Dealflow | August 28, 2019

Investments in ‘people and places’ start to demonstrate impact in Opportunity Zones

Dennis Price
ImpactAlpha Editor

Dennis Price

ImpactAlpha, Aug. 28 – Capital is finally flowing to projects in U.S. Opportunity Zones that promote inclusive development and community empowerment. In other words, impact is investable

Locally led development efforts, homegrown startup activity and affordable housing investments from Erie, Pennsylvania to South Los Angeles are demonstrating that capital-gains tax incentives available in Opportunity Zones can harness capital for high-impact investments in “people and places.”

To be sure, the nation’s 8,700 Opportunity Zones also have attracted development activities that generate little benefit for local residents (cf. Chris Christie’s storage facility in New London, Conn.; Ritz Carlton’s luxury condos in Portland; and Under Armour CEO Kevin Plank’s Port Covington project in Baltimore). 

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But impact-led collaborations are showing that deep engagement with communities can mitigate investment risk and accelerate project timelines. 

“Local leaders and anchor institutions are working together because they feel a sense of urgency in jumpstarting growth,” Rachel Reilly of Economic Innovation Group told ImpactAlpha. “They are using Opportunity Zones as a call-to-action, and their collaborative approach has allowed them to move farther, faster.”

Place-based collaboration

Last week in Erie, Pennsylvania – population 97,000 – local leaders and institutions announced $60 million in new Opportunity Fund commitments to jumpstart the economy in the ailing rust belt city. 

The city’s largest employer, Erie Insurance, deployed $3 million from its new $50 million Opportunity into a new downtown culinary arts district developed by Erie Downtown Development Corporation. Last year, the development corporation acquired 100,000 square feet of mostly vacant property overlooking Perry Square and State Street in downtown Erie. 

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With the new capital, Erie Downtown Development Corp. will turn the abandoned space into a food hall and public food market that create a steady source of fresh food inside the federally designated food desert. The space will also feature a commercial kitchen for community use and a culinary business incubator to fuel economic and job growth, as well as market-rate housing, currently undersupplied in the city. 

“We’re trying to shock the market back to life,” John Persinger of Erie Downtown Development Corporation told ImpactAlpha. The nonprofit development corporation has 12 to 15 similar projects in the works. Persinger says instead of going building by building, project by project and taking 20 to 25 years to revitalize four blocks in downtown Erie, Erie is layering Opportunity Zone capital with other patient philanthropic and public investments to move on all the projects now.

“Markets move based on confidence,” says Persinger. “We want to show people we are committed to downtown Erie in a big way.” 

Erie’s manufacturing-oriented startup community also attracted Connecticut-based CapZone Impact Investments, which partnered with the Erie Innovation District, a local venture accelerator, to identify and invest in Erie-based cybersecurity, information technology and Internet of Things startups through a new $10 million Opportunity Fund. 

A launch pad for businesses that can make Opportunity Zones thrive

Such accelerators, and co-working spaces like Launch Pad, which now has spaces in New Orleans, Newark, Memphis and Stockton, have become a focal point of local efforts to incubate operating businesses in communities. 

Opportunity Zones have spurred collaborative efforts to reimagine cities experiencing economic stagnation, says EIG’s Reilly, who says the trend extends beyond rust belt cities to rural towns and local tribes in Washington State (see Emerald Coast), as well as southern cities like Lafayette, Louisiana. More than 200 Opportunity Funds have launched across the country, aiming to raise and deploy more than more than $57 billion in capital. 

Engaging communities

In Los Angeles, SoLa Impact, a decade-old impact fund manager, has nearly hit its $100 million Opportunity Fund target. SoLa invested $28 million to acquire 17 properties for affordable and workforce housing in South Central, Compton and Watts, and plans to invest an additional $50 million to rehab the facilities. Community organizations will provide social services for tenants.

“If you can understand the risk in these communities you can make really good returns,” SoLa founder Martin Muoto, an ex-venture capitalist with General Atlantic Partners and Accretive Partners, told ImpactAlpha

SoLa claims a retention rate of 98% among its tenants, nearly all people of color and two-thirds low-income. Muoto says many are lifetime renters and reliable, making the properties attractive to investors. “These are tenants that are really recession-proof.”

“The most interesting deals we are seeing are local, interdisciplinary and rooted in community,” writes Bruce Katz, co-author of The New Localism, and Ross Baird of Blueprint Local. “We see local landowners, entrepreneurs, and stakeholders wanting to work with capital sources that they know are invested in the community for the long term.”

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Blueprint Local, the “local” fund platform Baird created with Brown Advisory and Admiral Capital, is in the market with its first Opportunity Zone investment. The 279-apartment complex in East Austin promises to preserve 10% of units for low-income residents in a rapidly gentrifying part of the city. The developer, Oden Hughes, has partnered with nonprofit East Austin Conservancy to help local families cope with property tax payments. 

More community-oriented capital is on the way. Derrick Morgan, a nine-year NFL professional, stepped away from football in July to build on his track record in impact investing to mobilize Opportunity Zone investments in Nashville, Atlanta, Austin and Coatesville, Penn., his hometown, which has four designated Zones.

Morgan, who has invested in a portfolio of local real estate and social justice startups including CNote, Bitwise, Community Housing Capital and Macro, launched KNGDM Impact Fund to promote upward mobility through ownership and empowerment in Opportunity Zones. 

“The types of projects we’re doing, they’re going to change the whole market,” Morgan told ImpactAlpha. Morgan says investment approaches that aren’t inclusive of residents will lead to more gentrification and displacement. “For us, it’s all about mitigating those things.”

Getting capital into a community is not that same as making sure people are benefiting from it, Candide Group’s Morgan Simon, an advisor to Derrick Morgan, said on C-SPAN. “There are so many opportunities to get engaged and make sure that impact is real for communities. ”