Rethink Real Estate. For Good.

Opportunity zones

Striving for impact.

How can real estate developers and investors make substantial positive change in the places in which they build? It’s a vexing question that luckily has numerous answers. You just need to know where to look.

Be direct and honest

Let’s face it, you’re not going to be able to please all the people all the time. As an individual investor or developer, your project’s scope and scale is going to be limited, and while you can make an impact, there are limits to that ability. Your best path forward is to be accessible, transparent, and to listen to community concerns. Avoid falling into the trap of being too vague or using wishy-washy language. If you are unable to address people’s concerns, tell them, and tell them why. Be accessible, be transparent, listen to them, and give honest responses. You won’t be able to take everyone’s suggestions into account, but you can listen and sometimes that alone can bring value to a neighborhood.

Survey the locals

The primary factor in making a positive change is ensuring that the project meets the needs of the community it is located in. To do that, it is vital to get out and talk to people in the area and try to understand what they want. Some communities are in dire need of affordable housing. Other communities may need retail stores. Grocery stores, in particular, are needed in many communities. Urban areas throughout the United States exist in what are called “food deserts” where the only access to food is via unhealthy options like fast food, convenience stores, etc. When you know what that community needs, you can adjust your investment to be as impactful as possible.

Consider alternative funding sources

Traditional banks and lenders will, for the most part, only finance conventional forms of development: suburban tract houses, sprawling commercial districts, office parks with little connection to their surroundings. The democratization of real estate capital finance is upending their domination of the property and development markets. Options like real estate crowdfunding, hard money lenders, and Opportunity Zone funds are all excellent sources of financing for non-traditional, non-greenfield projects.

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The definition of “impactful” is different for everyone. But the opinions of future residents and current stakeholders should be a primary concern when gauging what will work best for a development in a community.

Finding financing, working with local authorities, and getting the community on board are all necessary steps to building for the maximum impact. With the right approach, and the right team, you’ll be right on target.  

Rendering of Benning Market courtesy of Neighborhood Development Company.

Can Opportunity Zones provide opportunity?

Since the first New Deal housing policies emerged in the 1930s, governments from the municipal level all the way up to the federal government have sought ways to help alleviate the lack of affordable in this country. While there have been many successes, there have also been notable missteps. Infamous projects like Queensbridge in New York City and Cabrini Green in Chicago tarnished the credibility of projects subsidized by the government for decades and continue to tarnish that credibility today.

Low Income Housing Tax Credit

Low Income Housing Tax Credits (LIHTC, or Section 42 credits as they are sometimes called) support the development of much of the low-income housing product developed today in the United States. This tax credit provides a dollar-for-dollar subsidy to investors deploying capital into affordable housing projects. When investors choose to work with this program, in return for the tax credits they receive, they must abide by rent restrictions to maintain the affordability of these projects for low-income Americans. Rent restrictions can be required to continue for up to twenty years and can wreak havoc on the investor’s ability to project a financial return on a LIHTC project.

Real estate is by definition a depreciating asset, aside from the value of the land. Any structures built will require maintenance, repairs, and capital investment over the life of the building. If you are unable to rely on appreciation in value because the property is located in a depressed economic area, then you’ll find that you have a substantial restriction on how much income that property can generate. As a result, LIHTC projects are relegated to a small niche of developers who have figured out to how to generate returns despite these issues.

For many years those working to solve low-income housing issues focused primarily on the quality of housing- there was at least some lower-tier housing in most urban areas that even the very poorest could access through market means or government assistance. With increased urbanization and the concentration of economic opportunities in cities, these affordable housing opportunities have all but disappeared. Existing residents are forced to move further and further away from job opportunities, exacerbating poverty and environmental issues caused by commuting- and all the while, slowly by surely the fabric of inner-city communities across the country is being destroyed.

Opportunity Zones may help fill the gap

One of the definitions of madness is trying the same thing over and over and expecting a different result. Developers, investors, government and community groups would do well to adopt new, market-based approaches. Channeling capital from traditional markets to these underserved communities in a responsible way may help to reduce the affordability crisis in ways that government initiatives have failed.

A much talked about solution that has been underway since 2017’s Tax Cuts and Jobs Act is the use of Opportunity Zones. These zones (8,000 of them) offer investors tax benefits for investing in designated Opportunity Zones, which are economically depressed regions that have suffered from a lack of capital flow. While LIHTC projects have rent restrictions, Opportunity Zone investments have no such limitations. Investors can invest in market-rate projects that are not hamstrung by onerous rules and regulations that so often come with government-led housing development.

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Despite the not-insignificant issues that may arise as a result of public-private partnerships, there is incredible value to be created by working hand in hand with government to solve housing issues. Previous efforts that failed to take market forces into account unfortunately had predictable results. With Opportunity Zones and other such market-driven approaches, we can hope to see a greater reduction in housing insecurity in the years to come.

Image Cabrini Green Demolition, by Joe M500, CC BY-2.0

Fighting gentrification.

Fighting gentrification with socially conscious capital investments

Anyone paying even cursory attention to the real estate markets over the past ten years would think that things are going pretty well. Many metro areas, from San Jose to Tampa, are seeing substantial home value growth with many parts of the country hitting double-digits. However, with growth comes growing pains, and one particular issue is garnering a lot of attention: gentrification.

Is gentrification too big to solve?

There’s no sugar-coating it. People are being priced out of their homes in cities across the country. The reasons for this phenomenon are diverse and debatable. Urbanization and lack of economic opportunities have driven many talented workers from the suburbs and exurbs into cities, which has driven up demand for housing, and thus prices.

Wall Street and investment firms also hold much of the blame. Seeing growth opportunities, many institutional investors have scooped up vacant land and old properties and gone on a development spree. Unfortunately, much of the development in cities like San Francisco and New York city has been targeted at high-end luxury condominiums and is out of reach of most prospective homeowners. Despite substantial construction and even with many developments coming online, lower to middle end buyers in the housing market cannot find affordable, quality housing in many major metros.

This problem is expected to get worse, partially due to new legislation passed as a result of the Tax Cuts and Jobs Act of 2017. That bill created “Opportunity Zones” which are federally-designated census tracts that lag in economic development. Investors will be eligible for significant tax breaks by investing in these zones- the kinds of areas that gentrification is hitting the hardest.  Now, we can throw our hands up in the air or we can blame the government- but what can we do, as investors and businesspeople, to actually solve the problem?

Developing bridges and opening doors

An inclusive process is key to meeting gentrification head-on. By including minority and female developers and investors in development opportunities, the same populations most impacted by lack of affordability, we may stand a better chance of meeting community needs.  Empathetic developers are critical to the future success of gentrification-opposed development. We can do this by bringing more powerful financial tools into underserved communities.

Neighborhood trusts

One solution might be a neighborhood trust, an idea being experimented with in a number of cities in Texas, Massachusetts, California, and New York, with some success. These trusts are usually run by local nonprofits who acquire parcels of land and pledge to use them for projects that benefit the local community. Typical uses range from affordable housing to community-owned businesses.

Government solutions

Paradoxically, despite the government being the cause of many gentrification-related problems, it can also be a part of the solution. Cities like Washington D.C. and San Francisco are exploring ways in which to help homeowners, threatened by soaring neighborhood and property values, to stay in their homes. Changing the way that municipalities collect property taxes is one strategy being adopted in a few different cities.

When property values rise, the corresponding increase in property taxes often leads to long-term, low-income residents losing their homes. If cities offer tax credits or reduced tax rates for community residents, that could go a long way toward solving gentrification-related flight.

Real estate accelerators

Another strategy involves the creation of a “Real Estate Accelerator” by local nonprofits or other interested parties. An accelerator can provide community members with the tools to become real estate developers and investors themselves, by providing educational workshops and classes. Mentoring those that want to pursue real estate opportunities in their own neighborhood can be especially beneficial. Programs like these act as a steppingstone for low-income and underserved community residents to achieve careers in real estate development.

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The housing affordability crisis is not going away anytime soon, but a multi-pronged attack on the problem, led by both the private and public sectors, may help to alleviate some of the issues associated with gentrification.

Image “Gentrification Writ Large” by Matt Brown is licensed under CC BY 2.0

Opportunity Zones for everyone.

Opportunity Zone funds are a hot topic in the real investment world. These funds appeared as a result of the 2017 Tax Cuts and Jobs Act. This legislation included a provision that designated 8,700 census tracts in the United States as Opportunity Zones – areas with less than average direct investment and economic growth.

Investing in these zones offers interested parties a number of tax benefits for both business and real estate investments within the designated Opportunity Zone. These tax benefits are intended to spur investment in those areas, to bring them up to par with national economic growth, or even to exceed the national numbers.

Critics of the program have charged that the legislation only helps the very wealthy since the program allows investors to lessen their tax burden using rolled-over capital gains. If you look at the majority of rolled-over capital gains in the United States, you’ll find that those at the high end of the economic spectrum are the ones who stand to gain the most from Opportunity Zone investments.

How the wealthy use Opportunity Zones to invest

It would not be entirely out of line to assume that Opportunity Zone Funds were set up to benefit wealthy investors. They stand to gain the most from the program, and unfortunately, their priorities are not always in line with the aims of the program- to improve the lives of people who live and work in these areas.

Opportunity Zones are by definition in, or next to, socioeconomically disadvantaged areas. Those communities fear that much of the Opportunity Zone investments being planned are in constructing luxury housing which do not necessarily serve the local community’s needs. In fact, it may even force long-time residents out of the area, as their rents and expenses will increase with the completion of new high-end housing and commercial developments.

Early data from the first year of the program, 2018, has shown that home costs have risen by 20% in Opportunity Zones, even when compared to other low-income areas that did not receive the Opportunity Zone designation. What this likely indicates is that gentrification is occurring in these communities, and at least partially driven by wealthy people deploying capital in these areas to receive tax breaks.

A potential solution?

Although the Opportunity Zone provisions were written with ultra-wealthy investors in mind, anybody is potentially eligible to receive Opportunity Zone Fund tax benefits. If you can create an Opportunity Zone Fund that is open for investment by the community, and that accurately represents the voices of the community, you flip the script, and this program becomes a force for good, rather than a detriment.

Community-driven investment through Opportunity Zone Funds

Taking a democratic approach to land usage and community development is possible through the use of an Opportunity Zone Fund with locally minded, neighborhood-oriented investors. A locally funded development, with stakeholders as investors will create the kind of projects, or development, or housing, that the community wants and needs. Additionally, when these funds are profitable, those profits will circulate within that area, since the initial investment capital will have originated in that community.

This isn’t to say that raising capital locally in low-income areas is a walk in the park. As many development projects rely on economies of scale, they often require significant amounts of capital to break ground. It is a challenge to come up with that much capital, but it is not far from impossible. Every community has resources, even if they do fall into the low-income category. Even if 50% of the community is below the federal poverty line, look at it half full- 50% isn’t.

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Well-meaning government programs like Opportunity Zones can hurt or help local communities. While it may be impossible to stop gentrification and the growing affordability crisis, community-oriented investors can use these same programs to benefit current residents, rather than wealthy elites.

Philadelphia. Image courtesy of Small Change