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Attracting Investments to Opportunity Zones and Diverse Perspectives on Community Engagement

September 23, 2020

In 2017, Congress created a new federal income tax incentive intended to encourage long-term business investment in low-income census tracts designated as “opportunity zones.” One policy concern is that these tax incentives may benefit investors without any spillover benefits to existing residents and businesses within opportunity zones. This concern is based, in part, on the absence of a community engagement requirement in the U.S. federal income tax rules that govern the incentives. To better understand the possible concern about a lack of community engagement requirement, we interviewed people from ten organizations that each work to, among other things, attract investments into opportunity zones.  

Specifically, the tax rules make the tax incentives available only to investors in entities properly certified as qualified opportunity funds, which is only when they make a sufficient amount of qualifying investments in trades or businesses that operate within opportunity zones. Whether an investment so qualifies does not depend on whether any community engagement has occurred or will occur with respect to the investment. Thus, these tax rules permit investors to receive incentives even when making an opportunity zone investment without any notification to or engagement with the residents or businesses in the census tract and broader community in which the project takes place. 

We asked interviewees whether they were concerned about the lack of a community engagement requirement under these rules and how they see communities addressing community engagement with respect to opportunity zones. This blog shares some of their responses—primarily via direct quotations—and highlights that our interviewees for the most part agree that the absence of a community engagement requirement for an opportunity zone investment is most likely to be a concern when an investment does not require any interaction with local government, including through needs for public financing, building permits, or zoning changes.  

Interviewees

Our interviewees represented ten geographically diverse organizations in the Midwest, South, and Southwest. Some organizations are part of the economic development agency for a state or local government and others are private organizations. Most are funded by some mix of public and private money. All interviewees report having extensive experience over the last two years speaking and working with investors, governments, and communities with respect to opportunity zones. This small group, selected based on our interests as well as convenience, is not representative of the array of organizations or individuals working with opportunity zones, nor the communities they represent. 

 

Summary of responses

  • Interviewees said that community engagement is most likely to be a concern for opportunity zone investments when an investment does not require any interaction with local government, such as through a need for public financing, building permits, or zoning changes.  

As we describe more fully below, for some investments, respondents said that no special additional community engagement efforts were needed because local powers to control development ensure a level of community engagement necessary to block or modify undesirable investments and encourage investments that benefit the community. On the other hand, respondents said that for many other investments they had concerns that, without special additional community engagement efforts, the investments would generally ignore the needs and priorities of communities.  

Some respondents said that for most potential investments, the usual tools to control development—including via building permits and zoning requirements—generally allow residents to prevent unwanted projects from being implemented. Additionally, respondents noted that if projects are receiving public funding from local government (such as tax increment financing, tax abatements, or assistance from a city-run revolving loan fund) in addition to opportunity zone incentives, they must “go through the political stream”—by getting approval from local government bodies—and that local government leaders would not usually allow projects that do not have neighborhood support to receive public funding. One respondent noted that community engagement occurs because a project must obtain “the appropriate permits, mak[e] sure that things are zoned appropriately for what they want to do, and that the purchase goes through.” Another emphasized that “communities don’t lose any of the control they’ve always had. They still have zoning, they still have permitting ... the communities are making decisions about what type of development they want to see in those areas, and they’re zoning and permitting accordingly.” Due to these reasons, one respondent stated, “I don’t see projects being forced onto the community because of opportunity zones. I just don’t see it happening.” Another respondent noted that the lack of community engagement is not an issue unique to opportunity zones. To this point they stated, “Is it possible, the same as it would be on any private land, that private money will do things that not everybody likes? Sure, but I don’t know how different that is as a result of opportunity zones vs. anything else.” 

At the same time, respondents also shared concerns that, despite the tools described above, opportunity zone investments may still occur without any community engagement. One respondent stated that, “The greatest risk [with respect to opportunity zones] is a lack of community engagement in the development process.” Another respondent stated, “If they’re not taking money from public sources, they don’t have to factor in public engagement if they don’t want to.” Another said a lack of community engagement “is a big concern because most of the time the market is dictating what happens.” One respondent noted that it is difficult to apply any special scrutiny to opportunity zone investments because, “even if someone were to come in and apply for one of our other incentives, I would not necessarily know that that was an opportunity fund deal.” Others shared similar concerns. One respondent reflected that, “we don’t know everything that’s happening,” and another noted that they don’t know about opportunity zone investments “until we read about it in the paper.” Another said, “Even if they see investment in a zone, they don’t know whether or not it’s an opportunity fund because at no point does someone have to disclose that.”  

  • Interviewees’ own community engagement efforts included targeted investor outreach, encouraging community dialogue with investors, information sharing, and their organization’s role as an intermediary between communities and investors.  

With respect to targeted investor outreach, one respondent said that when preparing marketing materials for investors “we actually reached out to the communities for their input on what they would actually want to see and what they want and need.” Another respondent said their team looks for opportunity zone investors “that place an emphasis on social impact, rather than economic return, to maximize the benefit to the community and ensure community members are aware and involved in the investment process.” Similarly, another respondent said that, in reaching out to potential investors, they try to “prioritize projects that lift up priorities outlined in community plans [and] further public and philanthropic community investment strategies.” 

Other respondents described efforts to encourage dialogue with investors. One respondent said, “they work very closely with all kinds of different community groups” and that if “people get a heads up that these projects are happening ... we’ve seen those developers engage with the community because they know they’re going to need to.” Another respondent said that their organization encourages communities to “be proactive and to go out to a developer” and use existing “equitable development tools,” which they said are helpful “when developers are open to that conversation.” 

With respect to information sharing, several respondents described efforts to promote community engagement by collecting and publishing project information on their websites or hosting events to meet with community partners. One respondent emphasized that “our initiative is public facing, and information on projects and social impact funds are accessible to anyone who visits our website” and that they meet “with community partners to ensure communities are aware.” Another noted that “we hit every town, we met with all the business owners we could pull together, we had conferences, and we had seminars.”  

Some respondents emphasized the need for organizations, like their own, to intermediate between investors and communities. One respondent said that “without an intermediary, yes, I do worry that communities don’t know how to engage with the program and figure out how to use it for the type of projects that they think they need.” Another respondent stated that for opportunity zones to benefit a community requires “a local player that’s really willing to go the extra mile to see if this will work,” and “if you get the community engaged it can actually be a really powerful impetus to make all kinds of connections and open up new opportunities that weren’t being explored before.”  

Preliminary conclusions

In sum, respondents generally agreed that communities could sometimes use existing tools—like zoning requirements and building permits—to encourage or discourage certain investments, but many shared concerns that these tools are not applicable to all investments and that it is difficult in many cases for communities to identify whether a potential investment involves the opportunity zone tax incentives. Some respondents reported that their organizations have tried to encourage community engagement via targeted investor outreach, encouragement of community dialogue with investors, by sharing information with the public via websites and community meetings, and by trying to serve as an intermediary between investors and communities. With this tax incentive still relatively new, only time will tell whether these and other community engagement efforts will affect the types of investments that receive these opportunity zone tax incentives.  


The views expressed in this post are our own and do not reflect those of the Federal Reserve Bank of Chicago or the Federal Reserve System.

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