ImpactAlpha, Feb. 23 – Opportunity Zones are bringing investors to the table in a place they’ve long avoided: rural America.
The capital gains tax breaks, intended to encourage long-term investments in low-income areas, have spurred statewide efforts from Alabama and Virginia, to Utah, Colorado and Indiana. Local leaders have leveraged Opportunity Zones to bring together community-led projects with private investors and other public incentives to overcome hurdles and mobilize capital for development.
“Opportunity Zones provide the impetus for this new mousetrap that now exists to serve Alabama’s low-income places,” says Alex Flachsbart of Opportunity Alabama, which has helped drive more than $300 million to transactions in Alabama Opportunity Zones.
The organization has raised a $20 million private-equity real-estate fund to focus exclusively on Alabama. A second, $40 million fund is in the works.
“It’s a question of, how much do you have to de-risk a deal?” said Patrick Mullen of Arctaris Impact Investors. With support from the Governor’s Office of Economic Opportunity and Sorenson Impact Center, Mullen helped put together a statewide consortium for Opportunity Zone investing in Utah.
“Anytime you’re in a rural area, that level of de-risking is almost always much higher than it is in an urban area, because you have so many additional variables that you have to solve for,” says Mullen.
Flachsbart and Mullen collaborated on the “Rural Opportunity Zone and Recovery Playbook,” a toolkit from Sorenson Impact Center and the Utah Association of Counties. The pair sat down with ImpactAlpha’s David Bank to talk about what’s working and what’s not in rural Opportunity Zones.
Coal, agricultural and otherwise rural American communities, far from the coasts and their states major cities, have struggled to attract investment in job-generating industries. Returns are often low and projects filled with dependencies.
“That’s not an inherently bad thing. But it is an inherently hard thing,” says Arctaris’ Mullen, who also leads the state of Utah’s Opportunity Zone mobilization efforts at the Utah Association of Counties.
Boston-based Arctaris has raised more than $350 million across a number of impact-focused Opportunity Zone funds. In rural Colorado and Maine, Arctaris has collaborated with local philanthropies and public agencies to invest tens of millions in the expansion of broadband access.
Other organizations mobilizing Opportunity Zone capital include Opportunity Virginia, the Indiana Rural Opportunity Zone Initiative and Four Points Funding in Colorado.
“What we’re trying to do, collectively between all of our organizations, is flip that paradigm and bring in ways to make it easier and unlock capital that previously was just not looking at these types of areas.”
Thousands of funds have raised more than $75 billion of capital for Opportunity Zones, according to the White House Council of Economic Advisors. Still, the top 5% of Opportunity Zone tracts received 87% of total investment, according to researchers at UC Berkeley. Rural communities as a whole are among those that have received little investment.
Rural communities able to buck the trend are leading with impact and intentionality, according to the playbook from Sorenson and Utah Association of Counties.
Though not mandated by law, funds and projects that measure the impact of their Opportunity Zone investments have been able to attract impact investors. For its commitment to impact, for example, Arctaris was awarded a first-loss capital commitment from the Rockefeller and Kresge foundations.
A commitment to report on impact “aligned with what we were doing anyways,” says Mullen. “It has also put our feet to the fire.”
The Urban Institute’s Opportunity Zone community impact assessment tool can help communities and investors be intentional about impact, by planning for and tracking indicators such as access to high-quality jobs, community wealth building and access to affordable housing.
For Alabama’s Flachsbart, the conversation is about investing in place. “What does it take to facilitate investment off the coasts? What does it take to pool the sources of capital, and then deploy them to areas where there is need?” he asks.
Opportunity Zones have helped catalyze that conversation, he says. “If you’ve got all the stakeholders around the table, you can actually create even more flexible vehicles for deploying that capital.”