Opportunity Zones have gotten a lot of criticism. Could they promote equitable green development?
By ThienVinh Nguyen
Opportunity Zone funding is a federal program created to drive economic development in “distressed” areas across the United States, including in DC. The program has been received with both criticism and excitement, but something’s been missing from the conversation: The potential to use this money for clean energy and green infrastructure projects that benefit both the planet and the people living in these communities.
Can OZ benefit DC residents?
Opportunity Zones (OZ) were created in the Tax Cuts and Jobs Act of 2017. It provides tax incentives (such as full tax exemption on capital gains or profits after a 10-year investment) for business development in low-income communities. However, there’s a lot of debate about who would really benefit from the program — the communities receiving the investment, or mostly the investors.
“We want these investments to go in areas that need them most,” said Ward 5 Councilmember Kenyan McDuffie at a panel in July. McDuffie also chairs the DC Committee on Business and Economic Development. Municipalities nominate areas to be part of the Opportunity Zones program. DC has 25 census tracts designated as Opportunity Zones, most of which are east of the Anacostia River in wards 7 and 8.
At the panel, McDuffie raised questions about the potential of Opportunity Zones: “How do we capture any sort of increment that is generated as a result of these investments? What can we do to incentivize getting people hired from the community so that these businesses create jobs?”
Conversations about the program have overwhelmingly focused on housing and real estate projects that promise financial returns for investors. Some have criticized OZ because it drives investment towards low-income neighborhoods without mandating that investment actually benefit residents.
Opportunity Zones might incentivize the creation of more amenities (like housing and retail) and economic activity (including more jobs) in areas that need them. But some fear that these changes won’t benefit local businesses and residents, and worry that Opportunity Zone projects will contribute to displacement.
McDuffie offered a suggestion to ensure that investments benefit targeted communities without displacing residents: “I think there’s a way for the District to capture the increments in property taxes or in sales taxes or in income taxes. Instead of going into the general fund, [we] have it go to a special purpose fund, where we can have it reinvested into those communities to try and ward off displacement.”
Green infrastructure projects could help
Another potential way forward? Green infrastructure projects might be an avenue for the program to contribute to sustainable and more equitable development. Solar and wind energy and greener buildings, for example, can save low-income communities money on utility bills.
In addition, green investments have the potential to boost labor demands that increase and shift jobs, while furthering overall job quality. Julia Parzen, co-founder of the Urban Sustainability Directors Network, co-wrote about OZ with Graham Richard, former CEO of Advanced Energy Economy and mayor of Fort Wayne, Indiana. She thinks more jurisdictions should be taking advantage of the program to fund green projects.
“Many cities have a commitment to clean energy, but renewable energy resilience and investment green infrastructure are not high on their radar in terms of Opportunity Zones,” Parzen says. “Most communities in the United States have projects that advance sustainability and reduce greenhouse gas emissions in a way that’s beneficial to those neighborhoods.”
One of the things limiting investments in green infrastructure is the lack of coordination from the people and entities involved. These include investors who may or may not invest in Opportunity Zone areas already; targeted communities with their own visions and needs; municipalities that are tasked with designating and promoting Opportunity Zone areas to facilitate investments (like the DC Opportunity Zone Marketplace); and the federal government, which is supposed to provide tax incentives and set guidelines.
While there have been promising conversations about whether clean energy investors and Green Banks could use Opportunity Zone funds, investors are still waiting for further guidelines beyond the two sets that have been issued. As the guidelines stand, they are not favorable to green infrastructure projects.
“From our research, there is a practical difficulty in getting these dollars to flow into clean energy projects, rather than real estate,” says Jeffrey Schub, Executive Director of the Coalition for Green Capital over email.
“The OZ construct is based on an equity investment appreciating in value over time [where] the investor then is able to realize that increase in value by selling the asset, and will not have to pay capital gains tax on the appreciation. This format suits real estate very well, but it can be more difficult to invest in, sell, and measure the appreciation of a clean energy project over time,” says Schub.
Parzen, however, believes that green developments, from building renovations to infrastructural clean energy projects, have promising investment returns that would qualify for Opportunity Zone funds. She wants to harness the expertise and excitement from potential community investors, from Coalition for Green Capital and others like Enterprise Community Partners, LISC, Groundswell, National Housing Trust, and GRID Alternatives.
“LISC believes solar and energy efficiency could help some building rehabbers meet the opportunity zone requirement for the substantial improvement of existing property which is to double the adjusted basis in that property,” says Parzen, as an example. LISC also recently partnered with the Menkiti Group to create a $100 million Opportunity Fund to invest in neighborhood development, including in Anacostia.
Opportunity for whom?
It’s also challenging — but necessary — to foster good relations between investors and the communities that would receive the investment, panelists pointed out.
“It’s notable that the residents of all the Opportunity Zones, generally speaking, look very different from the investor base, where 56% of [the residents] are members of minority groups,” says John Green, a co-founding principal at Blackstar Real Estate Partner. He says it’s important that diverse investors and local government officials facilitate community conversations.
Parzen agrees: “The first step in any of these situations is there has got to be community involvement. And beyond involvement, if possible, there has to be community-driven design.”
However, until updated federal guidelines are released, it’s difficult to predict how the program can be used, and how it could help or harm the communities it claims it’s designed to serve. It’s also hard to say what kind of business developments the program will spearhead, from affordable to market-rate housing to commercial real estate to green infrastructure.
One thing is for sure: It’s best if they actually provide equitable economic opportunity for those living in the Opportunity Zones.
ThienVinh Nguyen is an Urbanist Journalism Fellow with Greater Greater Washington. Vietnamese-born, California-grown, ThienVinh resides in the verdant neighborhood of Deanwood. She focuses on stories about civic engagement, urban development and planning issues that are simultaneously critical and hopeful. ThienVinh holds degrees from UCLA, Columbia University, and the University of London (UCL).
This article was originally published September 5, 2019 on Greater Greater Washington as part of the Urbanist Journalism Fellowship, which is made possible in part by the Island Press Urban Resilience Project.