Published May 6th, 2020 at 6:00 AM7 minute read
When President Donald Trump signed tax reform legislation in late 2017, he focused on the economic relief it was expected to bring to families and businesses.
But deep within the 186-page bill was something else meant to appeal to two very different constituencies: high-rolling capitalists and low-income citizens.
This unlikely pairing came through establishment of Opportunity Zones, which aim to draw private investment into the most economically distressed communities in America. Dozens of zones exist in clusters throughout the Kansas City metropolitan area.
However, these investment tools have yet to meet expectations, prompting disappointment amidst continued optimism about the program. Some detractors have already written off the initiative. The COVID-19 pandemic, too, has introduced a wildcard into the long-term prospects of the program.
“The original hope was that this would really drive investment, even beyond Opportunity Zones, and really get people to look at some of these areas in a different light,” said Katherine Carttar, director of economic development for the Unified Government of Wyandotte County and Kansas City, Kansas. “I don’t think it’s happened to the degree that we had hoped.”
With the establishment of the Opportunity Zones, the Ewing Marion Kauffman Foundation spearheaded a local effort to steer those dollars toward projects that were important to residents in these underserved communities.
The outgrowth was We Grow KC, a broad-based effort that included business leaders and neighborhood activists. Organizers met with community leaders to discuss priorities.
The fear was that, left to their own devices, investors would cherry pick the least risky projects rather than help transform neighborhoods. That fear was mostly driven by the prospect of a national fund, with a pool of investors, swooping in on Kansas City as it scoured the country for good deals.
“We saw the community side of it,” said Larry Jacob, Kauffman’s vice president of public affairs. The “singular focus,” he said, was “how do we build wealth for the residents that are currently living in the communities?”
The Kansas City area has approximately 60 Opportunity Zones combined into the clusters. There are more than 8,700 zones nationwide.
The metropolitan area zones range from the area around the old Indian Springs Mall in Kansas City, Kansas, to Martin City, Missouri, in southern Jackson County. Johnson County, Kansas also has some in Shawnee, Lenexa and Olathe.
In Kansas City, Missouri, the clusters cover a swath of the East Side, including the area around Swope Park and the Historic Northeast. The vast industrial area along Manchester Trafficway is also included, as is the historic 18th and Vine Jazz District.
Opportunity Zones did not land out of nowhere in the tax-reform legislation. U.S. Sen. Cory Booker, a New Jersey Democrat, had championed the idea nationally with a Republican colleague, Tim Scott of South Carolina.
Nor are Opportunity Zones a radical departure from past practices.
Governments at all levels have a long history of providing tax incentives as a way to encourage private development in economically disadvantaged communities or blighted areas.
Tax increment financing (TIF), for instance, redirects local property, sales and other taxes to cover some eligible costs for developers. Other programs, such as the low-income-housing tax credit, reduce the amount owed in federal income tax.
But with Opportunity Zones, the tax incentive is directed at luring investors into projects in economically distressed areas. The zones allow investors to save money on capital gains, which are generally profits earned from the sale of a variety of assets, including real estate or stocks.
Opportunity Zone investors save money on capital gains in a couple of ways.
For one, they get a tax break on current capital gains, if they take the profits and invest them in an Opportunity Zone project. Secondly, they pay no capital gains taxes when they cash out of the Opportunity Zone investment at a later date.
Korb Maxwell, a real estate attorney with the Polsinelli law firm, also said Opportunity Zones hold an advantage over those other types of incentives by eliminating any government intermediary. Local officials, for instance, have to approve a TIF project.
One limitation of the Opportunity Zone approach, according to observers, is the requirement that investors stay in a project for 10 years. The point is to encourage long-term investment in a community, but it also diminishes the pool of potential investors.
But the Opportunity Zone program stumbled out of the gate.
The tax-reform law laid out the broad parameters of the program, but it was not until late last year that the U.S. Treasury Department finalized the rules and regulations. Earlier rules packages came out in the fall of 2018 and the spring of 2019.
The rules roll-out did not fit with the compressed timeframe for state and local officials to map out the zones. So, without a whole lot of guidance from the federal government, states scrambled to meet the spring 2018 deadline to submit their recommendations to the Treasury.
Without the rush, Carttar said, planners might’ve made different choices.
Their decisions at the time, she said, were “very purposeful.” However, Carrtar said, “Now knowing what we know, I think there are a couple other areas that could’ve been beneficial and spurred some additional development.”
She declined to identify those areas.
Carttar said Opportunity Zones did play a role in luring Scavuzzo’s Food Service Company to the old Indian Springs Mall site. It was not the deciding factor for the family, she said, but it was an added enticement to a site they already liked.
Opportunity Zones have disappointed Emmet Pierson Jr., CEO of Community Builders of Kansas City, a nonprofit community development corporation that works in the city’s urban core.
Community Builders is a major developer of residential and commercial projects in the urban core of Kansas City, Missouri.
Pierson has been heavily involved with We Grow KC, so you might think investors would be beating a path to his door with Opportunity Zone money. But you’d be wrong.
“My first real conversation with an Opportunity Zone fund was probably two weeks ago,” he said.
That came through equity2, an affiliate of AltCap, a nonprofit that specializes in helping small businesses and entrepreneurs find financing. A lot of its work is in the urban core of Kansas City.
As envisioned, Opportunity Zones would interest investors who wanted to do good for the community in addition to making money. These “social impact” investors are willing to give up some profit in return for helping out underserved communities, in part through working with minority business owners.
But Pierson hasn’t seen Opportunity Zones entice that kind of investor into the urban core. Nor, he said, has it prompted the real-estate-development establishment, such as banks and big-time development firms, to venture to the East Side.
Opportunity Zones, Pierson said, have not been powerful enough to overcome the perception of the city’s East Side as crime-ridden and failing.
“We are moving on,” Pierson said. “We’ve been around for 30 years. I can’t stop because I can’t get Opportunity Zone funding.”
Pierson’s disillusionment highlights a major flashpoint with the program.
With only the broadest of guidelines from the federal government, states were able to take radically different approaches to establishing their Opportunity Zones.
Predictably, zones placed in relatively prime spots have done fairly well at drawing investment, while those placed in brutally depressed areas have floundered. Downtown Salt Lake City is cited as the former. Chicago is cited as the latter.
For the most part, local observers said, communities in the metropolitan area mapped out the middle ground. Officials placed the emphasis on areas where Opportunity Zones could spur more investment in emerging areas and hopefully radiate that growth outward.
Emily Lecuyer, managing director of equity2, described an “urban acupuncture lense” that pinpointed areas close to transportation hubs and sections that filled in developing corridors.
Thus, the commercializing area around the University of Kansas Medical Center, around 39th Street and Rainbow Boulevard in Kansas City, Kansas, is in an Opportunity Zone.
Martin City, too, has seen a transformation with projects like the headquarters for Fishtech, a cybersecurity firm. It has also benefited from its proximity to major public projects like the intermodal facility located at the former Richards-Gebaur Air Force Base, and the new Kansas City National Security Campus.
This middle-ground approach made sense, said Polsinelli’s Maxwell, because the Opportunity Zone incentives are not powerful enough to, say, entice the rehabilitation of an old building for low- to moderate-income housing.
But simply making a good project great is out of sync with the “spirit of the legislation,” Pierson said, which he interpreted as an attempt to catalyze truly underserved areas.
The last time he checked, Pierson said, Richards-Gebaur was not in the urban core.
As with most things nowadays, the COVID-19 pandemic has infected Opportunity Zones with new uncertainties.
Maxwell sensed some real momentum coming into 2020, but investment capital has frozen with the economic collapse brought about by the coronavirus.
Even so, hope springs eternal.
Lecuyer’s operation is putting together a $5 million Opportunity Zone investment fund. She is hopeful the investment environment will improve by the summer.
And it’s really anybody’s guess how investors will react in the post-COVID environment. Perhaps the silver lining to the pandemic will be attractive real estate deals at affordable prices primed for Opportunity Zone money that can help rebuild the economy.
Lecuyer and others view Opportunity Zones as a vehicle to help existing businesses expand and provide good jobs in the urban core. If nothing else, she said, the program has broadened the development discussion.
“We are having conversations with investors about impact,” Lecuyer said. “We would not be having those conversations without Opportunity Zones being in the picture.”
Mike Sherry is senior reporter for Kansas City PBS. He can be reached at email@example.com or 816.398.4205.