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Opportunity Zones Have Done What They Were Created To Do – Will That Be Enough?

15th Nov 2023
When discussing the merits of OZ, it’s important to remember why the initiative was proposed in the first place. With the right changes, it can accomplish even more.

Because of our work with Opportunity Funds, we at JTC have been in an advantageous position to see the wide range of projects that have been funded by Opportunity Zone investments, and how the OZ initiative has helped both urban and rural communities attract investments in affordable housing, health care, minority and women-owned businesses, sustainable agriculture, renewable energy, and other important projects.

Despite these success stories, OZ has received plenty of criticism over the years that must be addressed if the program is to have hope of being extended beyond its current expiration date. To show that OZ has been an effective program, we need more than just anecdotal evidence, but hard data has been elusive.

While some studies have been done, it’s too early to draw conclusions because most of the research has been limited to the early days of the program. Even one of the more recent studies, performed by David Coyne and Craig Johnson for the Department of the Treasury Office of Tax Analysis and published in July 2023, states, “It is too soon to reach conclusions regarding the effectiveness of the OZ tax incentive.”

It will take time to know what effects OZ investment has had and will have on underserved communities, but it will also be impossible to draw conclusions if we don’t have industry-wide data or a consensus on how to evaluate the success of the program.

How will we know if OZ has been successful?

One of the drawbacks of OZ has been the lack of impact reporting standards. While legislation has been proposed in the past that would institute mandatory impact reporting, nothing has been enacted, meaning there is no requirement for funds to report on the social impact of their projects or for the government to report on the success of OZ as a whole.

At JTC, we believe social impact reporting is an important part of impact investments like Opportunity Zones, which is why we provide thorough impact reports that detail impact progress throughout a project’s lifecycle. If Congress institutes an impact reporting requirement for OZ, the community impact of OZ investments can be quantified. However, they’ll also need to settle on a metric for success.

There are many ways to measure community impact, and different government programs define success in different ways. For the EB-5 Immigrant Investor Program, job creation is the impact metric, and therefore the number of jobs created by each project must be thoroughly documented. But this is by no means the only metric by which a government program can be judged.

The number of jobs created, affordable housing units built, average home price, home ownership rates, local unemployment rate, poverty rate – there are many metrics by which the impact success of Opportunity Zones could be judged. Selecting one of these would make it easier to quantify success, but would also change the nature of the program, which does not involve a single impact goal.

Our research has shown that impact investors want to focus their investments on a variety of impact goals, and OZ allows them to do that. Projects with different goals might measure their impact in different ways. How can we evaluate OZ when each project has a different intention? After all, impact investing is all about intention, so we should focus on the original intention of the initiative to see if it’s been successful.

The origins of OZ – what was this initiative originally for?

To understand the intention of Opportunity Zones, let’s look at what government sources said about their creation.

From an IRS presentation on the Tax Cuts and Jobs Act of 2017:

Opportunity Zones
  • economic development tool to encourage long-term investment and job creation in low income communities
  • investment encouraged by providing tax benefits to Investors that invest capital gains into Qualified Opportunity Funds

From the Department of the Treasury upon the release of the first round of OZ designations in April 2018:

The Tax Cuts and Jobs Act created Opportunity Zones to spur investment in distressed communities throughout the country.

From the New Jersey Division of Taxation:

The Opportunity Zone Program was enacted as part of the 2017 federal Tax Cuts and Jobs Act and is designed to encourage long-term capital investments into low-income rural and urban communities.

From the State of Vermont Agency of Commerce and Community Development:

The Tax Cuts and Jobs Act of 2017 included the creation of Opportunity Zones, a new tax incentive aimed at increasing private investment in low-income census tracts.

What do all these sources have in common? They all demonstrate that the basic goal of Opportunity Zones was to drive investment to underserved communities. Though in recent years we’ve begun to think more critically about the long-term consequences of those investments, the program was created with the simple intention of getting investment to communities in need.

To determine whether the program has done that, we don’t need to wait for more data on jobs or housing prices. We can use the data we already have about how much investment has been made into Opportunity Funds and where that capital has been deployed to understand whether OZ is working as intended.

The success of Opportunity Zones

One thing we know for sure is that Opportunity Zones have attracted an impressive amount of investment overall. According to Economic Innovation Group, “Total OZ equity investment was at least $48 billion by the end of 2020.” It’s not just the amount of investment that’s notable, but how many areas have received investment, especially compared to other government programs.

Reports have found that 48% of QOZs have received investment, and as this data is from 2020, even more may have received investment by now. Other reporting indicates that many areas receiving investment are those that need it most, averaging “in the 87th percentile for poverty, 81st for median household income and 80th for unemployment.”

According to a paper from the Treasury Department Office of Tax Analysis, “OZs have higher poverty and unemployment, lower income, a larger minority population, less educated households, lower rates of homeownership, higher vacancy rates, and lower house prices than eligible but non-designated tracts, and eligible tracts were similarly different from ineligible tracts.”

By these numbers, OZ has been a big success. We may have to wait to understand the full social impact of OZ investments, but if the purpose of OZ was to drive investment to underserved communities, it has done that. Now the question is whether it can do more.

The future of OZ

Two bills have been proposed in 2023 that could potentially expand and improve Opportunity Zones: one would create new Rural Opportunity Zones, and another would extend the investment and deferral periods while also removing OZ designation from tracts with a median family income of 130% of the national median family income or greater and instituting reporting on community outcomes.

Both of these bills would increase OZ’s effectiveness by getting more investment to areas that need it. Impact reporting is key to the future of OZ because the more information we get on the effect these investments are having, the more we can see which kinds of investments are creating the largest impact. We can also remove bad actors and adjust the OZ map to drive investment to the communities most in need.

When considering the original intent of OZ as a method for driving investment to communities in need, the initiative has been a success. By tweaking the program based on the knowledge gained through its first few years, we can help it do so much more. With proper impact reporting and an adjustment of the OZ map to target the areas of greatest need, we can push OZ even further.

CTA: To learn more about JTC’s purpose-built solutions for Opportunity Funds, click here.

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