Published on Tuesday, March 24, 2020

Critics say the law should redefine distressed areas and prevent investments in casinos, stadiums, luxury hotels, student housing, storage facilities and high-end housing from qualifying for the tax breaks.


SAN FRANCISCO—Enacted in the 2017 tax overhaul, opportunity zones give capital gains and other tax breaks to investors who put their money to work in communities designated as economically distressed. The idea was to provide incentives for new housing, businesses and jobs.

But recently, opportunity zones have gotten a bad rap, says Dru Armstrong, CEO of Grace Hill, in this exclusive. Critics say opportunity zones have become a windfall for the rich rather than a boon for the poor.

Those critics cite the building of luxury hotels, student housing and storage facilities that require only a few workers in communities where gentrification is already underway. Even lawmakers who initially backed opportunity zones are seeking to change the law to redefine distressed areas and prevent investments in casinos, stadiums and high-end housing from qualifying for the tax breaks.

For investors, which side is right? The confounding answer is both and neither, Armstrong says.

“Let’s be clear. Opportunity zones have spurred good investments,” she says. “Insurance giant Allstate is funding a $35 million industrial building in the Chicago neighborhood of Pullman, where unemployment stands at 13%. The nonprofit owner of the building, Chicago Neighborhood Initiatives, was struggling to secure financing before Allstate secured the zone’s tax breaks.”

To be sure, some will take advantage of opportunity zones whether or not the spirit of the program is being fulfilled as long as the law is being obeyed.

“The question is not whether opportunity zones are good or bad,” Armstrong observes. “The question is how responsible investors, policymakers and community leaders can know whether the zones are advancing the social impact or environmental, social and governance investment goals they’re interested in pursuing.”

As with any investment, investors should perform due diligence on opportunity zone properties, as Tami Kesselman of Aligned Investing suggests.

“They need to identify the metrics they want to measure,” she points out. “Are they looking to create jobs? Or jobs primarily for skilled workers? Are they looking to grow businesses? What kind of businesses? Tech startups or businesses that are sorely needed in the community?”

Developing metrics requires investors to research the communities in question. Massachusetts-based Arctaris has been a leader in this regard, garnering a partnership with the Kresge Foundation to raise an expected $800 million for investments that hinge on standards that both asset managers and neighborhood advocates share, learns.

Government can also play a critical role. As research from the National Housing Partnership Foundation and Kingsley Associates has shown, there’s nothing like unpredictable and fragmented requirements to deter investors from socially valuable endeavors such as affordable housing. The same research shows investors potentially want to get involved in building affordable housing, in part because while there is not a great deal of upside to the investment, it is a reliable revenue source to hedge against downturns. “But reliable and consistent standards, if metrics are to come into play, are needed. And the administrative burden of obtaining and reporting those metrics needs to be light,” Armstrong says.

Knowing whether an investment will move a metric is another matter of course. Silicon Valley-based specialty financial administrator NES Financial is working with Columbia University’s Howard W. Buffett to develop software that measures the social impact of investing. NES is determining how specific investments will create jobs, increase incomes and spark other changes, and what might be the pace of those changes.

“Knowing how many jobs an investment will create now or later, whether those investments will raise incomes that will result in knock-on economic development or if the investment might fulfill a local need, say, like a supermarket in a food desert, gives investors the tools they need to spend their money wisely while potentially also building social capital in the community they are joining,” Armstrong observes. “The process might even lead to better planning for investments that yield positive impacts. What’s more, if more investors conduct analyses like those that NES Financial are proposing, they’ll produce more data that can be used to further hone financing in opportunity zones. That leads to greater efficiency.”

If impact is in the eye of the beholder and a fiduciary responsibility requires social impact to be directly and convincingly linked to positive returns, how does one track the many variables that are far outside accounting principles but vital to lifting up distressed communities?

Formulas that gather, sort, customize and automate the many data points in social impact investing and opportunity zones are exactly the fintech mechanisms that can overcome the barriers now facing investors who want to be certain of a capital outlay’s impact, Armstrong observes.

“Real estate and beyond real estate, social impact, is quickly becoming a question of making data easier to use, and through that, filtering out the boondoggles from the boons that make both superior returns, and lift communities,” she says.

Property technology company Grace Hill focuses on policy, training and assessment software designed to develop, retain and build talent.