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.

Announcement! Mayor Berry Joins The Atlas

We’re thrilled to announce that Hon. RJ Berry (Former Mayor, Albuquerque NM) has joined The Atlas Marketplace as Senior Advisor. Mayor Berry, a former two-term Mayor of Albuquerque, is known for his innovative approach to government. His passion for bringing diverse groups together to solve persistent and complex urban challenges resulted in efficiency measures that produced $34 million in taxpayer savings, expanded use of public-private partnerships, streamlined infrastructure planning and financing, and improvements in educational attainment and workforce development. You can read Mayor Berry’s full biography here.

Said Mayor Berry:

“As Mayor of Albuquerque, I was proud of our efforts to bolster the entrepreneurial ecosystem for startups and other creative small companies to drive economic development, create jobs, and improve city services. Now I am proud to continue that mission, but in a different role – as Senior Advisor to The Atlas Marketplace. The Atlas is an online community that facilitates learning between cities to accelerate the uptake of innovative infrastructure and technology solutions by highlighting what’s working in communities around the world. I enthusiastically support The Atlas mission and I am excited to continue working with civic-minded individuals who are dedicated to making our communities smarter, safer and more prosperous. As a public servant and an entrepreneur myself, I look forward to providing insight around key business decisions, as The Atlas seeks to expand beyond its initial 50 partner cities.”

 

Mayor RJ Berry
PC: Steven St. John

 

Said Elle Hempen, CEO of The Atlas Marketplace:

“We are excited to have Mayor Berry join The Atlas Marketplace. Not only does he have a deep understanding of how and why cities make important decisions, he also has deep expertise and experience in the infrastructure industry. We will rely on his strategic guidance – alongside Mayor Nutter’s – to inform how we effectively match cities to solutions.”

 

Mayor Berry will join The Atlas team for this week’s U.S. Conference of Mayors meeting in Washington, D.C.


Follow Mayor Berry on Twitter.

Follow The Atlas on Twitter, Linkedin & Facebook.

Help Wanted & Available: Cities, Companies & Collaboration

Editors Note: This post was written by Hon. Michael Nutter (former Mayor of Philadelphia) about how cities and companies can work together better to solve problems. It was originally posted on our Medium publication, CitySpeak. 

I was recently interviewed by Elle Hempen, co-founder and CEO of The Atlas Marketplace. We chatted  about how cities, small businesses and startups can work together better — not only to improve services, but also to ensure long term economic vitality by creating jobs and supporting broader community investment. It’s an important discussion to have, especially now that cities are taking the lead on everything from climate change to criminal justice reform.

Below are some thoughts & ideas that I shared with her:

Q: What is the state of cities today?

A: It’s the century of cities.

This is the decade, if not the century of cities. Cities are where people are moving, they’re where economies are growing, they’re where innovation is happening. When people talk about improving infrastructure in the US, they’re talking about cities. When they’re talking about the economy, they’re talking about cities. Climate change, waste reduction, education, immigration…those are all city issues. That is why it is so important, and exciting, to see mayors from across US and around the world rising up and speaking out on issues where state and federal governments are stalled. In my view, cities are the only level of government that works every day on behalf of citizens in tangible ways you can measure. For city government, either a pothole was fixed or it wasn’t. Trash was picked up or it wasn’t. It’s not about giving a speech it’s about providing service. Regardless of the topic, city governments have to deliver services to citizens each and every day. And often those services are ones that people take for granted. Nobody wonders whether a traffic signal is going to work, that when they turn on a faucet in the morning they’ll have clean water, that there will be water in the swimming pools for kids in the summertime and art supplies at the community center. Every day, city governments manage those activities, in measurable ways, and truly affect the everyday life of everyday citizens.

Q: What are your thoughts on Public-Private-Partnership?

A: It’s not a fad.

Cities small, medium and large, regardless of financial circumstances, are focused on everything — from public safety, citizen engagement, poverty, reentry, to infrastructure integrity and investment. And they’re doing so with very little expectation that there will be new, big, or additional money coming out of Washington, DC. While very important, states and the federal government are generally funders of services, not service providers. When states and the federal government make promises, it’s the cities that have to deliver. So, increasingly we’ll see cities collaborating and partnering with the private sector to get things done. Public-private-partnerships are not a fad, they’re a necessity. P3s have been used for decades outside of the US, but we’ve been slow to adopt them for a variety of reasons. I believe that is going to change and you will see more P3 activity in the US. But to do them right, there is a big need for education.

Continue reading “Help Wanted & Available: Cities, Companies & Collaboration”

P3s are great, we want P3s! But what about…?

Last week, we proposed rethinking public-private partnerships (P3s). Instead of closing a financing gap, P3s should fill a project execution gap. This change in perspective can better align incentives upfront and address the fundamental fact that public and private partners have different priorities.

Today, we’re taking a closer look at the issues cited as top barriers to traditional P3s: political risk, payments, and responsibilities. Lack of clarity for any of these three issues will exacerbate differences and drive a wedge between partners when project financing, rather the project delivery, is the goal. Let’s dive into each area of concern, and consider how a focus on execution rather than financing could lead to more successful public-private-partnership.

 Political Risk: Traditionally in the US, P3s are developed after the project scale and scope has been established, and the project has become so big, complex and/or long-term that it cannot be entirely financed on a city’s balance sheet. These types of expensive, complicated, and long-term projects leave public and private partners exposed to all sorts of non-market risk — not the least of which is politicians changing their minds or being voted out of office mid-project. In traditional financing-focused P3s, changing political dynamics can doom an entire project. But if a P3 is designed for execution rather than just financing, then private partners are involved in troubleshooting and negotiations from the beginning, not just once it’s clear the money will be hard to find. That early engagement between public and private partners builds trust in a city’s staff and institutions, beyond individual elected leader(s) — which is key to ameliorating political risk. In addition, early engagement means all parties are driving towards and end goal that is focused on addressing local needs, not just on financing a solution. Some cities are already encouraging early engagement and participation with private partners through broader use of competitions and Requests for Information.

 Payments: Quality cash flows are one of the greatest risks for any public-private-partnership. Many public infrastructure deals have failed or been slammed by citizens because real cash flows end up being very different than were predicted. The Indiana Toll Road is just one of several P3s that filed for bankruptcy after revenue came in much lower than projected. On the other hand, Chicago’s 2008 parking meter deal with Morgan Stanley caused a citizen uproar when the city’s inspector general concluded, a year later, that it had undersold the rights by about $1 billion, forfeiting an important source of revenue for the City. When a project is designed from the start to focus on service delivery instead of solely on financing, there is often opportunity to uncover non-traditional funding sources. The same is true when designing a P3. When private partners are at the table to start, more creative work can be done to clearly identify and quantify a range of potential payback streams. Having private partners help design, verify, and securitize cash flows results in a better deal for the city, the developer(s) and the investor(s). That’s why availability-payment projects, which are focused on service delivery and often require earlier engagement by private partners, are often more successful and growing in popularity compared to revenue-backed P3s.

 Responsibilities: Designating a single entity — or at least a very clearly defined process — responsible for capturing, aggregating, and monetizing direct and indirect revenues is key to successful P3s. The easiest way to clearly define these responsibilities is through a contract between the city, the developer(s) and the investor(s) that allocates risk among the partners by defining sources of revenues, scope of work and payment terms, goals, and bonuses. A P3 focused on execution rather than financing helps define these lines more clearly so each partner can focus on what it does best. Government would set goals and standards to protect health and safety. Developers and investors would set targets, build and manage cost efficient systems. Government organized P3 offices have been used to successfully execute these arrangements internationally in Canada and Australia, and at the state-level domestically in Virginia, California, and Michigan. P3 offices provide the technical support public agencies need to coordinate public and private partners. These offices are effective because they steer governments towards projects that can thrive with P3s and help with upfront planning, and structuring using their in-house financial expertise.

P3s are an effort to make building and maintaining big-dollar, complicated, long-term infrastructure projects more efficient and affordable. P3s are complicated. There will always be questions about political risk, payments, and responsibilities. But well-conceived P3s — those focused on project delivery instead of financing — can effectively align incentives and address risks for all partners upfront. Not only can these well-conceived P3s save taxpayer money and reduce burden on local governments, they can also result in better service delivery for residents and maximize the social benefits of a project.

For example, the City and County of Honolulu partnered with Covanta on the H-Power waste-to-energy plant with the goal of eliminating landfills from the island while creating a sustainable energy source. Since its initial completion in 1993, the plant has not only consistently met or exceeded environmental permits and invested in innovation, it has also generated more than $201 million in revenues for the City, which has more than covered the costs of operation. More and more, we are also seeing examples of startups and other technology firms developing exciting P3s with cities to upgrade infrastructure systems.

Next in this series, we’ll explore various examples of successful execution focused P3s — from the traditional to the more exotic.

P3s are dead, long live the P3!

For cities, President Trump’s budget includes some proposals that are sources of optimism and others that have raised concern. President Trump’s consistent support for increasing investment in infrastructure has been encouraging. If the proposed $1 trillion in infrastructure investment is strategic, the investment could be a great help to those cities struggling to upgrade aging and failing systems. However, the President’s budget also proposes to eliminate or drastically cut many of the programs that cities around the country rely on to provide essential services to their poorest and most vulnerable citizens.

 

Amidst this uncertainty, two things are clear: federal funding will continue to dry up, and cities must take charge where state and national politics are deadlocked. This reality has jumpstarted a decades old conversation on the role and importance of public-private partnerships (P3s).

 

Unfortunately, traditional P3s are complicated for everyone. Not only does each state have different processes and practices, but the American public has varying levels of comfort with private ownership, or even operation, of public infrastructure. It’s those reasons — in addition a strong municipal bond market and regular infusions of federal funding for infrastructure after the 2008 financial crisis — that have kept P3s from proliferating here in the US the way they have in other developed countries around the world.

 

Or maybe we’ve been thinking about P3s the wrong way. Instead of thinking of P3s as a solution to the financing gap, we should approach P3s as filling the execution gap.

 

In the US, P3s have always been touted as a solution to the financing gap: “your city doesn’t have the resources to build an infrastructure project? You should pursue a P3!” But in Canada, and elsewhere around the world, they are used to fill an execution gap. This means P3s are focused on service delivery, optimization, and efficiency — where financing comes as a result, but isn’t the driving factor. May seem like semantics, but it gets to the fact that public partners tend to focus on services and private partners tend focus on ROI. Execution-focused P3s address that fundamental fact that public and private partners have different priorities, and explicitly seek to better align those differing priorities upfront.

 

Execution focused P3s can also better match the types of modern infrastructure systems that technological advances have allowed cities, and their citizens, to demand. These modern infrastructure systems — unlike highways and bridges — are often diffuse and consist of many small pieces and parts. For example, a modern stormwater management system might include thousands of street trees, green roofs, wetlands, and repaved roads to absorb water. Or a large power plant might be replaced with a network of neighborhood generators that turn food waste into energy. Because these systems tend to have a large number of smaller component projects, aggregating them into a single P3 focused on delivering project financing can have insurmountably high transaction costs.

 

Because these more modern infrastructure systems are deliberately designed to more flexibly and efficiently provide the same services to citizens as traditional projects, they tend to result in the same, if not greater, local benefits. In addition, they require extensive citizen participation, open new pathways for private investors to participate, and can take the burden off government budgets to build.

 

Examples of successful execution-focused public private collaboration abound, especially around smart cities technology. Waze, through the Connected Citizens Program, is partnering with cities around the world to use real time data to reduce traffic congestion. The City of Las Vegas released an app this year for Amazon’s Alexa that lets residents pay bills and fees, check the status of applications and permits, and get more information on city services and officials. These technology businesses have figured out how to approach distributed infrastructure systems by focusing on providing a service. We should aim to learn from these successful cases, and apply them to develop and deploy execution-focused P3s for in sectors, like electricity generation and delivery and stormwater management, moving forward.

 

As with any multi-party agreement, there will always be questions about political and staff turnover, ROI, payments, and responsibilities (more on that in future posts!). But if at the outset, a P3s focus is on service delivery and execution, the details — and the money — seem to shake out more clearly and in the public’s favor than they do in traditional financing-focused P3s.


P3s in the Trump Era can’t look like P3s of the past. Instead of being a solution to the financing gap, P3s should be leveraged to fill the execution gap. They should be focused on service delivery, optimization, and efficiency — where private financing comes as a result, but doesn’t drive decisions. And where each partner is focused on what it does best: the government partner set standards and desired outcomes, permits and regulates; developers and investors build and manage cost efficient systems; and citizens actively engage in optimizing solutions for their community.

 

What do you think? What are some of the most impressive technologies, business models, or execution-focused public-private partnerships you have seen? What were the benefits and drawbacks to the public and private partners involved? What was the impact on citizens, and how did they respond?


Like this topic? Keep an eye out for future posts where we explore in greater depth some of the challenges of traditional P3s, as well as highlight examples of execution-focused P3s.