Opportunity Zone Players Say Biden Can Fix Program's Perception Problem

The opportunity zone program, passed as part of former President Donald Trump's signature tax law, has faced problems with public perception.

The program has been associated with the controversial former president, and opportunity zone players say that much of the program's positive benefits have been drowned out by some of the more scandalous stories of wealthy investors receiving tax breaks that didn't benefit underserved communities. 

Opportunity zone investors and consultants, speaking Thursday on Bisnow's Opportunity Zone Update webinar, said they hope the Biden administration can help improve public perception of the program by making it more transparent and making it clear that it has bipartisan backing. 

Falcone Group Executive Vice President Alfonso Costa Jr. a former Department of Housing and Urban Development official who focused on opportunity zones during the Trump administration, noted that the policy was crafted by a bipartisan pair of senators before being inserted into the 2017 Tax Cuts and Jobs Act. Costa also spoke on a Bisnow panel in 2019 next to a different bipartisan pair of senators who supported the program. 

"To label it a Trump program or something else is not accurate," Costa said. "The Biden-Harris administration has a great opportunity to actually make changes to the initiative and in some ways make it their own, or make it a nonpartisan-oriented program."

In addition to the program's architects being bipartisan, Costa noted that the communities selected as opportunity zones span the range of the political spectrum. 

"Whether it's a blue state or a red state, a lot of these communities, and the poverty and distress they’ve seen over the years, knows no party, knows no color," Costa said.

Costa listed a series of reforms the Biden administration could make to improve the program, including adding incentives for investors to partner with nonprofits and community organizations and extending the Dec. 31, 2026, deadline for deferring capital gains tax liability. He also suggested increasing the number of opportunity zones, though he noted there should be a focus on low-income neighborhoods that doesn't include nearby higher-income areas.  

"In light of COVID, there are some neighborhoods that have been hit harder than others," Costa said. "And what better way in future relief packages or during budget reconciliation to say, 'Why don’t we allow each state to increase their zones by 10%?'"

Develop LLC founder Steve Glickman, who helped craft the program when he led the Economic Innovation Group, said he expects the Biden administration will take steps to make the program more transparent. 

"One of the frustrations across the marketplace, no matter where you stand on the program, is that there’s not enough transparent data about how capital flows are going to the funds, and to projects, and to which parts of the country geographically," Glickman said.   

EJF Capital Senior Managing Director Asheel Shah, who runs a $500M opportunity zone fund for the private equity firm, said adding transparency could improve perceptions of the program, helping ensure its long-term success. 

"Fund managers that are going to be in the space for the long term should welcome that," he said of increasing transparency. "That is going to provide more positive news, and it gets more momentum behind the opportunity zone narrative."

Shah noted that there have been a series of reports that have cast a negative light on the program. The New York Times reported in October 2019 that Treasury Secretary Steve Mnuchin helped create an opportunity zone that benefited notorious financier Michael Milken. In November 2019, ProPublica reported that Florida Gov. Rick Scott created a zone that benefited an already planned superyacht marina project in West Palm Beach. 

The program has also come under scrutiny from think tanks such as the Urban Institute, which released a report in June that concluded the program wasn't providing economic benefits to the communities for which it was intended. One of its original Senate sponsors issued a warning at a Bisnow event in June 2019, saying he would "kill the program" if it doesn't live up to its goal of helping underserved communities. 

The White House said in August that the program has generated $52B of new investment in economically distressed communities. Shah said these benefits are occurring, they just aren't getting enough attention. He said if the government releases more detailed reporting of the economic impacts, that could change. 

"There is a lot of economic development happening, not just in gateway cities," Shah said. "It’s happening in secondary cities across the country, and it’s just not getting reported."

EJF Capital in May 2019 invested in a 262-unit opportunity zone project with retail in D.C.'s Hill East neighborhood. In April, it invested in a 284-unit opportunity zone project in Jacksonville, Florida, and in July, it invested in a project in the state of Washington.

MCB Real Estate Managing Partner David Bramble, a Baltimore-based developer with multiple opportunity zone projects, said the nature of the program, and of real estate development generally, means that the positive benefits don't materialize immediately. 

"The challenge is that deals take a long time, no matter what," Bramble said. "If you’re doing a real estate development deal, especially in the mid-Atlantic or Northeast, it's hard. It’s a slow process. It takes years to get through entitlements. You layer on the complexity of the tax stuff that nobody understands, there’s just so many things that had to come together to get to where we are. We’re really just now I think getting in launch position."

MCB in January 2019 landed an opportunity zone investment for the first phase of its 2.2M SF Yard 56 project in East Baltimore. The developer also filed plans in November for a 575-unit project in a West Baltimore opportunity zone, and Bramble told the Baltimore Business Journal that he aims to utilize the program's tax benefits. 

Another reality of the program, Bramble said, is that it only works for deals that would already be profitable without the incentive. Investors still assume the risk of the project failing, so they are less likely to invest in the least-proven areas for development. 

"A lot of people thought opportunity zones are a panacea for capital in distressed neighborhoods; it’s not," Bramble said. "It doesn't make the deal work. The real estate deal has to work first."

Bramble said the program has already succeeded in changing investor sentiment about deploying capital in low-income neighborhoods. He said investors have increasingly realized that many neighborhoods that have historically lacked development do have the potential for successful real estate projects, making them more likely to invest there in the future.

"The major thing that they’ve done, which is super important, is they’ve opened investors' eyes that you can make money in a neighborhood," Bramble said. "It is possible I am going to look at putting capital here."

He said there have been many deals in low-income areas that could have succeeded in the past, utilizing other programs like New Market Tax Credits, but developers were unable to raise the final piece of equity to complete the transactions. Now that is becoming easier. 

"What opportunity zones have done is shine a light on those opportunities and now we’ve got to try to run a train through it," Bramble said. "There are a lot of people doing it, and the momentum is definitely positive."