By: AIF Staff
Last week, former Speaker of the House and American Idea Foundation President Paul Ryan moderated a conversation with elected officials, on-the-ground community leaders, and researchers about the development of Opportunity Zones. Opportunity Zones, which were part of the Tax Cuts and Jobs Act of 2017, are a poverty-fighting tool designed to stimulate investment and development in economically disadvantaged areas across the country through the use of tax incentives.
The virtual discussion provided an update on the progress being made and the challenges being faced by policymakers and community leaders as Opportunity Zones have started to germinate. Consistent with the American Idea Foundation’s mission, the panel showcased how Speaker Ryan is serving as a connector between policy makers, policy and analytical experts, and on-the-ground leaders. Joining Speaker Ryan in conversation were:
- Congresswoman Terri Sewell of Alabama, who is working to improve Opportunity Zones on Capitol Hill, ensuring they meet their mission of revitalizing communities.
- John Persinger, CEO of the Erie Downtown Development Corporation who is currently spearheading the development of a promising Opportunity Zone in Erie, Pennsylvania.
- John Lettieri, President and CEO of the Economic Innovation Group (EIG), who is adding intellectual analysis and key perspectives on the best practices for those involved with Opportunity Zones.
- Patrick McKenna of Catalyst Opportunity Funds, who provides analyses for investors so they can maximize the benefit for both businesses and communities in Opportunity Zones.
The Foundation has included excerpts of all of the panelist’s contributions (Sewell and Persinger) and included below are some highlights from Speaker Ryan’s dialogue with John Littieri of the Economic Innovation Group and Andrew McKenna of Catalyst Opportunity Funds.
Video of the Virtual Panel is accessible here.
The Economic Innovation Group has provided research, analyses, and recommendations on how individuals, communities, and businesses can achieve the maximum amount of benefits from Opportunity Zones. John Lettieri, shared his perspective on the progress that has been made in Opportunity Zones thus far and what may come next.
Lettieri urged patience and continued evaluation before definitive conclusions are reached on the impact of Opportunity Zones.
“It’s important to remember how early on in the process that we still are. It’s easy to forget that, because in legislative terms something that past almost three years ago is long in the tooth. There is often this political timeline that says we should be able to know by now, that we should be able to declare victory or failure or to have some kind of firm assessment. But when it comes to a market-based incentive like this, there is all kinds of market formation and groundwork to be laid before you really get to see what the potential of the policy in the real world looks like.
“It starts with the regulatory piece because investors can’t move forward in confidence, can’t raise capital, can’t deploy capital until the rules of the road are clear and that only just happened in December of 2019. Then they had about three months before the pandemic, so there’s a newness to this in the real world and, as with any new product in a financial marketplace, it takes years to really make that normal…
“This was always conceived as a decade-plus policy fight for a reason because this is tackling a challenge that did not arise overnight. It is not going to be solved overnight. So, when you want to talk about real results, those need to be measured in decade-plus increments, but we can tell a lot about the design structure and whether those original ambitions and assumptions are proving to be correct.
“Opportunity Zones were designed to be a very flexible malleable incentive that could be relevant to a wide range of communities and a wide range of needs within those communities. It’s not a type of policy where you have one-size-fits-all use case.”
Andrew McKenna with Catalyst Opportunity Funds detailed the approach that investors take when evaluating how to make an impact in Opportunity Zones:
“When we start with a project and we are talking to a developer who has a history of engaging in the community, [the] number one [question] is: Have you talked to the community about what they need? Why is this project important? What are you doing measurably to ensure that you’re going to deliver locally for the community on what you’re promising?
“And when we show them a scorecard and say: This is how we’re going to measure this project. It is amazing how it aligns everybody’s interests. People are interested in the impact and they say: “I love measurement.” And this is what Congresswoman Sewell was talking about for measuring [impact via] legislation….
“We are so committed to the impact and we also have this core belief. I’m a very market-driven impact investor and [believe] that the market return will impact and attract more non-incentivized capital. The point isn’t just to have the Opportunity Zone capital coming in. I expect a 10x follow-on with more capital coming in behind this to engage communities and truly bring up the wealth factors. This is a catalyst. A catalyst to bring more investment behind it so the market rate return is going to track my return. And then our commitment to impact it over a 10-year period. We have the advantage of having a long-term use and when we’re looking at a project having a 10-year view to affordable housing is incredibly powerful to the overall return….
Lettieri also highlighted the diversity of Opportunity Zones across the country and what is needed for them to flourish:
“Congresswoman Sewell mentioned Opportunity Alabama and what’s happening there. The diversity of types of things you see within those communities is amazing. The fact that an industrial city, like Erie, and rural Alabama are both seeing benefit from this policy in dramatically different ways speaks to one of the early successes of the policy which is that diversity and flexibility that allows it to match with local needs.
“The second thing we need to see is scale. If you’re talking about a National Map of Places to really make a meaningful depth in the challenge that this was designed to address, you need a lot of capital. This has been one of the things that has hamstrung previous policy efforts. It just didn’t get to scale in getting private activity and private capital off the sidelines at the scale that was necessary….
“Opportunity Zones make deals that would otherwise be not attractive, much more attractive. But for the really, deeply distressed areas, to really do high impact things in those areas you often need even more concessionary capital than what the private market alone can provide. This is a perfect role for philanthropy to come in and provide loss guarantees and backstops to investors that make it less risky to take what is an enormous bet — because remember the tax benefit for Opportunity Zones only comes in for an investor after 10 years of committed capital in an Opportunity Zone investment. That’s a long-time horizon for any investor. That’s not normal for the marketplace. If, on top of that you’re asking them to do deals themselves that are extremely risky or have very low margin, there needs to be other factors that help to mitigate some of the risks that they may perceive if you really want to drive towards the highest impact stuff.”
Lettieri reiterated the importance of having local ambassadors and community leaders on the front-lines to assist investors, developers, and potential job creators locate high impact investments in Opportunity Zones:
“One thing that we see in almost every successful market for Opportunity Zones is there is somebody coordinating that activity on the ground. This is another way that philanthropy can help fill the information gap that is so much of a hurdle for outside investors or for any anyone who wants to do good in these communities: How do they know what the needs are? Or what the opportunities are as far as where to put their capital? So, you have facilitators in cities like Baltimore, in cities like Norfolk, in Opportunity Alabama’s case in Birmingham and many other places and states where they are playing the intermediary role. This helps to bring in outside capital, attach it to high impact local projects, measure the transparency of it, and make that known to the community and get people on the same page, so these plans that may take 5, 10, or 15 years under normal circumstances can accelerate quite a bit and have a real time impact the lives of local residents We should do legislation, but these types of community partnerships are much more powerful in the long run than anything Congress can mandate of the private sector.”
Speaker Ryan summarized why this conversation matters in his concluding thoughts:
“The great promise of America is that the next generation is better off than the previous generation. For too many people in too many communities that promise seems to be breaking.
“Opportunity Zones have the potential to restore that promise by providing private sector capital to neighborhoods and communities that have been underserved for too long. We’re seeing that success already, and our panelists today are doing the hard work to ensure that the promise of Opportunity Zones is fulfilled.”
The hard work is ongoing to ensure Opportunity Zones mind their mission and are utilized as tools for revitalization and rejuvenation, not gentrification or displacement. By providing unprecedented amounts of investment and resources to help communities build themselves back from the ground-up, Opportunity Zones have tremendous potential. However, that potential will only be realized if lawmakers work collaboratively across party lines and strategically with local leaders and investors. Opportunity Zones cannot and should not primarily be a passive parking space for investors’ capital, rather these tax incentives should actively support the communities and the residents in them to improve outcomes and the overall quality of life in areas that have long been distressed.
The American Idea Foundation, led by Speaker Ryan, will continue to do its part so this public policy increases opportunities for residents to fulfill their potential and realize their version of the American Dream.