Leveraging the opportunity of #OpportunityZones

recently headed up the coast to Los Angeles to spend the day with mayors from across the country, real estate developers, bankers and community leaders. Accelerator for America had brought this diverse group of people together to discuss something at the top of everyone’s minds. The topic? Opportunity Zones.

Opportunity Zones were created by the Tax Cuts and Jobs Act of 2017. They create a tax incentive to push more dollars into the communities that need investment most. The basics of how it works: someone has capital gains, by reinvesting those gains into a pre-approved Opportunity Fund that someone will receive a temporary tax deferral and other tax benefits. These Opportunity Funds are required to invest 90% of its money in pre-approved census tracts — most of which are in rural or lower-income urban communities.

Proponents have estimated that this could be a $6 trillion dollar opportunity for cities to leverage. As a result, communities could see real estate investors rehab old buildings to create tech incubators and more VC money for local startups. Those more hesitant to jump on-board warn that this recent policy isn’t much different than previous attempts to encourage economic development with tax incentives which failed to generate substantial economic growth.

If there’s one thing our diverse group agreed on, it’s this…

Cities need to act now and get positioned to leverage the $6T investment Opportunity Zones promise.

Otherwise it’s uncertain that these investments can be channeled towards the projects communities need the most, as those project often have uncertain returns associated with them.

Mayor Eric Garcetti (Los Angeles), Mayor David Holt (Oklahoma City), Mayor Greg Fischer (Lousiville) getting ready to share their thoughts on Mayor of South Bend, Pete Buttegig’s draft investment prospectus. Love when cities learn from other cities!

Some initial thoughts about how cities can start acting now to take advantage of Opportunity Zones are below.

  • Early bird gets the worm. 8,700 specific census tracts have been defined as Opportunity Zones across the country, but implementation isn’t certain (the Treasury Department is still figuring out lots of deets!) But even with lots of uncertainty, 20+ funds have already launched, and there are more in the works. Cities that prepare now will be best positioned to receive funds, and do so in a way that is focused on their priorities, rather than the investors.

 

  • Match the hatch. Money has never been the (only) problem when it comes to investing in communities. Private sector dollars flow to projects that are well designed, quantified, and valued — in terms that investors understand! This means that to get money in the door for a specific project, public entities have to first identify projects that either create revenue or generate savings that can be attributed to a specific entity. Not to mention define capital stacks, ratios, and IRR. Just like you can’t turn a blueprint directly into a mortgage document, you can’t turn an economic development strategy directly into a set of bankable projects….but you may be able to turn it into an investment prospectus. Accelerator for America, in collaboration with smarties like Bruce Katz and Jeremy Nowak,* are helping cities do just that. By defining, in an investor friendly way, an existing set of goals and a pipeline of projects that could be possible if there were private dollars available, cities can help ensure that investments are made in ways that actually make their most vulnerable neighborhoods safer, smarter or more sustainable. (h/t to my dad for raising me on catchy fly-fishing lingo that is also very useful for business!)

 

  • Define success first. Some have raised concerns that this could be just another way for money to flow towards investments with stable financial returns — like franchise fast food restaurants (see EB5) — instead of local grocery stores or cool projects like school LED light replacement that doubles as STEM education that could truly help transform distressed neighborhoods. Whether doing an all out investment prospectus or just getting organized, cities should start thinking now about what success looks like and putting mechanisms in place to track whether Opportunity Zone investments are helping. There are plenty of tools that cities can use to track how a neighborhood’s jobless rates, per capita income, or crime rates are changing over time. (Checkout how High Point, NC is tracking neighborhood scale improvements as they work to alleviate blighted properties or how Nashua, NH is tracking how livability factors like obesity rates and access to healthy foods are impacted by community investments.)

 

  • People should drive projects. Successful Opportunity Zone investments will align with city priorities and deliver on neighborhood needs. $6T is an excellent carrot and cities should use it as another reason to support meaningful engagement with their residents. Ideally, all Opportunity Zone projects stem from asking residents: what are the most significant problems in your day to day life? what can make your community better? There are tons of tools cities can use to make that process easier. (Checkout how Kansas City used a citizen survey to pass a $800M bond. Or how Purceville, VA used a polling platform to prioritize block-by-block investments.) These tools, used at scale, can be a great way to not only inform an investment prospectus but create a pipeline of projects that drive value to residents.

Finally, one caution from this eternal optimist…

The rise of the rest of the unicorns?

There’s a lot of discussion about how Opportunity Zones could be the thing that finally moves venture capital money from its current comfortable home on the coasts. Don’t get me wrong, as a co-founder of a startup based in San Diego, I strongly believe that good ideas are everywhere and VC money should be more evenly spread across the country. But it’s important to remember that most startups that get venture funding have high margins(some operate at 90% margin!). To get there it often means companies have low capex (meaning they don’t build many things) and low opex (meaning they don’t hire many people).

Venture-backed startups are not the most likely to create jobs for low-income residents in vulnerable communities, and they are not the most likely to stay in those communities after they get quickly acquired to payback their investors.

The biggest job creators in communities tend to be existing business in those communities. When it comes to Opportunity Zones, those are the types of corporate investments that should be prioritized.

To realize the value that many believe Opportunity Zones can create, investments need to go into the businesses, real estate projects, and community services that drive value for the most vulnerable residents. Investment dollars will find projects that make financial sense, its on city leaders to make sure those projects make community sense too.

Want to read more on Opportunity Zones? Checkout these recent pieces in Route FiftyWall Street Journal and all this great stuff written by Bruce Katz and Jeremy Nowak.

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*Shortly after I drafted this piece, Jeremy Nowak passed away. His absence is felt by our entire community. My heart goes out to his family, friends and colleagues. Read more about his incredible life of service here.

Smarty Pants

Sometimes walking into conference exhibitions, we feel like we’re living in the Silicon Valley parody of TechCrunch. But, after attending Smart Cities Silicon Valley this week, we feel genuinely energized about the range of city-centric technologies being developed and deployed to make local governments more efficient and effective, while also improving our daily lives.

Here are some of the companies and technologies that caught our eye:

Echelon: We know that LED lighting reduces energy use and saves money, but this adaptive control system lets a city adjust streetlights block by block to better match neighborhood needs. This level of responsiveness is pretty great from a public safety and economic development standpoint too.

Fybr: Knowing that legacy water and sewer systems are something many cities in the US are dealing with, we were most excited about their ability to provide real time insights into the operations of wastewater, stormwater, energy and streets systems on one dashboard. Not only will that save utility and public works staff time (and $) but it may also help cities find opportunities for system integration.

CNX: Last mile broadband expansion is a big issue for a lot of small and mid-size cities. Making the permitting process easier for both cities and companies, using a platform like theirs, will go a long way towards solving it.

Ike: These digital kiosks are cool not only because they provide guidance to tourists, visibility to local businesses, and are designed to match the local vibe…but also because they generate revenue for the cities that deploy them.

Inrix: They’re doing a lot of thinking about how autonomous vehicles will impact our cities. Also, after getting to play with their system we’re hoping my next car comes with Inrix navigation.

LocalIntel: We loved that this unique data-driven economic development support is applicable to nearly everyone, including the small cities that often need the most support. Also, we appreciate their CEO’s commitment to keeping operating costs down so they can continue offering affordable solutions.

Ingenu: Still wrapping our heads around this one, but it sounds like this network is designed specifically to support smart city deployments – and ensures that monitoring flood sensors won’t be impacted by our constant streaming of The West Wing.

Hitachi: Obviously not a small company, but one that is doing innovative work to improve public safety and streamline emergency response by aggregating data captured by everything from video feeds to social media.

We’re looking forward to understanding more about the tangible benefits (and any challenges) that these, and other smart solutions, are providing for cities and their citizens.

What other smart city technologies have you been impressed by?