If you are an investor looking to have impact and for the latest, greatest thing since sliced bread, opportunity zones may well be your XS Max, Hyperloop and Impossible Burger rolled into one. A multi-billion dollar investment fund proclaimed this week, at the Opal Impact Investing Forum in New York City I attended, that they had set aside 25% of their assets for opportunity zone investing.
Simply put, opportunity zone legislation, approved in the U.S. Tax Cut and Jobs Act of 2017, allows investors with any kind of capital gains to reinvest those gains in funds (“opportunity funds”) that invest in underserved communities (specifically designated by states as opportunity zones) and if they keep the money deployed in opportunity funds for ten years, not only do they get a 15% discount on the taxes they owe on those original capital gains, but any and all profits they make from the investments in the opportunity fund are entirely tax free (there are also incentives for keeping the investments in for a shorter period of time but let’s not get too much into the weeds here).
The OZ part of the Tax Bill is an extraordinary piece of legislation that had across-the-aisle support in a Congress that doesn’t otherwise know the meaning of bipartisanship, making it all the more exceptional. It is a piece of legislation that has the potential for doing amazing amounts of good by unleashing seriously large amounts of investment (see the 25% figure mentioned above as just one example) into poor neighborhoods around the country that have had great difficulty attracting private investment.
While it seems to be a brilliant piece of legislation, with lots of win-wins, it is also one that could hold some significant drawbacks for the communities in question. One of the most commonly voiced negatives is that the economic improvement that opportunity zone investment supports — beginning with an obvious one, real estate — could gentrify the communities to the extent that the inhabitants, which one is supposed to be helping, are priced out of the market and will have to move away. (Some people feel that this issue is fixable; for example, as regards real estate, a voucher system that subsidizes rents for original tenants. I, for one, question whether this is the right approach and whether it would be enough).
Another potential negative of opportunity zones is also related to one of the bill’s positives: that as far as the federal legislation is concerned, there aren’t many if any restrictions on what opportunity funds can invest in. As long as a business or project is located within the designated zone, it is eligible for investment by an opportunity fund. While one can argue that any kind of capital investment in the poorest of communities is a step in the right direction, this does not necessarily promote a local economy that the community can be proud of or, even more critically, reflects an awareness of the social and environmental realities and needs of the 21st Century. Indeed, it strikes me that this provision could inspire a great deal of abuse if not outright fraud if not carefully managed. Remember, Times Square was a bustling place in the 1980s but not necessarily a healthy model for the local economy.
This last point — the need for sustainable and responsible economic development — is enough to give opportunity zone communities pause when considering how to engage with the OZ program. As Dennis Price reports in ImpactAlpha, which has done an excellent series on opportunity zones, “Champions of impact investing are working together to ensure that investment strategies align with community goals. The idea is to coordinate among community stakeholders, set social and environmental objectives and fund local businesses that create good jobs, raise wages and build wealth for local communities as well as investors.”
At the Impact Entrepreneur Center, we are focused on advancing models for what we call “impact economy.” An example of this work is our recent international leadership summit and report with Rockefeller Philanthropy Advisors, “Philanthropy Transforming Finance: Building an Impact Economy.” Growing from this impact economy work, which also includes instruments such as Public Benefit Enterprise Zones and Integrated Impact Finance Vehicles, I would propose to opportunity zone communities that they add an overlay to their community development plans prior to seeking funding from opportunity funds.
Let’s call this overlay an Impact Economy Opportunity Zone. Ideally, here are some core characteristics of an IEOZ:
- IEOZs have global sustainablity context. This means that they are not only deeply attentive to local stakeholders and their needs, but also to the macro challenges. Since 2015, impact economy builders (including entrepreneurs, investors, scholars, governments, NGOs and others) around the world have been able to circle around the Sustainable Development Goals (SDGs) as a foundation and touchstone for global sustainability context. (For even more sophistication, particularly on the measurement side, I look to the work of susty context experts like Mark McElroy and Bill Baue.) IEOZs should likewise anchor their opportunity zone planning to the SDGs.
- IEOZs’ “operating systems” have a triple bottom line brain chemistry. A mature impact economy is distinguished by its abundance of authentically blended value companies, such as Certified B Corporations, benefit corporations and L3Cs. So IEOZs should emphasize to opportunity funds and to entrepreneurs and local business people that investments in these kinds of entities are most welcome. Indeed, the ‘soft’ incentives I have described as part of our Public Benefit Enterprise Zone model fit well into this thinking as they accumulate and reinforce local support for “for benefit” business development and investment.
- IEOZs are fueled by impact investments. While some may argue that any OZ investment is an impact investment, so starved for capital are OZ communities, I disagree. Authentic impact investors seek measurable social and environmental benefits alongside their financial return. The most reputable impact investors (such as, for example, RSF, Calvert, Acumen, Root, Leapfrog and Omidyar) make the analysis of the short, medium and long term social and environmental benefits of their potential investments, and their subsequent measurement during deployment, paramount in their process.
- IEOZs are keyed into the principals of place-based impact investing, which is a rapidly growing philosophy and practice within impact investing. We have a good bit of information on PBii in our “Philanthropy Transforming Finance: Building an Impact Economy” Report. Additionally, a great example of place-based impact investing in practice is the Boston Impact Initiative, and there is a growing body of journalism around PBii.
These last two points are really crucial. Advocates of opportunity zones believe they may unleash a frenzy of investment into underserved communities, and much of that investment is likely to come from outside the community — far outside. Inevitably, however, alongside any gold rush comes a fever. Communities need to consider the pros and cons of investment coming from Opportunities Funds that are located in far off cities with investors who may be scattered widely, and to create some clear rules of the game. Yes, it is much needed capital, but it may well come from sources that do not necessarily have the communities’ best interests in mind, such is the nature of the extremely attractive tax incentives built into the legislation.
So I urge opportunity zone communities to embrace the concept of Impact Economy Opportunity Zones and not settle for a ‘take the money and run’ approach. Not every opportunity is the right opportunity. At IE, our first definition of “impact” is “the rigorous application of blended value.” Our second definition is “transformation.” Opportunity Zones offer the potential for transformation, but making that transformation real and lasting and truly in service to the people within underserved communities and the broader economy will require a great deal of rigor, circumspection and care.
Opportunity zones may well be the greatest thing since sliced bread. The question is whether the bread is Wonder or multi-grain.
Laurie Lane-Zucker is Founder and CEO of Impact Entrepreneur, LLC and the Impact Entrepreneur Center for Social and Environmental Innovation, based in the Berkshires. Readers can request a copy of the new report on Building an Impact Economy by Impact Entrepreneur and Rockefeller Philanthropy Advisors here.