Are “Opportunity Zones” an opportunity for DC residents, or only for investors?

Opportunity Zones are a new provision in the recently-passed Republican tax bill meant to create incentives for economic development. After flying under the radar during the debate over the bill, the provision is now getting some small degree of attention. But cities and states should be giving Opportunity Zones much closer scrutiny, since they’re set to become the biggest economic development program in the country — more than Low-Income Housing Tax Credits (LIHTC), New Markets Tax Credits (NMTC), or even Community Development Block Grants (CDBG).

It’s estimated that there could be up to $2.2 trillion invested in Opportunity Zones, but the key question is what that money will be spent on, and how. Unfortunately, the design of the program has some serious flaws, and will likely accelerate the patterns of displacement caused by runaway capital that we’ve already seen for decades, but on a federally-subsidized scale.

The program was intended to correct the imbalance of investment across the country and spur investment in communities that have historically seen little of it. However, Opportunity Zones have been designed in a way that could, and probably will, lead to rapid gentrification of the same neighborhoods, rather than investment in existing residents and neighborhoods. Here’s a quick breakdown of how the program works:

• Each state Governor (or “CEO,” as the DC Mayor is referred to in the legislation) selects census tracts that will be designated as Opportunity Zones. A state can select up to 25% of a universe of low-income/”disadvantaged” tracts (or tracts contiguous with them). If a state has less than 100 of such eligible tracts, it can select 25 total, which is the case in DC. Rules for census tract eligibility are similar to programs like the New Markets Tax Credit, which incentivizes retail investment in underserved neighborhoods.
• Individuals and corporations are incentivized to defer their investment capital gains and place them in Opportunity Funds, which are certified by the Department of Treasury.
• Opportunity Funds must invest 90% of their capital in Opportunity Zones, and can do so in any state. Outside of this limit on the geographic scope of their investment, there are very few strings attached.

DC’s Deputy Mayor for Planning and Economic Development (DMPED) released their nominated census tracts on April 20. The selection largely focuses on Wards 7 and 8, but it also targets census tracts that are home to large economic development projects that are already in the works, like Walter Reed and Buzzard Point. In Ward 1, the community I serve, lower Georgia Avenue is included among the nominated census tracts.

If accepted by the Treasury Department (which is likely), these census tracts will remain DC’s Opportunity Zones for the next ten years, with no option of changing them.

DC needs more development to provide enough housing for our growing population, but we need to be thoughtful about where and how create incentives so that development doesn't displace existing residents.

At the heart of the issue with the program is its adverse incentive structure. Though Opportunity Funds have to invest in certain areas, the primary incentive is still a return on capital, and there are virtually no stipulations that their investment has to support programs or construction that actually benefit the residents of the zones, or prioritize things like affordable housing.

A report from the Brookings Institute drives this point home:

“The value of the tax subsidy is ultimately dependent on rising property values, rising rents, and higher business profitability. That means a state’s Opportunity Zones could also serve as a subsidy for displacing local residents in favor of higher-income professionals and the businesses that cater to them—a subsidy for gentrification. Indeed, the highest returns to investors, and thus the largest tax subsidies will flow to those investing in the fastest gentrifying areas.”

Some cities, like Redwood, Pennsylvania, requested that their state exclude them from the program out of fears that it will displace local residents. As a state-level entity, DC can’t exclude itself from implementation, but we should treat Opportunity Zones with the same level of skepticism.

A full third of the tracts that have been nominated as DC’s Opportunity Zones have been flagged by an Urban Institute Analysis as being at high risk of further socioeconomic change (read: more housing unaffordability and displacement) as a result of these incentives. That includes neighborhoods like Brightwood, Pleasant Plains, Deanwood, and Carver Langston.

Kriston Kapps at CityLab raises the concern that in cities like DC, Opportunity Zones could “pour gasoline on a market that’s already white hot.” He raises an alarm about DC’s selection of census tracts: “[a] nightmare scenario under the Opportunity Zones program would mean tax benefits flowing to the wrong places or paying for the wrong things: Amazon receiving sweeping federal tax benefits to build HQ2 in DC’s Shaw neighborhood, for example.”

There’s another problem. Even if a state like DC wanted to add its own requirements on how Opportunity Funds could invest – ensuring certain amounts of affordable housing, for instance – the design of the program creates a race to the bottom. Since Opportunity Funds can invest in any state they wish, a state with additional restrictions on that investment might see that money dry up in favor of states with no rules.

As the Ward 1 Councilmember — representing neighborhoods like Columbia Heights and the U Street corridor — I am keenly aware of the pressures that increased neighborhood investment can put on the ability of families to stay in their homes. There are important lessons we’ve learned as a District in the last decade-plus of development. I’m afraid that if we allow the unchecked capital of the Opportunity Zones program to go forward as-is, we will fail to heed those important lessons.

In areas that see increased investment, there should be commitments to producing housing below 60 and 30 percent of AMI, covenants for existing independent businesses to help keep rent low, and local hiring requirements. Unfortunately, because of the profit-driven motives of a program like Opportunity Zones, there is little encouragement to give resources to bold ideas like Community Land Trusts, which invest in communities while keeping them affordable in the long-term by reducing speculative housing costs.

If we want to sustainably invest in communities that have historically been overlooked, it’s not simply a matter of driving dollars there; we need a combination of enforceable regulations on how that money benefits the community and proactive programmatic work that meets our residents where they are.

The Treasury is prepared to put out further regulations on the rules that will govern Opportunity Funds. As a member of the DC Council, I want to make sure we keep a close eye on those rules. They may reveal a need for further regulation of these funds to guide this investment to benefit DC residents and not accelerate trends of displacement.

It’s clear that in order to ensure longtime residents are not forced out of these “opportunity” zones, we will have to be deliberate about the investments we make with local dollars to balance out the gold rush effect of this new federal program. In Ward 1, I’ll be working to implement an equitable development plan for lower Georgia Avenue modeled after the work being done around the 11th Street Bridge Park. I welcome others to join me in these efforts.