The Benefits of Opportunity Zones In a Recessionary Economy
AP Photo/The Grand Rapids Press, Tanya Moutzalias
The Benefits of Opportunity Zones In a Recessionary Economy
AP Photo/The Grand Rapids Press, Tanya Moutzalias
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Urban blight is a cyclical dilemma that has plagued many major American cities for generations. Great urban centers once considered to be bastions for economic opportunity, professional mobility, and relatively peaceful living environments now suffer from financial disrepair, labor drought, and a continuum of structural stagnation. Cities like my former home of Detroit (once revered as the “Paris of the West”), Baltimore, and Pittsburgh were once renowned for being national centers of industrialization and modernized work opportunities, providing a constant source of capital, work for skilled laborers, and rapid urban development. With the advent of globalization, deindustrialization, and the outsourcing of professional opportunities, many of these cities have been found noncompliant with modern times and now stand as shells of their former glory. Where booming industries like the automotive market once fueled the success of the factory system across many major cities, more expedient methods of attracting labor and capital are being utilized by struggling urban centers desperately seeking to improve their economies.

Two of the most productive methods are opportunity zones (OZs) and Tax Increment Financing (TIFs). Both options represent notable tools used by federal, state, and local governments to target and incentivize qualifying businesses and wealthy individuals to invest in funds designated for the restoration of cities. A TIF is a public financing tool that is set aside by a city specifically for subsidizing urban redevelopment. TIFs serve as useful revitalization programs for cities seeking to channel investment money toward blighted public areas that are sectioned off for economic improvement. These provided subsidies work to divert or refund a segment of tax money to better facilitate the privately invested construction process for an area under development. TIFs typically repair dilapidated streets, abandoned parking lots, damaged bridges and other city-wide infrastructural projects.

These projects are designated under “TIF districts," structurally or financially troubled areas. Participating cities are required to adhere closely to state regulations governing these areas. TIFs are one of the more notable public financing options that fall under, “value capture strategies”, which is understood as a public entity recapturing or preserving the value that is generated in a defined area by public infrastructure to offset the costs of investment for private developers subsidizing the area. These provide circular benefits to both government entities and private investors working to sustain public infrastructure in a manner that captures value and reduces developmental costs.

Following a similar concept to TIFs, Opportunity Zones are designated areas in the U.S. that target economically distressed communities. American governors are tasked with labeling these areas by census tract and typically compete to receive federal approval from the U.S. Department of Treasury, which delegates much of the verification process for potential OZs to the Internal Revenue Service. First created through the Tax Cuts and Jobs Act of 2017, OZs are defined by HUD as “economically-distressed communities where new investments, under certain conditions, may be eligible for preferential tax treatment." After first launching in April 2018, Opportunity Zones are now spread across all 50 states and five U.S. possessions, with over 8,768 zones to-date, impacting nearly 31.5 million people, with 57% of residents being non-white minorities. Opportunity Zones exist across diverse regions, and can be formed in a mixture of downtown, suburban, industrial, and rural areas. The average poverty rate across OZs is 27.7%. The defined zone can either be utilized by states for funding real estate or providing direct equity to businesses, and a fund must maintain 90% of its assets to be used to finance the designated OZ tract. States can designate up to 25% of low-income census tracts exclusively for OZ purposes.

 When considering TIFs v. OZs, no one option is perfect. There are various strengths and weaknesses to each, in addition to a host of policy risks and benefits that both OZs and TIFs can offer qualifying cities in need of financial restoration. The most notable benefit provided through both OZs and TIFs are the promising offers for concentrated financial and structural redevelopment to blighted urban centers. In a recent podcast interview hosted by Jimmy Atkinson featuring Chris Loeffler, the CEO of Caiber, viewers are provided some perspective on the nature of opportunity zones in the midst of America’s 40-year high inflation rate of 9.1%, double-digit drop in the stock market, and as the economy gradually teeters toward a recession.

Loeffler emphasizes that now would be a most opportune period for developers to make investments at the peak of this economic uncertainty and when there is “maximum fear in the market”.

For those investors who are unable to adequately fund their existing projects, opportunity zones allow for renewed funding options from other capable investors willing to take over the project who may qualify for significant tax-cuts. “And [if] you’re saying, should I put money in a [opportunity zone] fund now or, should I just wait and see what happens to the economy?” Loeffler asks, “If you wait and see what happens with the economy, you’re going to miss a lot of the opportunity.” As an investor, Loeffler sees even greater opportunities to purchase existing assets that seem favorable in Opportunity Zones amid a pending recession. “Certainly, continuing to do ground up developments in opportunity zones, because that is the nature of the program, but, having a tighter focus on existing assets as well.”

One of the co-sponsors of Opportunity Zones, Senator Tim Scott (R-SC) has been optimistic about his promotion of OZs since they were enacted. In addition to the generous tax-cut incentive provided to investors, Scott has focused a great deal of attention on promoting the financial benefits these zones bring to underfunded, largely minority occupied communities that are in great need of urban renewal projects. “This [opportunity zone] incentive provides needy communities with a new tool and a level playing field when competing for investment”, according to Scott. “By offering communities a hand up instead of a hand out, Opportunity Zones are already credited with spurring economic development, job creation, revitalization, and new opportunities for countless Americans.”

Stone A. Washington is a PhD student at Clemson Graduate School, and Research Assistant at the Manhattan Institute.  

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