into the deal like other tax credits. The actual end rate to investors is completely unknown, and deals will be set as a pre-tax rate. In my opinion, this just means residents and businesses currently in Opportunity Zones will be priced out even more, as the capital gains tax benefits will have more value to the wealthy.
- Philanthropy and government have large roles to ensure community voice will be heard. This is a very significant but short-term effort that may determine the path of communities and inclusive development for decades to come.
The OZ Forum reinforced my skepticism and caution, but underlined that movement forward is required. At Mission Driven Finance, we have an obligation to continue to lend our voice and experience developing community-connected capital.