How to Fail in an Opportunity Zone
“There is always going to be this tension between what investors may want out of an Opportunity Zone versus what may be a good social return.”
MINNEAPOLIS, MN—Here is a formula for certain failure when investing in an Opportunity Zone.
Investors may be so eager to invest that they overlook the potential risks involved in that area’s development. Unlike the low-income housing tax credit (LIHTC) program, which produce tax benefits every year, Opportunity Zone projects will perform the best if the underlying property appreciates over several years. And given that a union electrician charges the same no matter if they are working in an area with $400 rents or $1000 rents, developers may gravitate towards the higher rent areas despite the intent of the legislation, Ronald Homer, Chief Strategist, U.S. Impact Investing, RBC Global Asset Management, tells GlobeSt.com.
What happens next is that if investors back projects with rents that are out of reach for area residents and they perceive they may be displaced, these residents and activists will organize ways to obstruct or slow down the project. In Homer’s opinion, the best tactic is to invest in projects that offer at least some affordable housing where middle-income or working-class residents can reside.
“There is always going to be this tension between what investors may want out of an Opportunity Zone versus what may be a good social return,” explains Homer.
This does not rule out gentrification as a strategy. Gentrification, or the process of renovating blighted urban neighborhoods, which is then followed by an influx of more affluent residents and businesses, can have several positive side effects including better jobs, essential community services like ambulatory care centers and more schools plus retail options.
“The best outcome for residents and investors alike is a project that appreciates with the surrounding neighborhood, delivering solid, tax-advantaged returns over a long-term holding period. That will motivate investors to seek out the next Park Slope or Fort Green,” says Homer. “But the only reason to give a tax break to someone who is already wealthy is to encourage them to help people who are less fortunate. Properly conceived Opportunity Zone projects can achieve that goal, producing solid returns and a positive social outcome.”
The bottom line: investors should remember the central idea behind Opportunity Zones is to benefit the residents of areas that struggle to attract capital while rewarding investors who deliver that capital, Homer says.