How Opportunity Zones Help with Economic Development

The Opportunity Zones program—the first new community development tax incentive program enacted since the Clinton administration—has the potential to generate an influx of capital in distressed communities. At the same time, concerns have been raised about the potential unintended consequences of the program. Two examples of these concerns include:

• Displacement
• Concentration in high-cost cities

Displacement

Given that equity capital generally seeks the highest possible return on investment, Opportunity Zone funds may target distressed areas already in the process of gentrifying. In such tracts, Opportunity Zone funds may focus on building infrastructure—such as high-end housing and retail space—that caters more to a population with higher income. Such investments may displace existing residents with low income.

Concentration in High-Cost Cities

Equity investments are likely to earn higher returns in higher-cost areas since consumers and small businesses in those areas can support higher rents (both residential and retail). This may exacerbate current situations where equity capital is concentrated in the high-cost coastal cities and largely absent in the middle of the country. Just because all 50 states have designated eligible Opportunity Zones does not mean that Opportunity Zone funds will be invested equally across the country.

Filling in Information Gaps

Since the passage of the Opportunity Zone program in December 2017, key decisions by the government and the private sector have to be made in a relatively short amount of time. It is important that data is available to help inform these decisions.

To make data accessible to relevant stakeholders, the St. Louis Fed has created the Opportunity Zones Explorer, an interactive tool that visualizes current investment activity and the risk of displacement for designated Opportunity Zones throughout the U.S. We used a dataset created by the Urban Institute to create the tool.

In the Opportunity Zones Explorer, investment activity is comprised of the following:

• Commercial lending
• Multifamily lending
• Single-family lending
• Small business lending

Data was compiled from both proprietary and public sources and includes investment activity between 2011 and 2015.

Displacement risk refers to Opportunity Zones that appear to be gentrifying, based on available data. The following four measures were used:

• Percentage point change in the share of residents with a bachelor’s degree or higher
• Dollar change in median family income
• Percentage point change in the share of non-Hispanic white residents (which, for example, can help to explain differences in assets, not just incomes)
• Change in average housing cost burden

How Some Eighth District States Are Approaching the Program

Illinois

The Illinois Department of Commerce and Economic Opportunity (DCEO) is convening forums to educate communities about Opportunity Zones and introduce them to potential investors and Opportunity Fund managers. Opportunity Funds are a new investment vehicle that aggregates private investment to be deployed in Opportunity Zones.

Additionally, the DCEO has discussed the creation of a state-operated Opportunity Fund with other branches of the Illinois state government. To date, no formal legislative proposals have been drafted.

Kentucky

The Kentucky Cabinet for Economic Development (KCED) has dedicated a portion of its website to act as a clearinghouse for all information related to Opportunity Zones in Kentucky. It also includes a map of available industrial sites and buildings located in Opportunity Zones.

Pending the release of guidance from Treasury Department, the KCED will host a regional tour to provide communities with information and resources to capitalize on their Opportunity Zones.

Missouri

The Missouri Department of Economic Development (MDED) created a section on its website describing the program. It has also hosted an informational webinar for interested stakeholders.

The MDED is awaiting guidance from the Treasury Department before it engages in additional educational outreach.

Finally, the Missouri Legislature became the first state to pass Opportunity Zones-specific legislation. S.B. 773, signed into law in this summer, reserves $30 million of the state’s annual historic preservation tax credits allocation for eligible projects in Opportunity Zones.

Wrap Up

Opportunity Zones hold a lot of promise, particularly for communities that have experienced declining investment over the last several years and decades.

At the same time, it is important for all stakeholders—including Opportunity Fund managers, states and developers and others—to have relevant information so that both investors and communities alike benefit from the program.

Notes and References

¹ We used a dataset created by the Urban Institute to create the tool.

Additional Resources

• Community Development: Opportunity Zones Explorer
• On the Economy: State Small Business Credit Initiative Encourages Investment in Rural Areas
• On the Economy: New Markets Tax Credit Program: Vital to Post-Katrina Recovery