American Rescue Plan, meet Opportunity Zones.
Last year’s American Rescue Plan sent $350 billion in direct, flexible funding to state and local governments. Policymakers across the country have responded in kind, unveiling projects to support everything from affordable housing development, rental assistance, and small businesses financial support, to infrastructure improvements and tax credits for families with children.
Opportunity Zones, which have so far mobilized tens of billions in private capital for U.S. communities, can help provide leverage to these federal dollars to maximize return on investment and social impact.
As is always the case with public funding, the challenge is putting capital towards projects that will have the fastest and most significant impact on our country’s hardest-hit communities. One need look no further than the history of infrastructure developments to see the billions in overruns and vast scheduling delays publicly-funded projects often bring. In fact, a University of Oxford professor who studies such projects found that 92% “overran their original cost and schedule estimates, often by large margins.”
In our experience, the coordination of yield-seeking private investment with public funds can help make large visions a reality and deliver their intended impact more effectively and efficiently. Opportunity Zones (OZs), which allow investors to defer capital gains taxes for making investments in historically underinvested areas, have proven to be an effective tool in this respect – providing capital and liquidity to markets where there was previously very little.
That’s why we think policymakers, investors, philanthropists, and other relevant stakeholders should leverage OZs to accelerate sorely needed ARP projects.
Chicago case study
With affordable housing units facing extremely long development timelines and complexity, policymakers face an endless battle of not having enough housing in the United States.
Case in point: by the time A Safe Haven, a Chicago nonprofit providing a comprehensive approach to combatting homelessness, broke ground on a 90-unit veteran housing project, it had been four years since the project’s inception. There were 11 layers of funding, inclusive of federal, state, and city dollars, as well as private donations. This caused a massive administrative burden – and a long delay in getting the project off the ground.
Though the project was located in an Opportunity Zone, plans began before the law came into effect. Previous versions of the site plan included ground floor retail that likely would have stayed had the OZ program been available sooner. When it went, so did additional jobs, taxes and income to the community.
Since the program’s inception, however, A Safe Haven has invested in OZ communities to build numerous supportive and affordable housing units for Chicago’s vulnerable populations. Alongside individual case management, job training, and social business enterprises (the organization runs a catering business, a landscaping company and its own staffing agency to place their program’s homeless participants into over 1,000 jobs, annually), these residential units improved the quality of local housing capacity, created employment opportunities where people live, and reduced crime.
Investments in extremely depressed communities not only help stabilize families and the economic fabric of the community, but also improve wealth for existing homeowners: one A Safe Haven project in Melrose Park, IL improved surrounding residents’ valuations by 300% within two years of project completion. Nationwide, OZ investments are on track to decrease the poverty rate and have created at least 500,000 new jobs, according to a 2020 report by the White House Council of Economic Advisors.
Despite these steps in the right direction, Chicago still has an affordable housing shortage of over 120,000 units, which a new, $1.3 billion plan – drawing in large part on ARP funds – aims to tackle. OZs can help. By attracting and incentivizing private investment they might not otherwise receive – and aligning that investment with public dollars – policymakers and developers can facilitate collaboration, resources, and capital to fund more affordable housing (or small businesses, schools, and healthcare facilities) faster.
With OZs and private investment, a project like the 90-unit veteran housing building could go from concept to ground-breaking in 12 months – not four years.
As the market for ESG and impact investing continues to grow, so too has the scrutiny – by investors and regulators – of the impact these investments purport to have.
The demand for effective impact reporting, measurement, and transparency carries over to the OZ program, which has had to combat claims that the program isn’t delivering enough impact to our country’s most vulnerable communities. Though at present there is no impact measurement requirement, one might be on the horizon – whether it’s a push from the Biden administration, which has stated it wants to empower the Treasury Department to ensure the OZ program provides distinct economic, social, and environmental benefits; or Senator Tim Scott’s bipartisan legislation aimed at providing a robust analysis of OZ investment impacts.
These headwinds, combined with the inevitable spotlight on the use (or potential misuse) of ARP funds, underscore the importance of transparent impact measurement and reporting that gives a clear picture of job creation, social impact, and whether the project met affordability mandates. Effective and specialized finance administration that can navigate the complex tax, accounting, and compliance nuances at play with these types of projects (the ARP has its own reporting requirements, as do OZs), is also crucial.
The fear, of course, is that the burden of impact measurement might outweigh the expediency that using OZs can provide ARP-backed projects. That doesn’t have to be the case. Partnering with a fund and governance solutions provider can enable managers to easily track and measure impact – employing a framework like the one developed by Howard W. Buffett – as part of a wholly automated technology platform. The key is to strike the right balance between deploying more standardized reporting programs that relieve administrative burden and allow for scale while implementing more complicated methods when particular situations call for it.
The ARP provides a once-in-a-generation moment for policymakers to utilize funds to support our most underserved communities. With proper administration and impact measurement, OZs can crowd in private capital to amplify the social impact. Not only is it beneficial for investors looking for places to put their capital, but it can have a lasting impact on peoples’ lives.
A Safe Haven knows this firsthand. On a recent visit to their 90-unit veteran housing project, their staff recognized a security guard, named Andre. Formerly homeless himself, he’d battled drug addiction and had been riding buses up and down the street to stay warm when he decided to change his life and reach out to the organization. Now, over nine months clean and sober, he had been hired to work at their new veteran’s building and moved into his own apartment.
It’s just one example of how investments in impoverished communities can help break the cycle of poverty, homelessness, crime and addiction – through affordable housing, comprehensive care, job creation and the follow-on benefits these provide communities – and create a new cycle of hope and prosperity.
Fortunately, that’s what the ARP is designed to do. With the right policies, administration, and reporting, OZs can help.
Neli Vazquez Rowland is an affordable housing developer, serial social entrepreneur, and co-founder and president of A Safe Haven.
Reid Thomas is Chief Revenue Officer and Managing Director of JTC Americas, the North American division of JTC Group, where he is responsible for overseeing the day-to-day operations of the Specialty Financial Administration business unit.