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Getting ready for the opportunity – and peril – in Opportunity Zones

ImpactAlpha, May 16 – “The single biggest tax incentive to invest in low-income communities across America that we’ve seen in 100 years.”

That is how Rajiv Shah, president of the Rockefeller Foundation, described “Opportunity Zones,” a provision included in last year’s U.S. tax bill. At the Mission Investors Exchange conference in Chicago this week, Shah made a plea for urgency in making the most of the historic opportunity, and avoiding the considerable perils.

“I hope that we all can move fast enough,” Shah said. “Otherwise, we make this big tax investment in people who have quite a lot of wealth, and a lot of unrealized capital gains. And the consequence of that [is] not lifting up those that this was intended to lift up.”

The Treasury Department will soon announce the neighborhoods that states have selected to qualify for such investments. Governors were able to designate up to one-quarter of their low-income census tracts as Opportunity Zones. Investors making investments in the zones can defer and even reduce capital gains taxes on their stock-market gains of recent years.

>>MORE: Invest in where you know: Impact investors rediscover the power of ‘place’

Huge potential

The potential investment is huge, with more than $6 trillion in such capital gains, according to the Economic Innovation Group, which helped develop the bipartisan legislation (see, “Turning capital gains into community investments”). The potential negative consequences could also be huge. A flood of investment with few protections could, for instance, drive gentrification that dislocates neighborhood residents and businesses.

“Think of how easy it is for this to go sideways,” said Rip Rapson, president of the Kresge Foundation, adding, “We can work with municipalities, with the private sector, to create bumper rails around projects to benefit low-income residents of our communities.”

>>MORE: “Opportunity Zones need responsive, transparent and long term investments”

The Rockefeller and Kresge foundations are putting out a call for fund managers that want philanthropic partners to help ensure their impact is positive.

“A lot of funds are about to move into funds designated as Opportunity Zone funds,” Shah said. “I believe these funds are fundamentally impact investment funds. Whether they live up to that will determine whether this American investment bears fruit.”

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