Geographies | August 1, 2018

Real estate funds move into opportunity zones, raising concerns about displacement

Jessica Pothering
ImpactAlpha Editor

Jessica Pothering

Fundrise has made its mark by democratizing commercial real estate investing.  By pooling commitments of as little as $10,000 from 50,000 investors, the firm has made the asset class accessible to investors who don’t necessarily have a seven-figure net worth.

Since 2012, the company has invested $500 million in equity across about 150 deals. Now, Fundrise is planning a $500 million fund to invest in so-called opportunity zones. Across the country, 8,700 mostly low-income census tracts qualify for significant investment tax benefits under the Investing in Opportunity Act that was part of last year’s U.S. tax-cut bill. 

“It’s a promising opportunity for us,” Fundrise’s CEO Ben Miller told ImpactAlpha.

Funds like the one Fundrise is raising could again democratize access to the tax advantages to be offered by opportunity funds. The tax-law provision allows investors to defer taxes on capital gains for long-term investments made into fund that invest at least 90% of their capital into opportunity zones.

The goal is to unlock some of the trillions of dollars in unrealized stock market gains of U.S. investors, and make it available for investment in the “real economy,” where it is sorely needed for urban and rural development. A number of social-impact oriented funds in the works from organizations like Access Ventures, LISC, Village Capital and Bridge Housing view the Investing in Opportunity Act as a chance to drive prosperity in distressed communities.

Early movers are getting a jump on opportunity zones – and the future of community investing


Fundrise’s investment strategy focuses on urban properties’ and development sites’ upside potential from renovation and turnaround—a strategy commonly known in the commercial real estate sector as “value-added investing.” Its opportunity fund represents an expansion of this strategy.  

“The aim for opportunity funds is typically to redevelop properties that have sat vacant, blighted, or out-of-use, and otherwise would have remained that way for the foreseeable future,” Miller said.

Fundrise is part of a growing group of community developers, real estate firms and investors looking to capitalize on the law, which is designed to encourage more investment and development in and around low-income areas. The prospect of a flood of value-added real estate investing has raised concerns about rising housing costs, displacement of local residents and other downsides of gentrification. Current ambiguity around what qualifies as an opportunity zone investment has increased those concerns. 

Fundrise’s new opportunity fund may offer a chance to establish industry practices to guard against extraction and dislocation, however. The company doesn’t consider itself an impact investor and doesn’t target investment opportunities specifically for their social impact potential. But Miller agrees that there should be more transparency on the impact of opportunity zone investments.

Miller has called for “a joint initiative among all opportunity funds” to share data about the impact of investments, including building “a shared framework and combined database.”

Rachel Reilly, director of impact investing for Enterprise Community Partners, said such transparency is a critical first step. “Third parties like Enterprise can see where those projects are located and benchmark impact on those communities and observe how communities at the census tract level change over time,” she says.

Federal rules may well determine whether opportunity zones fulfill their promise. Fundrise has joined the Opportunity Zones Coalition, a “broad coalition of stakeholders” organized by the Economic Innovation Group, the think tank behind the Act.

In June, the coalition sent a letter to the David Kautter, acting commissioner of the IRS, requesting guidance on a host of issues. The coalition asked for clarification about how long eligible capital can sit in an Opportunity Fund before it must be invested, and whether capital can be recycled in one opportunity fund through multiple investments.

Impact investors mobilize around inclusive Opportunity Zones

Fundrise’s first opportunity fund investment is a partially-vacant property in Washington D.C.’s LeDroit Park, a designated opportunity zone wedged between two of D.C.’s current gentrification hotspots: Shaw and Bloomingdale. Fundrise wants to fill the Fourth Street building’s ground-level retail space, which has been vacant for 20 years.

The company will use its opportunity fund to continue investing in cities where it has previously acquired properties and development sites, like South L.A., South Chicago, and Pittsburgh.

Enterprise’s Opportunity360 portal offers a zone-by-zone breakdown of what each community needs and a framework for investors to achieve and measure positive social impact. Reilly said understanding opportunity funds’ investment strategies will be particularly important to understanding the law’s overall impact. 

“I really want to understand how funds are thinking about responsible exits, and impact measurement and reporting around that,” she said. For example, “does the property have the ability to refinance and deliver an acceptable return without displacing residents and changing the use of the property?”