After 5 Years And $34B In Investments, It’s Still Unclear If OZ Program Is Living Up To Its Promises

In the five years since the creation of the Opportunity Zone program, thousands of investors have poured $34B into projects in zones across the country, proving the program’s appeal as an investment vehicle.

But with little in the way of data on how precisely the money is spent and whether developments in the zones really benefit underserved communities, it’s still unclear if the program is meeting the community development goals set for it back in 2017.

“The program has been around for five years, but we still have very little publicly available data on what is actually catalyzed in communities across the country,” Economic Innovation Group Research Director Kenan Fikri said.

Opportunity Zones, created by the federal Tax Cut and Jobs Act, are meant to “spur economic growth and job creation in low-income communities while providing tax benefits to investors,” according to the Internal Revenue Service website.

About 21,000 individual taxpayers and 4,000 corporate entities have invested in OZs.

In March, EIG released a brief about OZs and their impact, citing recent research reports by other organizations: a paper by two economists with the Treasury Department using tax data, and another by a University of California-Berkeley economist using building permits data.

“What we can tell is that, from the latest available data — and this is just through the end of 2020, or the first full year of the program — about 48% of all Opportunity Zone census tracts had received investments,” Fikri said, and aren't concentrated in cities or rural areas, or in any part of the country.

“We're able to get confirmation that a large and diverse range of places are seeing opportunity zone investment,” Fikri said. “We don't know exactly what it's doing. But we know that it's not just a metropolitan phenomenon.”

Reporting requirements for investors were left out of the original language of the bill, and have never been added, leaving the program "flying in the dark," as the Government Accountability Office put it in 2020.

The most recent attempt to modify the program to include more reporting requirements came almost a year ago, with the introduction of the Opportunity Zones Improvement, Transparency, and Extension Act, in both the U.S. House of Representatives and Senate. The bill died in committee in both chambers. 

The senators who originally shepherded the idea through Congress, New Jersey Democrat Cory Booker and South Carolina Republican Tim Scott, didn't respond to queries from Bisnow on their plans for moving reforms forward.

Investment within the universe of OZs tends to skew toward better-off places. Treasury economists David Coyne and Craig Johnson note OZs that have received investment have generally been economically better off than zones that haven't, with higher educational attainment, median household income and housing values. The top 10% of zones in terms of resident income receive over 20% of investment dollars, while the bottom 10% receive 10%.

Still, some investment is making its way to the bottom one-third of zones, which “count among the lowest-income 10% of census tracts nationwide, revealing that OZs have unlocked billions in equity capital for a meaningful share of the country's most severely distressed communities,” according to EIG.

Opportunity zones were largely the brainchild of EIG, a group founded in 2013, and the organization still advocates for them.

OZ incentives are strong enough to sway investor behavior, according to a survey by JTC Americas and Opportunity of 145 existing and aspirational investors. Nearly 70% of those surveyed consider the program’s incentives enough for them to consider investments they wouldn't have otherwise made, according to the survey.

Fifty-four percent of those surveyed would be willing to accept a lower financial return if they were investing in a project with community benefit.

“Most Opportunity Zone fund investors are motivated by the economic return from their investment, which includes the tax benefits,” said Capital Square CEO Louis Rogers, whose company is the sponsor of seven OZ funds building or redeveloping projects in the Southeast.

“Other factors, such as improving the economy and creating jobs in an economically distressed area, are material to the investment but of secondary importance to many investors,” Rogers said.

Capital Square was an early participant in OZ developments, including three properties supported by three separate OZ funds in the Scott's Addition neighborhood of Richmond, Virginia, all of which are now completed and stabilized. 

The first of them, Ink, is an 80-unit market-rate apartment building where rents range from $1.4K to $2.3K.

“As far as I know, I think we're one of the first developers nationally to kind of get this far with an OZ development, though calling it full cycle is incorrect,” Capital Square Chief Development Officer Adam Stifel said. “That usually refers to something that's been sold, so we're not quite there yet. But we did everything we said we were going to do, and a little bit better.”

The project was in the planning stages when the OZ came along, whose tax benefit Stifel characterizes as a “cherry on top” of the investment. Capital Square had long been interested in investing in Scott's Addition, a rising neighborhood in a growing city.

“We raised the funds, invested it into the development, which came out of the ground during Covid, and we were also able to refi the construction loan and get those proceeds out for our investors,” Stifel said. “Actually, we ended up getting more proceeds than we projected we would at the beginning.”

Scott’s Addition is a historic district in the heart of Richmond that, like many historic areas, has experienced a renaissance in recent years, with trendy retailers and boutique firms moving in. While Richmond as a whole has a median annual income far below the rest of Virginia — $54K compared to $80K, respectively — for 2017 to 2021, the Scott’s Addition is among the most expensive neighborhoods for renters in the city.

Ultimately, the benefit OZs offer distressed areas remains uncertain.

“It is too soon to reach conclusions regarding the effectiveness of the OZ tax incentive,” Coyne and Johnson of the Treasury wrote.

For instance, they found little evidence so far that employment rises simply because an area is an OZ. Census tracts designated as OZs were already trending toward employment growth and poverty reduction compared with tracts that could have been named OZs, but were not. 

Commercial real estate data finds little indication of property price differences between OZs and similar but non-OZ tracts, but there is evidence of increased prices for vacant land and older properties within OZs that might be redeveloped.

“This evidence suggests that these parcels have priced in the potential tax benefit, but there is not yet evidence for expectation of future economic growth across the zones that benefits other parcels,” Coyne and Johnson wrote.

On the other hand, in his working paper, UC Berkley economist Harrison Wheeler found no evidence of differences in new construction between OZs and comparable areas in the four years before the program, but after OZs were approved, there was an immediate impact.

For opportunity zones, Wheeler found despite the increased supply of housing, median home values increased 3.4% in OZs by 2020, compared to 2017.

One anecdotal criticism of the program is that tracts that became OZs aren't always those that need the strongest shot in the arm, economically speaking.

Carmen Hill, an adjunct real estate professor at Cerritos College in Southern California, says that, as a real estate broker and a local advocate for the program, she believes some areas that need zones have been overlooked.

“At least in Los Angeles and the surrounding areas, opportunity zones aren't in economically distressed areas, such as the Adams area, Hollywood, Koreatown, Crenshaw area or USC area,” Hill said.

Part of the reason may be that when created, opportunity zones relied on increasingly old data, and neighborhoods have a way of evolving fast.

“Perhaps the census demographics have changed from when the opportunity zones were created,” she said.

Locations in opportunity zones sometimes help facilitate deals, according to Land Advisors Organization Northern Arizona adviser Capri Barney, whose company recently represented the seller of about 26.6 acres in Yavapai County, Arizona's opportunity zone.

"The opportunity zone designation for this parcel in Camp Verde, Arizona, contributed to the strong interest we received on it, and ultimately was a major factor for the buyer on purchasing it," she said.

"This was our second closing of the four parcels we currently represent in the Yavapai County opportunity zone, both of which occurred within a few months of one another," Barney said. "Based upon the interest that is received on parcels within OZs, I've seen how useful the designation is in spurring economic development."

CORRECTION, APRIL 10, 12:50 ET: A previous version of this article misattributed a statement regarding the lowest-income 10% of census tracts. It has been updated.