John Lettieri and Steve Glickman: Turning capital gains into community investments



New Revivalists is a series from ImpactAlpha and Village Capital profiling the people, places and policies reviving entrepreneurship — and the American Dream.

New Revivalists: John Lettieri and Steve Glickman, co-founders, Economic Innovation Group
Place: Washington, D.C.
Mission: The duo created the model for “opportunity zones” into which investors can re-invest capital gains and defer or reduce taxes.

The provision was included in the recent U.S. tax bill.
Follow: @LettieriDC and @StevenGGlickman

Tucked into the recent U.S. tax bill was a plan to draw billions of dollars in private capital into low-income communities across the country. Stock market investors with capital gains are now allowed to temporarily defer taxes by investing in low-income areas designated as “opportunity zones.”

Meet John Lettieri and Steve Glickman, the policy wonks that scored a big win in December when the ‘Opportunity Zones’ proposal was included in the Republican tax bill.

Lettieri, a Republican, and Glickman, a Democrat, and their free-agent Washington think tank, the Economic Innovation Group, brought fresh thinking to a long-standing challenge: how to get the private sector involved in rebuilding American cities and rural communities. Their approach, they say, appealed to a “geographically and politically diverse, progressive to conservative spectrum from all over the country.”

The Opportunity Zones are intended to enlist investors and entrepreneurs in solving local economic challenges. Even with this week’s stock-market tumble, investors have as much as $2.3 trillion in unrealized capital gains in U.S. stocks and mutual funds. The Joint Committee on Taxation estimates the provision will cost the Treasury $7.7 billion from 2018 to 2022.

Invested capital will flow through “Opportunity Funds,” new funds and vehicles required to invest 90% of their assets in economically distressed communities. Governors must nominate areas for inclusion by March 21.

“The herd is working against these places,” Lettieri and Glickman told ImpactAlpha. “What this program can help create is a herd effect that benefits low-income areas rather that works against them.”

The new loophole in the U.S. tax bill that could draw private capital to distressed communities

ImpactAlpha: How can the new opportunity zone model change a community?

Steve Glickman: One example we often think about is a place like Baltimore. You’ve got a really important research university in Johns Hopkins, in a really important sector for the economy: healthcare technology.

But you’ve got a situation in Baltimore where it’s very difficult to keep that technology and those entrepreneurs and businesses in the city. The zone model is a way to bring the capital to Baltimore as opposed to pulling the technology and entrepreneurs out of Baltimore to New York or San Francisco.

If you get that right and you create really scalable healthcare technologies in Baltimore, that starts to change the economic map of what communities in Baltimore look like.

All the press around which city is going to win the Amazon HQ2 prize has really obscured the fact that these cities ought to be turning their attention to how to build their homegrown local economy.

ImpactAlpha: Beyond the tax incentives, is there a market opportunity in the revival of American cities and communities?

John Lettieri: We’ve spent a lot of time going around the country to places where traditional venture capital never shows up. We’ve seen firsthand a lot of very smart and high-potential entrepreneurs and great businesses that can be built in these types of communities and there are investors who do see that market opportunity now.

But the herd is working against these places. Investors, like any other industry, tend to move in a herd. What this program can help create is a herd effect that benefits low-income areas rather that works against them. The program gives great entrepreneurs and great investors a reason to keep these companies in their community where they have a tremendous opportunity for impact and a great market opportunity.

We see an artificial distortion of the market in many cases. The best entrepreneurs have to pick up and leave Baltimore or Cleveland or Detroit or San Antonio and go closer to VCs. That’s not necessary in many cases because that’s the best place to scale their businesses. It’s just the way you get capital.

Rooted in all of this is our belief that our knowledge that this is a capital rich-country and right now in particular when you’re talking about capital gains, thanks to the stock market and other parts of the economy, we’re sitting on a lot of those as a country and as investors. The opportunity has never really been better than it is right now and the need really has never been greater.

ImpactAlpha: You guys come from different political backgrounds. What’s the common interest?

Glickman: Even though I’m a Democrat and John is a Republican, we agreed with a lot of what we thought was needed in the economic policy conversation and frankly felt like some of the thinking of both of our parties had gotten stale.

We decided we wanted to do something together that would bring a new focus on solving economic challenges through the lens of the role of the private investor and entrepreneur community and that lens of how to deploy that expertise and those resources to solve big challenges.

ImpactAlpha: Why do you think the opportunity zone idea is bipartisan?

Lettieri: We think that this is where a lot of the core needs in the economy are. There’s a disconnect between the Washington economic debate and the economic reality for millions of Americans and their experience in their communities of what today’s economic landscape is offering them and how they fit into that.

It’s a jump ball because neither party has done well at either articulating the problem, in our view, accurately, or offering a solution that really gets to the heart of it. This is an opportunity for both sides to reframe how they’re both thinking about and addressing the challenge.

You see this among a lot of the younger members of Congress, at least that there’s a freshness to their approach to some of these questions that it’s hard to tell party affiliation just from hearing them talk about it or seeing how they responded to this. We’re talking about a geographically and politically diverse, progressive to conservative spectrum from all over the country.

Glickman: Ideologically, this has been a long-standing, bipartisan problem to try to solve: how do you get the private sector engaged in developing American communities? There’s a lot of interest from Democrats and Republicans to ensuring that we’re not just harnessing government or philanthropic resources, but also harnessing the private sector.

The problem has been one of design and brand. Early attempts to address the zone-based models for community development were designed badly. They were designed to fail almost. The aspirations were right but the structure for doing it proved not to be very successful.

Dennis: What’s different about this zone model?

Glickman: Enterprise zones and renewal communities have a very mixed track record because they’re set up so that the incentive goes to companies within the zone that often can’t take advantage of it. There have been more successful examples, like the New Market Tax Credit, for example. But a tax credit approach is an inherently limited, because there’s a limited government resource that has to be distributed.

The design of this program was really meant to improve upon those pre-existing attempts to get this zone model right. One: It allows an unlimited amount of capital to go into communities. Two: It constrains the places, it forces governors and mayors to work together to figure out the places that could most benefit from private capital. And three: It leaves it open for a lot of innovation in the investor community for them to come in and figure out profitable and sustainable ways to build things in distressed and low-income communities.

This doesn’t require the government to step in and approve the doling out of either tax credits or the approval of individual projects. That really empowers the private sector to be creative and to run with this.

ImpactAlpha: Is this administration open to more of these types of policies?

Glickman: We believe both sides have fallen short. But there’s also openness on both sides. So in that respect the Trump administration reflects the broad political reality that these types of policies resonate because they are so responsive to the needs of so many constituents in red states and blue states and cities of rural America and everything in between are feeling.

We truly believed there was an opportunity for success on this regardless of won the 2016 campaign, regardless of which party was in control of congressional majorities.

ImpactAlpha: How do you ensure that wealth creation extends to the communities themselves, and not just the investors?

Lettieri: With this model, there are a couple of things that make it harder to abuse or harder to overcomplicate, just by design. This doesn’t use a tax credit, so you’re not dealing with a fixed resource that requires the government to be a gatekeeper both of the allocations of the credit or about projects being pursued. That creates one major safeguard, which is there’s no guarantee to the investors, there’s no doling out of a public-sector subsidy upfront.

Congress is very intentional about saying ‘we’re not going to prescribe what every local economic development strategy and what local impact these communities are looking for, what that has to look like up front. Every community is different. Every state is different. Regions are different.

In many ways that’s federalism at its best. But it’s important to underscore this is not a guarantee. There’s not a single dollar of guaranteed capital that is going to move to this program.

ImpactAlpha: Can the average investor invest in an opportunity zone?

Glickman: The private sector may design whatever products they think makes sense in the context of the program. For a starting place, you can invest in a huge range of assets. Real estate. Brownfield facilities. Manufacturing rehab. Operating businesses. High-growth entrepreneurship. The source of the capital for the funds have to be capital gains, which is the whole range of how investors currently earn money in their investments.

There shouldn’t be much of a limitation in terms of the type of investor that can engage. The key piece and where’s there is room for growth in the community is to develop fund managers who are able to raise capital from capital gains and deploy it in a placed-based way.

ImpactAlpha: Which fund managers will be eligible for the incentives and how do they go about accessing them?

John Lettieri: The eligibility sketched out in the statute itself is pretty broad and clear. The funds can be organized as partnerships or corporations and the basic criteria for opportunity funds is that they must invest 90% or more of their assets in qualifying businesses or properties within these opportunity zones created by governors this year. Beyond that, it’s up to Treasury and regulators to sketch out a process and implement a process for certifying the funds and determining other eligibility requirements that may be part of that process.

The goal is to set clear boundaries in terms of geography in the nature of the incentive and to allow for a lot of flexibility and innovation among funds and among local communities as they figure out how to best use this tool.

ImpactAlpha: Will new and existing funds will be eligible?

Lettieri: The incentive is for new capital to be rolled over into what will be an opportunity fund, once that certification process is set up. So for practical purposes, we think that the fund entity itself will have to be a new vehicle, because existing funds that are already capitalized —that capital is not incentivized. The incentive only applies to new capital rolling in, in the form of unrealized capital gains being rolled this year.

What Glickman and Lettieri are reading:

  • The Third Wave by Steve Case
  • The Innovation Blind Spot by Ross Baird
  • Tribe by Sebastian Junger
  • The Captured Economy by Brink Lindsey and Steven Teles
  • The History of Rome podcast

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