John Lettieri: Opportunity Zones and Economic Dynamism

John Lettieri

How was the Opportunity Zones initiative created in the first place? And why is this program so radically different from previous place-based policies?

John Lettieri is co-founder and president of the Economic Innovation Group, a Washington, DC-based public policy organization that created the Opportunity Zones legislation and continues to inform the rulemaking process.

Click the play button below to listen to my conversation with John.

Episode Highlights

  • How the Opportunity Zones program represents as fundamentally new type of place-based policy — one that will be the largest development initiative in U.S. history.
  • How John Lettieri (a Republican) and Steve Glickman (a Democrat) formed a balanced left-right dynamic that was able to broaden EIG’s appeal.
  • Sean Parker’s idea to impact domestic emerging markets with investment capital.
  • How EIG heat-mapped the country in terms of economic wellbeing with their Distressed Communities Index (DCI), first published in 2015.
  • Why the DCI resonated with those feeling the recession in a very visceral way.
  • A behind-the-scenes look at the process of getting the Opportunity Zones legislation passed, with broad bipartisan support. And why getting the bill passed was only the beginning.
  • How to measure the effectiveness of the Opportunity Zones program. And the data that EIG believes Treasury should collect.
  • How Opportunity Zones compare to New Markets Tax Credits.
  • The people most critical to making Opportunity Zones a successful program.
  • The frustrations of having the Opportunity Zones initiative labeled as a Trump program.

Featured on This Episode

Industry Spotlight: Economic Innovation Group

EIG

Founded in 2015 by John Lettieri, Steve Glickman, and Sean Parker, Washington, DC-based Economic Innovation Group (EIG) is a bipartisan public policy organization credited with creating the Opportunity Zones legislation. Its mission is to empower entrepreneurs and investors to forge a more dynamic U.S. economy.

Learn more about EIG at EIG.org.

About the Opportunity Zones Podcast

Hosted by OpportunityDb.com founder Jimmy Atkinson, the Opportunity Zones Podcast features guest interviews from fund managers, advisors, policymakers, tax professionals, and other foremost experts in opportunity zones.

Show Transcript

Jimmy: Welcome to the “Opportunity Zones Podcast,” I’m your host, Jimmy Atkinson. And today, I’m on site at the 2019 SALT Conference at the Bellagio Hotel in Las Vegas. And joining me on today’s episode is John Lettieri, co-founder and president of the Economic Innovation Group. John, thank you for joining me and welcome to the podcast.

John: Great to be here.

Jimmy: Yeah, absolutely. Well, John, I’m excited to be talking to you today because you are one of the individuals who started all this. Your organization is essentially where the Opportunity Zones Program was born, and the panel that you’re on this morning is all ready to nominate you for a Nobel Prize, I understand.

John: That was one of the unexpected benefits of coming to SALT this year was the Nobel Prize nomination. But, yeah, it’s been fun to be a part of this and to see how this journey that we started taking years ago has really taken off into a big national movement.

Jimmy: Yeah, absolutely. And it was relatively quick, too, the path. EIG was formed in 2015, I believe, and less than three years later, the Opportunity Zones legislation policy that your organization created was passed as part of the Tax Cuts and Jobs Act. But can you tell me more about EIGs beginnings and how it was formed?

John: Yeah. We really formed the organization in 2013 and didn’t end up launching until 2015. So we had a long process to iterate and develop the core structure of the organization, the idea of what we would end up becoming. But, in short, this is a…you know, the co-founders of the group are Sean Parker, who’s a well-known technology entrepreneur and investor, partner Steve Glickman, and myself.

And our goal was to start a new type of research and advocacy organization to really fill a gap in the Washington policy environment that we thought was really important to fill but didn’t have enough voices in the mix to really help policymakers understand how to deal with certain economic challenges, and particularly the challenge of, what do you do for communities that are, even in the midst of a big national economic growth cycle, are being left behind?

So we started by looking at the data and looking at how this recovery period from the Great Recession differed from previous recoveries in terms of the geography of economic growth. So you saw this record amount of concentration in terms of where jobs and businesses were being created, and a record number of places that were really seeing no recovery for whom the recession just kept on going. And we saw that and really thought that was gonna be a compelling economic and political challenge for our country.

And we also saw that the tools we were using in terms of public policy to respond to that challenge were either non-existent or completely inadequate. And so it seemed to us to be a good time to revisit the idea of place-based policy, how do we think about the economy in terms of local markets? And, in particular, how do we improve access to capital and give investors a nudge to look at markets they might be overlooking?

Because our fundamental belief was there’s a lot more untapped potential in American communities than what the market has priced. And that if we get investors to take a first look, and to give them an incentive to connect with entrepreneurs and businesses in these areas, that you can see dramatic progress in a relatively short period of time. But it required a new type of policy tool.

And so that’s where Opportunity Zones were born is really out of the birth of this organization as one that wanted to focus on, how do we boost economic dynamism, and how do we broaden the playing field of places that are really benefiting from national economic growth?

Jimmy: The place-based policy, which has been tried over the decades in numerous forms, but, I believe, this is the first one that’s really been as flexible as it is, unlike new markets, tax credit, or low-income housing tax credits or empowerment zones. This one is very flexible, very few hurdles. There’s no central agency that you have to go through. The funds can self-certify, so it’s a lot more open-ended in that regard. John, can you tell me a little bit about your personal background. How did you get to where you are today?

John: So I’ve worked in public policy for most of my career, everything from foreign policy to tax policy, trade policy, and I’ve worked in the private sector as well. And EIG really represents issues that I’ve been passionate about for a long time but until we started EIG had not had a chance to work on directly, which is, number one, again, how do you make capitalism work for communities that have historically struggled? And how do you boost the dynamic features of the economy: entrepreneurship, healthy churn, and the local labor markets, geographic mobility for workers, skilled immigration, things that help our economy stay fresh and vital, and new on an ongoing basis?

These have been historic strengths of our economy, but they are struggling now. And so the chance to launch EIG was a chance to really work with more focus on issues that I’ve been passionate about for a long time, and to do with partners who are really incredible people, which includes not just the founding team, but also this diverse group of economists, of business people, of policy experts from around the world who are all very different in their political worldview, but passionate about these issues and really wanna see us make progress on them.

So, I’m very fortunate to be a part of this thing that really started as a grand experiment. We had no idea whether or to what extent the concept of EIG as a different type of organization would pan out in the real world. We certainly were aspirational about the idea of being able to move policy, but, as you said earlier, to go from new organization launching in 2015 to our feature concept becoming law by the end of 2017, I think that was a little ahead of schedule for even our high hopes.

Jimmy: Yeah, pretty impressive how quickly that was able to succeed for you. When did you first meet Steve Glickman, and when did Sean Parker come into the picture?

John: Yeah, Steve and I have known each other going back quite a ways. Back in both of our previous gigs, we worked on opposite sides of the table but collaboratively on some policy issues around trade and foreign direct investment. So, he was part of the Obama economic team. I was running policy for a trade association at the time, and our goal was to find new ways to boost inward investment from around the world into the American economy, to make the U.S. economy more attractive and competitive for inbound investment, and to look at the slate of policy and regulatory issues that could be getting in the way, or that could be enhanced, and to put some new pieces in place, new policies in place that would help boost the American economy via investment.

So there’s some parallels here, actually, to what we’re talking about with Opportunity Zones, which is thinking about how capital markets work, how investors operate, and how to connect capital with communities and certain types of economic needs. So, that’s how Steve and I met. And we had kind of always said we wanted to do something together. We had bookmarked the idea of collaborating. And then he got connected through a mutual friend to Sean, and then this quickly became a project that we took on together and, again, launched in 2013 as really with the ambition of being a distinct type of policy organization.

One that was not beholden to any particular party or industry and that was a free agent. That’s really the key attribute that we set out to embody was, “Let’s go where the data lead us. Let’s be free agents for good ideas, and to offer a totally different value proposition when it comes to policymakers who are used to dealing with industry groups who have self-interest.” And there’s nothing wrong with that, but it limits the scope of what you can do with a policy maker if you’re just doing it on behalf of your client list or on behalf of your membership organization.

For us, we wanted to get in the trench with policymakers who cared about these challenges and offer them with no strings attached. We want to work together and help you succeed on a bipartisan basis. So that proved to be a very powerful model and one where Steve’s background in Democratic politics in mind and Republican politics came in handy as an asset because we provided this very interesting kind of left-right dynamic that made our appeal as an organization much broader than what it would have been otherwise.

Jimmy: Yeah, the Investing and Opportunity Act had really broad bipartisan support. The Tax Cuts and Jobs Act was passed along party lines, but the Opportunity Zones statute itself received a lot of bipartisan support leading up to its passage. When you founded in 2013, so you didn’t really have an agenda. You just were working on different ways to stimulate the economy in some of these distressed areas. When did you first like come up with the idea of Opportunity Zones? When did that first start to form as an idea that could be worth pursuing?

John: Well, this really goes back to Sean Parker. Sean had a long term interest in rethinking how we do foreign aid and how investment capital may be a much more powerful impactor of foreign markets that need development and need economic growth than the traditional model of foreign aid. And so this was the seed planted in his mind. And then kind of fast forward to when all of us got connected, he really had this idea of rethinking domestic policy along those lines as well, and, in particular, when it comes to the way incentives interact with capital gains.

Investors who have capital, unrealized capital that could be redeployed into these types of domestic markets, essentially domestic emerging markets. Much the way that we think about foreign emerging markets, but there hadn’t been really a policy tool to aggregate capital and to focus in those types of areas. So the seed of the idea starts with Sean and then grows as we put this organization together, from the beginning, intending to start to think about policy along these lines.

But it was just the seed of an idea at the time and really required a lot more iteration and stress testing before we came up with what I’d call a viable concept. And we did that in concert with a number of economists, a number of investors around the country, working closely with a number of policymakers, even before the organization launched, to beta test these ideas and see how they respond to it. Could we get a broad bipartisan amount of interest and backing? And then by the time we actually rolled the bill out, we knew that we had a pretty good product that had gone through a lot of those iterations and stress tests.

So we were pretty confident it’s gonna be viable. We just didn’t know how quickly it would find a home, and how quickly…in an environment where there is a lot of political gridlock, even good ideas languish. And so that was the open question to us, how successful could we be as a new organization in taking a new idea and moving it through a very difficult process? But the idea itself traces all the way back to pre-organization, Sean’s view of the world and how to move capital into certain types of social and economic needs.

Jimmy: In early 2016, nearly two years before the legislation was passed, actually, EIG published the Distressed Communities Index study, which is, I guess…was this one of your stress test just to see what numbers you could come up with and where the capital is needed most? Can you tell me a little bit more about that study and how it led or how it was kind of…how it concurrently shaped the Investing and Opportunity Act and the Opportunity Zones legislation?

John: Yeah, sure. The Distressed Communities Index was our first big research product as an organization. And it was really born out of something very simple, which was, we were trying to describe to people the scope of communities around our country that were being largely left out of national economic growth. But we were finding a hard time…finding it difficult to really make this a reality to people we were talking to, both policymakers, and press, and other stakeholders.

We thought there must be some kind of diagnostic product, some kind of research effort that’s already been done to quantify this and to map it out around the country. And when we looked for that product, we really couldn’t find one, and certainly not one that met what we had in our heads. And so it was out of that necessity that we came up with the idea for, “Let’s do our own measure of economic well being, and let’s use it to heat map the country in terms of the state of economic growth and opportunity.”

And so, out of that, we found, just when we put out the beta version of that product, it was making front page news, actually, in this market in Las Vegas. It made front-page news in 2015 because they were still feeling the effects of the recession in a very visceral way. And now they had a tool that helped them quantify what their community was enduring. And we were finding that same story around the country, that people were really responding to the data because it reflected what they were experiencing but had not yet found a way to quantify and to communicate to their readers or their constituents.

And so that product really did help to inform the development of Opportunity Zones because, for the first time in a very definitive way, put a marker down for just how much of our country is being left out of the economic recovery. That was hugely motivating to policymakers. They saw that product as a way to communicate back to their constituents and say, “This is where we rank as a district or as a state. This is the number of distressed ZIP codes we have in our state, or in our region. Here’s the lack of business growth. Here’s the lack of job growth.”

And to be able to put numbers to that, and to show the scope of it, then to visualize it because it’s an interactive product, that turned out to be an incredibly powerful tool. And one of our first, you know, milestones as an organization was when we released that full product, we got a big New York Times story out of it that shut down our website. So it reminded us how much of a startup we still were as an organization, that we were unprepared for the success that we were having in getting attention to our work.

And that has stayed our flagship product. We’ve iterated that and built on that every year, and it continues to be one of the most important legacies of the organization, is providing data and open sourcing that data to researchers around the country. So we license it to academics and nonprofits, and over 100 other organizations have used our data to do their own research, which is a big part of our values as an organization.

Jimmy: Good. That’s a good problem to have when the New York Times shuts down your website, I guess.

John: Yeah. I enjoy that.

Jimmy: Absolutely. Can you tell me a little bit about the process of enacting the Opportunity Zones legislation, how involved your group was? And, as I said before, it was passed as a very small part of the Tax Cuts and Jobs Act, but can you…take me behind the scenes for a minute, take our listeners behind the scenes, and can you explain, from your perspective, how the sausage got made, and what were some of the challenges in getting it across the finish line?

John: Well, the first challenge was the most important, which was finding policymakers to work with that really believed in the vision of Opportunity Zones and cared deeply and intrinsically about the nature of that challenge, of communities being left behind and of using market forces to bring more hope and opportunity to those same places and people. And so we were incredibly fortunate that when we went to Senator Tim Scott, Senator Cory Booker, Congressman Pat Tiberi, Congressman Ron Kind, those were our top four.

When we drew up the list of members that we wanted to work with who we thought both understood the material and really believed in and had a legacy of leading on these issues, and had a lot of credibility with their colleagues as leaders in this space, those were the top four we wanted to work with. All four of them said, “Yes, we’re in. We want to do this with you.”

And so that partnership as an outside group working hand in glove, providing data, providing resources, providing expertise to a bipartisan and by camera group of policymakers who were deeply motivated to make sure we could bring these new tools to communities and to connect capital and community in a new way, that proved to be very powerful because those members do have a lot of stature with their colleagues.

When they buy into something, it makes it easier to get the next person to sign on because, again, if those members are signed on, it must be a good idea. So they did a ton of the heavy lifting on every front. They pitched it to their colleagues, they spoke about it in the press, they wrote about it, they talked about back home, and we just tried to make their job easier. We tried to give them data. We tried to work with their colleagues. We opened a lot of doors and knocked on a lot of doors to recruit support.

And what you saw emerge was the broadest possible coalition of policymakers from the left and right, from every region of the country, tax policy is not where you get a lot of that kind of collaboration these days. And so it was an uncommon spectrum of members who said, “We buy in. This represents the kind of challenges that we’re dealing with in our own communities, and we like the idea of bringing this new tool to the table.”

And so it was just putting one foot in front of the other. First getting a bill introduced, which happened in 2016, and we knew nothing was going to pass in 2016 as the last year of the Obama administration. Congress wasn’t passing anything. It’s an election year. But getting to that point allowed us to have a product to take around, and we used the Investing Opportunity Act as a vehicle to talk about the bigger challenge of, how do we do more for communities that have struggled in the post-Great Recession economy?

Then in 2017, when the bill gets reintroduced for the new Congress, we thought, “We actually may have a window here because we know tax reform is coming,” and our goal was to put this in a position where it would be a no brainer. If you’re gonna do tax reform, you’re gonna do this once in a generation overhaul of the tax code, how could you not include a bill that has nearly 100 co-sponsors from the right and left that’s affordable for the taxpayer, but very high impact for communities? And there was truly a policy innovation in this area.

And that’s exactly what happened. By the time it came time to really narrow down the list of issues that were gonna be included in tax reform, this bill was in great position. And then, again, it was up to our leadership, Tim Scott and the folks leading the bill in Congress to muscle it across the finish line, which they did. And, ultimately, the, you know, the lines here, the credit really does go to Tim Scott because, down the stretch, it was him putting his reputation and his political capital on the line that got it across the finish line when it really counted.

But, by that point, we had done a lot of legwork collectively as an organization, as a coalition of stakeholders to get this thing in a good position to take advantage of that opportunity. So it really goes all the way back to, the ideas not enough, right? The execution matters. Like, in all things in life, the execution really matters, and who you have on the team really matters. And, in this case, we had the best possible collection of public sector and private sector teammates to work with.

Jimmy: Right. It was the right idea at the right time, and you had the right people behind it also. So that’s very helpful. What was it like for you and your colleagues at EIG that night in December when the Act was passed? Was there a big party there or what? Tell me about that night?

John: It was surreal. There wasn’t a big party. I think there was a small party, maybe a few toasts were made, and we were exhausted and very happy. And also in a bit of disbelief that this had happened and that we had climbed the mountain. But I think we also had a sense, even at the time, that the hard work was nowhere close to being over. Getting the bill passed was…its kind of like getting to halftime in a football game. If you want to win the game, you got to win the second half as well.

And that’s where the regs come in because taking the idea from a legislative reality to a practical tool that can actually be used in communities requires regulatory work from the IRS and Treasury that we’re still seeing, actually, even 16 months later. That process is still underway. So it was, by no means, a done deal just getting the bill passed. As much of a gratifying moment as that was, we had some sense that, you know, governors had to choose the zones, and investors had to be educated about this.

And people around the country had to be educated about it, and the rules had to be written. So, actually, the harder work was what came after the bill got done, which is kind of hard to believe, even now, but that’s been the case. And so the last year and a half has been very much focused on taking this and making it a practical reality in the communities that it was intended to benefit.

Jimmy: Yeah, so tell me about what EIG has been doing for the past year and a half now? What’s EIG’s role been? You know, for the first few years of its existence, it was focused on passing this legislation. Now that it’s been passed, you’ve shifted more to education and advocacy. Tell me a little bit about what you’re doing over there?

John: I’d be remiss if I didn’t mention that much of what we do is think tank work. We do original research, and we put out studies and reports, which, opportunity Zones aside, has built a really big national reputation for our organization. We’ve been very fortunate to be able to capture a lot of attention on the economic research work that we’ve been doing. And so that runs parallel to a lot of the work on the policy side, and it informs the work on the policy side, but that’s a substantial portion of what we do year in and year out.

On the policy side, as you said, since the bill passed, we’ve been very much focused on implementation, how do we actually get the rules of the road so that Opportunity Zones can work the way they were intended to? So we’ve built a big national coalition of stakeholders, investors, philanthropies, community organizations from all these different sectors to help inform the rulemaking process.

So, we’ve submitted very detailed technical comment letters to Treasury and the IRS. We’ve testified at congressional hearings and IRS field hearings, and we’ve done a lot of that legwork to build the expertise at the agencies and help inform their process for how to write the rules of this new policy, which itself is a grand experiment, right? So there’s no playbook for exactly how to do this. You have the statute, you have the legislative language, but a lot of dots have to be connected.

There’s a lot of connective tissue that has to be filled in. So we’ve been, above all else, focused on that because, again, if you don’t get that part right, passing the bill doesn’t mean anything. So that’s been our number one priority today. And now that we’ve gone through two big rounds of rulemaking, a lot of the work on the Opportunity Zones’ side shifts to communities and intermediaries, how do we help educate even though we’ve been doing hundreds of conversations like these around the country, conferences, events, roundtables to try to do the 101 of Opportunity Zones?

Now that we have the rules, we have to go up to the next level of expertise and make sure that all the different stakeholders in these communities are prepared to actually use this tool and to put it to effective use. And that’s just Opportunity Zones. We also have work on skilled immigration policy that we’ve just released that, much like Opportunity Zones, is designed to connect places that are struggling with demographic headwinds with skilled immigrants who want to live in those communities. So creating new programmatic doors to connect human capital with struggling communities, not just investment capital.

Now, we’re also looking at ways to unlock the potential of the American workforce and the American entrepreneur by pushing for reforms to things like non-compete agreements, which are used to really stifle innovation and stifle worker mobility. So we have a number of different things that we’re working on in the policy and research space, but they all go back to the same core issue, which is, how do you bring out the dynamic potential of the American economy?

And how do you lead with entrepreneurship and investment into areas where we have a lot of potential but we’re not fully realizing that potential for reasons that trace back, in many cases, to policy and regulation? So we’re looking to expand all that work in the months ahead, but nothing is going to be more important than getting Opportunity Zones right for the time being because we have such a short window to define the scale and scope of what this policy is gonna be.

Jimmy: And the statute gave local leaders and state governors a lot of agency in determining which census tracts were deemed zones or nominated zones. Can you tell me, from your point of view, how did the governor’s do overall with that authority? Were there any abuses in the system, or did they do a good job overall?

John: Yeah. I’d say, overall, they did. Congress gave them a lot of latitude. They set some basic parameters for what types of communities can be Opportunity Zones. They had to meet a certain need threshold. But within that, they gave them latitude to choose. And so what you saw our governors do was work with mayors, and county officials, and local community organizations to put together a selection process, and every state was a little different. I’d say, anytime you have a big national decentralized effort like this, you’re gonna have outcomes that either make you scratch your head or make you wince, in some cases.

And I’ve definitely felt that when looking at some of the selections, but those are mostly on the margins. Those are mostly outliers. The vast majority of Opportunity Zones that were selected are fully in keeping with the spirit of the law. These are places that have, on average, a 29% poverty rate, a $44,000, median family income, which is well, well below the national average, education attainment is much lower than the national average, life expectancy is lower than the national average. You have all these, on all the need criteria, Opportunity Zones as an asset class of places live up to Congress’s intent. They’re high-need, high-poverty, low-income places with some exceptions, right?

Jimmy: There are a few Opportunity Zones you look at and you kind of scratch your head, you’re like, “How come this is an Opportunity Zone?” Is that right?

John: Absolutely. And it’s a shame because there’s an opportunity cost to that, you know. The selection that went to a place that didn’t need the incentive came at the cost of another place that did because governors had to down select out of that eligible pool. And I think it’s easy to get distracted by those outliers, and, certainly, there’s been a lot of attention to them, and that’s understandable. But what I hope doesn’t happen is that those marginal selections should not take away from the massive pool of communities that now have a new way to benefit, have a new way to connect with capital, and a new way to spur economic growth and opportunity for their local residents.

And that really should be the primary focus right now. When we talk about Opportunity Zones, we should be talking about that vast pool of places that have largely been overlooked and disinvested for a long time but still have a lot of potential to thrive. And I think if people take nothing else away from conversations like this, it’s that the more that we get exposed to Opportunity-Zone communities, the more that we see what’s happening there, the more optimistic we are that these are communities with a lot of potential that has been untapped.

That’s the whole thesis of Opportunity Zones, is if you give investors a nudge to look for investments and opportunities in non-traditional places, they’ll find more than they expected to find. And that’s exactly what’s happening. So I think this can be a transformative moment, but it requires us to stay focused on what’s really at stake here and not get distracted by even unfortunate outliers, like some of the ones we saw Governor select.

Jimmy: Sure. Let’s talk a little bit more about what’s at stake here. The Distressed Communities Index, EIG essentially was measuring the effectiveness of the economic recovery. How did it affect more distressed parts of the country as opposed to wealthier parts of the country? How will EIG measure the effectiveness of the Opportunity Zones program, though, and what would need to happen for you to deem it a success? What are you looking for?

John: Yeah. Well, you start with poverty and income. Those are the two fundamental criteria that were used in the selection process. And I think, over time, if you see poverty go down and median incomes go up. And if they do that in a way that accelerates the trajectory they were on before Opportunity Zones were passed, that’s one way you can look at this as a starting point and say, “There seems to be an effect to being designated an Opportunity Zone for those communities.”

And one reason that I’m optimistic we can chart this in a very analytical way is that the places that were chosen are higher need than the places that were eligible but not chosen. So, in other words, you had this pool of places…governors use their selection authority to skew generally towards higher need areas.

Jimmy: And, by rule, they were able to select up to 25% of their low and consensus tracks. Is that correct?

John: That’s correct. And so that other 75% started in a better position than the Opportunity Zones that were selected. If, over time, you see Opportunity Zones dramatically exceed the places that were eligible but not selected, that would imply that the effect of being selected in Opportunity Zones was a very positive one for those communities. But I think you have to look across the whole board. I wanna look at educational attainment. I wanna look at life expectancy and health metrics.

We want to look at new home construction, new business starts. I think, if there’s one indicator that would tell us more than anything else about the health of Opportunity Zones over time, it’s startup rates in those areas. And so, again, there’s a number of different ways to slice it. And, I think, the benefit of a project like this is that you’re gonna get a ton of analytical work being done by think tanks, academics, organizations like ours, and the federal government itself is committed to evaluating the progress of these communities over time.

And that’s not just important for historical reasons just to know what we’ve done, but it also should inform what we do next time because this is not a perfect policy as much as I’m fond of it. No policy is perfect. No human endeavor is perfect. And so it goes without saying that we’re gonna learn some lessons and should learn some lessons from this that can be rolled into the next exercise and make it even more effective than Opportunity Zones round one. And I hope there is an Opportunity Zones round two because we shouldn’t wait every 20 years before we introduce new policy ideas that can really help assist communities in a market-driven way.

And our track record is to wait a generation in between those policy measures. This gives us a chance to do it much more in real-time. So, as we have economic shocks to the system, as we see the industrial landscape change, as different regions of the country are going through different types of challenges, Opportunity Zones can be a tool that helps them adjust and helps us ensure that prosperity is more evenly shared across American communities.

Jimmy: The original Investing and Opportunity Act, the original bill that was introduced into the Senate and the House of Representatives called for a reporting requirement by the Treasury Department. That was stripped out of the final version that passed as part of the Tax Cuts and Jobs Act. Would you like to see the Treasury adopt some sort of reporting framework, and what do you think their options are for doing so?

John: I think it’s a no brainer. Honestly, I wish they’d done it already. I think it’s a relatively straightforward thing to do, and one that doesn’t…doing so doesn’t place an undue burden on fund managers or on anyone else in the process. I think it’s pretty straightforward. We know that fund managers opportunity funds are going to submit paperwork every year to the IRS, give them some forms to check, get some boxes to check and forms to fill out that tell us, generally speaking, where are you investing? What kind of categories of assets are you investing in? Is it businesses? Is it real estate? What type?

How much are you investing? What zones are seeing investment? And just give us some demographic data on Opportunity Zones that we can use in the aggregate over time to understand, how much of this national mosaic of places are actually seeing inward investment, and what does that tell us, by the way, about the regulations themselves? Because one reason that programs fail is not just the policy side, it’s the regulatory side. Are the rules too complicated to navigate? Do they disincentivize the behavior that the policy was intended to encourage?

And just like policy, regs are never perfect. So we should learn the cause and effect of certain types of rulemaking on certain types of outcomes. And we can also understand where is this particular tool because we’ve done this scattershot thing where governors have chose 8,700 sensors tracks around the country and territories. Obviously, not all of them are equally viable for Opportunity Zones investment, that goes without saying, but that’s not in and of itself a sign of failure. That’s a chance to be more successful in targeting tools like this, that, again, the next time around winnowing down to, where does this particular tool work very well?

What types of communities match up with it very well? What types of investments matchup? The data will tell us that if we collect it, and then we can add additional layers of analysis on top of that. So that’s what makes this exercise so important. And, again, it’s a relatively light lift for Treasury, so we hope to see that soon. They asked for comment on this in the latest round of rules. They asked for information and ideas, and we have certainly not been shy about providing that to date. So we intend to do so again here in this next round.

Jimmy: And I’m sure you’ll be there at the hearing this upcoming July. And it is a complicated program, right? This Opportunity Zones program. We got that second tranche of IRS guidance back in April, what have been some of the biggest misconceptions that you’ve come across so far in your dealing with this since the legislation was passed about a year and a half ago?

John: I kind of liken this to if somebody tried to say that baseball and football were the same game just because there’s people on a field throwing a ball at each other, we would all laugh at that, right? Obviously, those are very different games. Opportunity Zones is not the same as enterprise zones, or the same as new markets tax credit, or the same as any of these other programs. It’s actually radically different. Top to bottom, radically different in structure. And so I think the biggest misconception is that this is just a slight iteration on previous attempts to use the tax code to encourage capital investment and economic growth in underserved areas.

It is an attempt to do those things, but it’s a radical departure from the way that we’ve done in the past. It’s scalable. It’s flexible in terms of its use case. It’s much more user-friendly in terms of investors can move at the speed of market opportunities and deploy capital without having to go through a federal government intermediary. It’s lower cost to the taxpayer, lower risk to the taxpayer, meaning federal treasury. So, all of those are…and there’s so many different layers to that. All of those are big fundamental design differences that, I think, set this up for success that we’ve never seen in other programs.

So that’s one big misconception. I think people are still trying to understand exactly the scope and dimension of this, and how much it differs from other policies. Another pretty persistent misconception is that this is primarily a real estate incentive, full stop. And I think that’s driven by the fact that, to date, without regulatory clarity, you certainly see more real estate investment than any other category because that’s what’s more straightforward. There are fewer unknowns and variables to worry about in real estate.

That said, the centerpiece of this was always get capital into local operating businesses, new businesses, and scaling businesses, and help drive job growth and wealth creation. So I think, as people start to see the number of different things you can do using Opportunity Zones’ financing, manufacturing, tech startups, clean tech, and clean energy indoor agriculture, and then, of course, housing, industrial, all kinds of other use cases that are more oriented around the built environment, I think it’s gonna become clear pretty quickly now over time that this is a much broader and more diverse policy tool than anything that people initially may have thought.

Jimmy: The new markets tax credit, that is a $3.5-billion-a-year program. It’s capped at $3.5 billion a year, and there’s a lot of hoops that you have to jump through, whereas the Opportunity Zones Program is virtually limitless, the amount of capital. I guess, EIG has cited the $6-trillion-plus figure, which is the unrealized capital gains as of the end of 2017, I believe, that are sitting on the sidelines, and, you know, I’ve heard different projections as to how much money will actually end up flowing.

Nobody expects $6 trillion to flow into it, but I’ve heard as high as $1 trillion earlier this morning. One of the panelists threw that number out. I believe you said you’re expecting $500 billion, Treasury Department’s expecting $100 billion. But any way you cut it, it’s a very large amount of money that’s flowing into these zones.

John: Yeah, I hesitate to put a number on it, and I think so much depends on…

Jimmy: You were pressured into giving that number this morning.

John: Especially giving that number. And, really, when I talk about 500 billion, I mean more than just the Opportunity Zones equity itself. I think that, you know, you’re gonna see a lot of collaborative capital that comes in, philanthropic debt equity, other types of financing that comes alongside the Opportunity Zones equity into projects and businesses. So, all then, it wouldn’t surprise me to be in the hundreds of billions easily, especially if you have a lot of strong local leadership that’s doing what they can do to facilitate that capital to actually flow for the purposes it was intended.

But, to me, the scale of capital matters a little bit less, especially at this stage, than what the capital does. Where is it placed, and how is it used? Because a little bit of capital in an early-stage company, getting that company off the ground, and making it viable to scale and higher and become a successful anchor in the community, that may have started with a very small investment, but the overall impact of that investment is much greater than building a very expensive new building, right?

And so I think, when we think about capital, the key question is the where and the how much more than the how much. I think, easily, this is gonna be the largest economic development initiative in our country’s history.

Jimmy: By far, by a huge amount.

John: By far. So we’re already well into positive territory as far as scale goes. The dimensions and diversity of Opportunity Zones capital is really the most important piece. Because, again, if you had $500 billion of capital just going into real estate projects, that’s not anywhere close to what we aspire to in putting this together. It’s fundamentally about the diversity of needs that communities have and making it easier to finance a bunch of mutually reinforcing priorities so that every investment has a higher chance of success because a lot of other investments are happening in the same community meeting a lot of different types of needs.

That’s how capitalism works. That’s the vision here of a healthy community. It’s not just one project here, one project there. And you mentioned new markets. I think new markets has done a lot of good with its resources. And it’s not designed to do the same things that Opportunity Zones is designed to do, so I view these as complementary policies. But on the Opportunity-Zone side, it was meant to differentiate from new markets in its scalability and flexibility.

And the fact that you’re not getting a deep upfront subsidy as an investor, maybe on the investor side feels a little worse, right? You’d like to have a deep upfront subsidy if it’s available. But with new markets, that also comes with a cap. It also comes with an intermediary. It comes with process complication that can be very frustrating to navigate.

And so the trade-off there is you’re not gonna get the deep upfront subsidy like you get with new markets, but you’re also not gonna…you’re gonna have a lot easier ways to deploy that capital available to you in this policy than you do with the other ones. Alongside of each other, they can be really powerful. So when you marry Opportunity Zones with other tools and other incentives, you can see how these are force multipliers for each other.

Jimmy: Of course. So, John, who’s most critical to making the Opportunity Zones Program a success?

John: It’s a great question. I think there’s an underappreciated role for local leaders in making Opportunity Zones successful. So, you have governors…they had a statutory role in selecting the zones, and there’s nothing, by law, that compels them or other leaders, mayors, or county officials to do anything else if they don’t want to. But I’d say to actually get the most out of this, you’d want to have a strategy. Opportunity Zones is just a tool. It’s not a strategy for a community.

So it’s a tool that can make a lot of other strategic priorities easier to achieve, but you have to have a plan for how you’re gonna use them, and how you’re going to organize the public sector to support the kind of outcomes that you want to see from the private sector. So I don’t necessarily think that local public sector leaders are the most of important stakeholder, but they’re the most underappreciated stakeholder in this process so far.

When you have enlightened mayors who are really leaning into this, who are really leading what their community is doing with Opportunity Zones, like you see in Birmingham, Alabama, for example, the results are just fundamentally different. It gets a different response out of the private sector. It gets different stakeholders off the sidelines, the philanthropic sector, major employers. Everybody can pull in the same direction if they’re following behind enlightened local leadership. And that’s the role of mayors and governors, first and foremost, is to define, what are our goals as a community?

What resources are we applying to those goals? What do we want to see out of the private sector to help us achieve those goals? And while you wanna leave a lot of room for the private sector to work, it’s much better for everybody if there’s some clarity about, what are the fundamental priorities that we’re all gonna pull towards, and where does the public sector have other tools in its toolkit to make it easier to achieve those goals, zoning, permitting, all kinds of other things that are in the local tool kit, not the federal tool kit, that can make a huge difference in whether an investment is viable?

So it’s not enough to have the incentive. You have to know, “I can get this project out of the ground,” or, “I can get my business permit in a reasonable amount of time,” or there are other types of practical support and information that the public sector can provide that help to elevate everybody’s level of knowledge and expertise. That transparency is so key to making everybody work more effectively. So, that’s the one we’re really focused on, is making sure that the intermediaries in the public sector and local connectors on the ground…

There’s a group called Opportunity Alabama, for example, that’s doing incredible work to facilitate interest from investors to translate that into actual investment into projects and businesses on the ground in and throughout Alabama. They are critical to making this thing work over time. And so, as an organization, we really put our thumb on the scale and said, “We wanna do anything we can to help those organizations succeed because if they’re successful, the private markets going to be successful, and the communities are gonna be successful as well.”

Jimmy: Right. So a lot falls to the local leaders, and mayors, and their economic development offices, and county leaders. Tell investors, what assets do you have, what your goals are, where your Opportunity Zones are, a lot of transparency, that level of transparency would be great. And where you can cut the red tape or eliminate the red tape in terms of permitting, that’s all very helpful for everybody.

Well, John, before we go, I wanted to circle back to the beginning of our conversation, how we talked about how EIG was first started about 2013. The concept was first started in 2013 and officially formed in 2015, and this is bipartisan legislation. How frustrating is it for you when the Opportunity Zones Program gets labeled as a Trump program?

John: It’s frustrating because I think that’s a shorthand way of dismissing that intrinsic bipartisanship. We’re overlooking it. I don’t blame folks for…you know, at a 30,000-foot level this passed as part of the tax bill. And if that’s all you know about it, then that’s the shorthand, the Trump tax cuts.

Jimmy: And it does look like a Trump program then if that’s all you know about it.

John: That’s right. And the Trump administration, obviously, is the one implementing this policy as well, so they do have ownership of it in a specific kind of way. But on the ground in these communities, most Opportunity Zones are in Democratic congressional districts. Many, many, many of the local stakeholders we’re working with and who are the most enthusiastic about Opportunity Zones, they’re Democrats. This cuts across all the different partisan lines.

And so what concerns me is when people dismiss it because they’re using a partisan lens to understand the policy rather than understanding that this is a bipartisan idea from the beginning for the reason that economic distress and the need to get opportunity moving to more people and more places is not a partisan exercise. And, fundamentally, this is the kind of thing where we should put our partisan labeling aside and say, very practically speaking, “How do we use this tool?” That’s all it is.

It doesn’t have agency on its own. It doesn’t have a mind of its own. We give it agency, and communities give it agency when they put it to use. So I think that’s the right framework to use, and, frankly, you know, some of the political stuff is just lazy. It’s a way of skirting past the substance and being dismissive without giving it much thought.

Jimmy: And it can definitely be frustrating. Well, John, thanks for joining me today. I mean, without you and EIG, I wouldn’t be here talking with you. So I appreciate all the efforts that you and your organization has done to make Opportunity Zones a reality. Before we go, can you tell our listeners now where they can go to learn more about you and EIG?

John: Sure. It’s great to be with you. I love the work that you’re doing as well. You can learn more about EIG at our website, eig.org. You can find all of our research, all of our commentary on Opportunity Zones and other issues there. You can also find a lot of interactive data, both on Opportunity Zones nationwide and community wellbeing nationwide. So, eig.org is where you can find all of our great work.

Jimmy: Great. Well, for our listeners out there, I’ll have show notes on the Opportunity Zones database website. You can find those show notes at opportunitydb.com/podcast, and you’ll find links to all of the resources that John and I discussed on today’s show, including the Distressed Communities Index and links to eig.org as well. John, thanks again. I appreciate it.

John: Great to be with you.

Jimmy Atkinson

Jimmy Atkinson

Hi, I'm Jimmy Atkinson... I founded OpportunityDb in August 2018. I'm a veteran Internet entrepreneur with a background in economics and Web marketing. I previously founded ETFdb.com. These days, I am passionate about impact investing and tax-advantaged investment opportunities. At the crossroads of these two ideals is the opportunity zones program, a place-based tax policy intended to economically transform some of the poorest areas of the United States with new real estate and business development.

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