Tying Philanthropies to O-Zones

The Opportunity Zones program goes hand-in-hand with urban renewal. The capital gain tax incentive is geared to generate tens of billions of dollars in investments in low-income communities, with the goal of generating jobs and improving economic benefits to these communities. As such, tying funds and capital allocators to community advocates familiar with lower-income communities should be a slam-dunk.

But, according to Bruce Katz with Drexel University’s Nowak Metro Finance Lab, there is a disconnect between these two groups, despite the fact that the program “has the potential to channel private capital to communities that have suffered from neglect by financial institutions and government.”

In a paper prepared for the Knight Foundation, “How Philanthropies Leverage Opportunity Zones,” Katz points out two reasons why philanthropies have been slow to join the Opportunity Zone bandwagon:

Risk. “The lack of guardrails, the absence of reporting requirements and the realization that a few high-profile, gentrifying communities were designated as Opportunity Zones mean that this is an imperfect tool,” Katz said, adding that, until the dust settles, it seems to be safer to remain on the sidelines.

Unfamiliarity. Unlike certain programs, Opportunity Zones for philanthropies outside their comfort zone expose them to market and project finance questions, with which they might not be comfortable. For instance: “What is the market vision for low-income neighborhoods which haven’t seen serious market investments for decades?” Katz wrote. “What’s the blend of debt, subsidy, equity and concessionary capital that can make a workforce housing deal pencil out?” While these are questions that need to be answered, they are also questions that philanthropies might not have the answers to.

Katz does, however, provide some solutions for philanthropies to become involved. These include:

Convene stakeholders. Philanthropies can take charge of gathering public, private, civic and community leaders to discuss the tax incentive, and how to proceed.

Map assets. Foundations can help finance the effort needed to help cities in developing strong investment prospectuses which, in turn, helps communicate competitive advantages and identify projects that are ready for public and private capital.

Build markets. A philanthropic investment can close the gap between available equity and amount of debt supportable by the project. “This role — known in the finance world as concessionary capital — will be critical in projects where the Opportunity Zone deal wouldn’t otherwise make sense to investors,” Katz noted.

Build institutions. Katz acknowledged that, in many communities, existing nonprofit organizations or local governments have either capacity or professional experience to design, finance and deliver programs to help transform the local economies. “Cities should use Opportunity Zones as a way to modernize and redefine their institutions to maximize economic, social and environmental impact,” he commented.

Katz concluded his commentary by pointing out that the philanthropic role in Opportunity Zones will mirror the evolutions of the cities; some of the organizations will be first movers and, as measurable outcomes result, other philanthropies will follow. While Katz indicated that the process will eventually assist with urban renewal in areas that need it, he noted that “the potential will only be realized if philanthropies and other players help shape this new incentive, so that it provides as much benefit to the public . . . than it provides in private gain.”

For comments, questions or concerns, please contact Amy Sorter