Are Opportunity Zones (OZ) Nothing But a Tax Break for the Rich?

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By Brian P Phillips

September 1, 2019

Yesterday, the New York Times published an article on Opportunity Zones by Jesse Drucker and Eric Lipton: How a Tax Break to Help Poor Communities Became a Bonanza for the Rich. We think the authors correctly point out several real estate developments underway under the auspices of OZ which do not meet the ambitions or aspirations of the OZ program in terms of delivering needed social and economic development to low-income census tracts. The factors described driving the rise of such projects are all spot-on, including investor opportunism, the inclusion of zones that are not currently or strictly low-income, and zoning that encompassed already planned or pet projects. However, we agree with John Lettieri: this “early wave” is not what we should use to judge OZ overall.

In fact, we believe there will be “Three Waves of OZ”: Wave 1, The Land Rush, is the current focus on real estate (OZRE). It is worth noting, this wave is itself in early days, which is why we see the most opportunistic projects happening first. Wave 2, The Business Boom, is venture capital investment in OZ businesses (OZB) and is the sweet spot of the program in terms of community/social impact as well as broader scale investor returns. Cherry-picked projects aside, venture capital has the potential to deliver higher ROI than real estate development over time. Wave 3, The End Zone, is when OZB and OZRE together deliver on the full promise and ambition of OZ. At that point, OZRE will have slowed and be possibly even be overbuilt, OZRE construction projects will be coming ready for occupancy, and they will need tenants who can pay rents/leases that justify the increase in basis required by OZ regulations. The best source of such tenants ideally will be successful, fast-growing companies and the supporting infrastructure (places for employees to live, eat, and shop) that will have been fueled by OZB investment (wave 2).

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