Philanthropic capital will be crucial to achieving large-scale success in Opportunity Zones nationwide. So why has the philanthropic community’s response been tepid thus far?

John Lettieri is co-founder, president, and CEO of the Economic Innovation Group (EIG), a Washington DC-based policy group that helped create the Opportunity Zone tax policy.

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

Episode Highlights

• A high-level overview of what is happening in the Opportunity Zone space — early investment, use cases, and capital deployment.
• The challenge of moving forward with making Opportunity Zone investments without final rules from IRS, and how lack of final regulatory guidance is holding back the scale and diversity of capital that could be flowing.
• How the 2019 deadline for the full 15-percent basis step-up is meaningful but marginal, as this is meant to be a long-term incentive — and why John believes the majority of the investment will come in 2020 and 2021.
• The importance of philanthropic capital to the success of Opportunity Zones, and the tepid response of the philanthropic community so far. Why the scale achieved so far has been pretty minimal.
• To be answered in the next year: Will there be a proliferation of Opportunity Zone investment that moves the national needle or will the policy remain as small pockets of first movers without real meaningful scale nationwide?
• John’s response to the August 31 New York Times article that was largely critical of Opportunity Zones.
• The damage done to the reputation of Opportunity Zones by a handful of poor zone selections by state governors.
• Why some level of required data collection and reporting on Qualified Opportunity Funds is a “no-brainer.”

Featured on This Episode

• John Lettieri on LinkedIn
• Economic Innovation Group
• The first Opportunity Zones Podcast interview with John
• Rockefeller Foundation
• Kresge Foundation
• New York Times: How a Trump Tax Break to Help Poor Communities Became a Windfall for the Rich
• Wall Street Journal: Erie Hit ‘Rock Bottom.’ The Former Factory Hub Thinks It Has a Way Out.
• Opportunity Zones Podcast episode about Erie, PA
• Heartland Visas
• EIG report on non-compete and no-poach agreements

Industry Spotlight: Economic Innovation Group

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.

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Show Transcript

Jimmy: Welcome to the Opportunity Zones Podcast. I’m your host, Jimmy Atkinson. And today’s guest is a repeat visitor on the Opportunity Zones Podcast. I’m here today with the Economic Innovation Groups co-founder and president, John Lettieri. John, welcome back.

John: Thanks, Jimmy. Good to be here.

Jimmy: Yeah, good to be talking with you again. We spoke at the SALT Conference in Las Vegas a few months back and it’s great to catch up with you again here during our conversation today. So briefly, for those who may be new to the Opportunity Zone space, or may not have listened to my first interview with John, he heads up the Economic Innovation Group, EIG, which is an economic research group based in Washington, D.C., and they helped create the Opportunity Zone incentive.

If you haven’t listened to that interview, you can find it on the show notes for today’s episode by visiting opportunitydb.com/podcast. So, John, we dive into the weeds on this show pretty frequently covering many technical, legal, and accounting aspects of the Opportunity Zones incentives, but to start us off, could use zoom out a little bit and give us a high-level overview. What are you seeing out there in the land of Opportunity Zones in terms of who’s raising money, who’s investing capital gains, and where the investments are being deployed?

John: Sure, I’ll do my best. There’s a lot happening. And, you know, I think one of the challenges is that even though this has been law for close to two years now, approaching two years, it really is still in the first phase as a policy and in terms of its impact in the marketplace. So just now you have a real proliferation of funds being created of business and project investment beginning to flow, of communities beginning to actually put up a plan in place to harness that incoming interest and to generate more incoming interest.

I think early on, there were a lot of challenges informationally, that kept folks at square one. For communities, they didn’t really know what their next steps should look like, or how to organize around this new policy. They had many cases of vague notion but no kind of specific playbook. And you see that’s much further along now. You have dozens of communities that have really taken a very proactive approach and are starting to see some real benefits from that.

For investors, there was a lot of regulatory uncertainty, which still hasn’t been cleared up. In full, you have final rulemaking from IRS expected before the end of this year. Frankly, until that’s done, I think a good portion of the marketplace is gonna sit on their hands and not really start to move until they have all their questions answered.

And then the market that is moving, it’s pretty diverse, in terms of where it’s putting capital, what types of investments are being made across all these different sectors and asset classes, but it’s still pretty thin. It’s not the scale of capital that I think we could see over the next year. And it’s not as diverse as it will be once folks get their head around the different use cases that are possible here.

So it’s probably safe to say that the majority of the early investment has been on the built environment side, real estate, mixed use housing, industrial downtown revitalization, those types of activities that are, in many cases, the first order of business that anchor a local revitalization plan. But that should be the floor, not the ceiling for what happens next.

And it’s that what happens next part that I think is really interesting, and it’s we’re on the cusp of seeing that because once you have final rulemaking and a little bit more market maturity. I would expect 2020 to be the privet year for Opportunity Zone as a market incentive. So either it’s going to bring a different scale of capital and a much wider pool of investors and stakeholders to this conversation or it’s not. And I think we’ll pretty much know the answer to that by the end of 2020.

Jimmy: Okay, that’s interesting. Because in order to achieve the full tax benefit of the program, the investment dollars have to be in by the end of 2019, which makes this year, 2019, a key year. And at the same time, while you have that clock ticking against you, we’re down to the last couple of months of 2019 now. You also have the fact that the rulemaking hasn’t been finalized. Has that been frustrating for you? That lengthy amount of time that it’s taken for the IRS to get that regulatory guidance published and out to the public?

I think we had the Tax Cuts and Jobs Act passed in December of 2017. It’s probably gonna be close to or maybe about up to a full two years before we get final rulemaking on that. Has that been frustrating for you?

John: I’d say, I know it’s been frustrating for many people in the marketplace and for many of the community leaders themselves because without rulemaking it’s hard to de-risk what is already a very challenging proposition. You know, investors are being asked to commit their capital for 10 years or more, which is a longer lockup period that most investors would normally agree to.

They are being asked to invest in inherently higher risk and less well-trodden areas. In many cases, places they’ve never invested before. That at least carry their perception of being harder to pencil in terms of the kind of investments you can make in these areas. And they’re being asked to do all of that thus far without final rules.

So that’s a lot. And I think that’s clearly one of the factors that is holding back the scale and diversity of capital that could be flowing. On the other hand, two years sounds like a lot of time to the average private-sector leader. It’s not a long time for typical rulemaking at IRS. And so, you know, putting my policy hat on, I get why it takes a long time. This is not the only thing the IRS has to deal with. I do wish a few things had been prioritized earlier, that would have made it easier to get the market up and moving.

And perhaps, you know, the cadence of the rulemaking could have been a little different. They’ve opted for two large rulemaking rounds, and then a final round. And so maybe in hindsight, they could have broken that up a little bit. All that said, this is a long term thing. And so I think people make a lot out of the 2019 kind of the diminishing of the incentive after 2019.

It’s meaningful, but pretty marginal compared to the benefit that remains. And so the idea that there isn’t an investor rationale after 2019, I think is wrong. I hear people, you know, ask that question a lot. And I’m always a little bit surprised because I don’t think the math bears out any kind of fatalism about 2019 being a cut-off. I actually think the vast majority of the investment we’ll see will come in 2020 and 2021. If it’s successful, it will carry on all the way through to the end of that window that closes in 2026.

But I think because we’re at such a pivotal time in the early marketplace, if 2020, you know, if the next 18 months really isn’t a…if there isn’t some real momentum, I think that will change the calculation for a lot of people about what the scale of possibility is with this policy. And, again, so much of this rests on not just what do investors do, but what do communities do? What does the IRS do? What are the other macro factors in the economy that play out over the next year to two years?

So this exists in a broader context and that broader context really does matter. Which is again, why we emphasize so much at EIG the role of state and local leadership in making communities better prepared and better able to harness investment and attract it, but also able to put their other tools to work alongside of Opportunity Zones, because capital, the Federal incentive is important, but it’s not enough to fundamentally change the dynamic in many of these communities.

And if you think it is, you really don’t understand either the policy or the fundamental challenge that the policy is meant to address. It’s meant to be a tool. And it can be a very powerful tool when it’s used properly, but it’s not magic. And so I think there has been a little bit of a kind of an irrational exuberance when it comes to what this policy can do absent a really sound local vision, a collaborative local strategy, and a broader set of tools that are being put into place alongside of this one that can help reinforce each other and make the whole environment for growth stronger on the ground of these areas.

Jimmy: Now, that makes perfect sense to me. I think you’re absolutely right. I agree with you that the 2019 deadline and making sure you achieve that full 15% step-up benefit is meaningful, but you’re right. It’s absolutely marginal. At the end of the day, you know, there’s a long term play and the main tax benefit is that last one that tax free growth of the investment within the Opportunity Zone. And that’s around for several years to come here through 2026.

You mentioned that, you know, that Opportunity Zones is just one tool, but it alone is not going to be able to achieve economic transformation in these areas. You spoke about the need for sound local vision and for a collaborative strategy. Additionally, do you feel like the Opportunity Zones incentive could be a catalyst or should be a catalyst for philanthropic capital to flow into disadvantaged communities? And what is the philanthropic community’s response to Opportunity Zone investing in so far?

John: It’s been pretty tepid, so far. I’ve been surprised. You know, I’ve learned a lot over the last few years about how this policy has motivated different players to get engaged in different ways. And you know, some of this conforms with my expectation and some of it doesn’t. I’d say the philanthropic side of things is probably where my expectations have diverged the most radically from reality.

Meaning that my perception was on the front end of this that once this law passed that major organizations that had the most direct and obvious stake in the well-being of underserved communities would be the first and most aggressive in stepping up, and building the kind of capacity, and providing the kind of de-risking capital that would help the marketplace organize around, what are some of the most important priorities.

And you could kind of rattle those off, you know, the support for underserved entrepreneurs from marginalized communities. We have a housing crisis in this country. So there’s all kinds of things we could do on the housing side where we already know, forget about Opportunity Zones, we know it’s extremely difficult to build affordable housing in this country or just a housing that is affordable because of all kinds of factors, many of which are local.

And there’s a perfect role for philanthropy. We know that there’s challenges in communities and cities themselves to have somebody who’s able to…for cities to devote the resources that are necessary, to having a full-time person engaging on this and helping to quarterback the local efforts and engagement with anchor institutions and outside investors and community leaders and putting together a local strategy.

All of that speaks to the potential role of philanthropy and yet, we’ve seen precious little capital, and a lot of kind of crossed arms when it comes to the philanthropic communities engagement. So I shouldn’t bury the lead. There’s some real bright spots that you have, you know, the Rockefeller Foundation, you have Kresge, you have a couple others who have stepped up in meaningful ways, but the scale that has been achieved so far has been pretty minimal when you put it against the national context.

And I’d say the two areas that are the most disappointing for me are, you know, you take what Kresge has done, they’ve provided a loss guarantee to two opportunity funds, impact opportunity funds. And that capital is gonna be…those fund manager is gonna leverage that to raise many, many times the amount of committed capital from Kresge from private investors who will feel more comfortable stepping into this brand new space and doing higher impact work, because they know they have their downside protected up to a certain point.

Well, that’s I think Kresge’s number is $22 million. That’s what they’ve done so far. That’s what they’ve committed, period. They did that based on an application that happened almost a year ago now, maybe even more than a year ago. So think about how much the marketplace has evolved, how much bigger the scale of need and interest is. Twenty-two million should be $2 billion of philanthropic capital commitment, easily.

And with that $2 billion could come tens of billions of impact-oriented capital deployment into the highest need areas and the highest need priorities. And it’s just a basic math challenge, unless you have that kind of capital being put into the game to support, what are many cases, new fund managers or existing fund managers who are trying to scale up their efforts to really meet the scale of the need.

The policy is not gonna reach its full potential without those types of institutions stepping up. That’s one big area, is that how do you de-risk the proposition for outside capital? Particularly in this first phase, and that’s an area where philanthropy could be playing a much larger role. The second is capacity building in the communities themselves.

And again, I looked at what Rockefeller has done with I think now six cities where they’ve funded a Opportunity Zones coordinator in these communities. And that person’s full-time job will be to help the city make the most for its residents, and for the long term legacy of this policy to coordinate those types of resources and to develop that strategy and to have somebody who’s full-time job is focused on that. It’s a huge deal because it means there’s better accountability and more thoughtful work being done.

Well, that is, too, a scalable challenge for philanthropy to meet. And you can’t legislate that, you know, this is not something that can be done by federal fiat. It really requires those with the capital and with the mission to step up. And so far, I’d say there’s been…it’s mostly tepid. I’m hopeful that that just like we hope to see more market activity in the next year, I hope to see a lot more philanthropic activity, but frankly, that that should have been the last two years to lay the groundwork for the market once the regs were done, to be ready to go.

And so there is some missed opportunity there.

Jimmy: Yeah. So Kresge and Rockefeller have done something, they have contributed some capital or have contributed some support, but it sounds like in your mind, even what they’ve done has been drop in the bucket compared to what they could have contributed. And then there’s a lot of other philanthropic organizations just sitting on the sidelines, where, you know, the need for their support and for their capital is very large in a lot of these communities.

Why has it been like that? Why has the response from the philanthropic community been so tepid so far?

John: Well, first, I want to say, I’m really pleased by what Kresge and Rockefeller have done. And I think if all foundations and more of the philanthropic community were just following their lead, we’d be in a much better place.

Jimmy: Agreed.

John: So it’s to me less about getting them…those who have already done something to do more, although that would be great. And I think my expectation is both Rockefeller and Kresge will be doing more. There’s, especially from Rockefeller, there’s been a pretty steady series of announcements coming over the last few months, all of which have been very welcomed.

But there aren’t enough copycats or and enough other organizations who are picking up the baton and saying that’s a model that we can buy into and help achieve that national scale that we’re looking for. So if you had a consortium of like-minded philanthropies and foundations who were doing this at broader scale, I think the impact would be tremendous.

So as to why, you know, I’m not 100% sure, I think there’s probably a combination of reasons. Some of it is just institutional inertia. Rockefeller and Kresge feel comfortable stepping into this space because they have either the mandate from their boards or the kind of the legacy of impact investing expertise and a kind of a comfort with this type of engagement with the private sector. Not all foundations have that. So some of it is institutional expertise, inertia.

Some of it is just it takes a long time and philanthropy to execute on these things just like in the rulemaking process, it takes a long time to get regs. So timelines are a challenge. And then some of it is clearly the sense that, like all policy, Opportunity Zones isn’t perfect. There’s some headline risk, as I’m sure we’ll talk about, with some of the coverage nationally of Opportunity Zones, and it’s like all things in policy, there’s politics involved, too.

And so, I think for some foundations they’ve not been eager to step into that fray. And again, I understand that, but I think the cost of not engaging is pretty high in terms of the missed opportunity of what could have been done and what still can be done with really strong collaborative engagement from all the different key parties.

So I’m hopeful. I think as we see some of these new models and new paradigms emerging from communities that are making progress. And by the way, some of the most important philanthropic stakeholders are the community foundations. If you look at Erie, Pennsylvania, for example, one of the most important factors in that has been the engagement of their community foundation.

And that’s a, you know, the national foundations have, you know, multibillion-dollar endowments, and they’re important, but a lot of these community foundations are the key that unlocks the door for those particular communities and getting local investors off the sidelines as well and helping to build that local capacity on the public sector side.

So I think they’re very important. It’d be a mistake to overlook their potential role as well. It’s getting some of these early models to proliferate. That’s the challenge we’re in right now. You have the seeds of success, and you have some first movers, the question that I think we’re gonna see answered over the next year is, will there be a proliferation that moves the national needle or will it still just be pockets of a first movers and no real meaningful scale nationwide?

Jimmy: So okay, I think that makes sense. And I think maybe my timeframe is a little bit faster than the timeframe of the IRS, for one and for philanthropic organizations, number two, you know, the inertia for these types of things, it takes a long time sometimes to turn a really big ship, I guess. So, I’m with you. I hope that 2020 and 2021 are our key years for private capital flowing into the Opportunity Zone space, for more funds getting established when we have final rulemaking, and also for philanthropy, stepping up and contributing more capital as well.

You mentioned headline risk. I want to ask you a question about that very topic. “The New York Times” ran a front-page story on Opportunity Zones back in August. It was largely critical of the Opportunity Zone incentive. What did you make of that story overall?

John: Well, but I’m not unbiased here, because we spent a lot of time with those reporters. And I think, you know, my disappointment with the piece was not that they were critical, because I think there is some fair game criticism to be had here, which we can talk about in a moment. It’s that it was so unilateral, and that the piece really appeared quite obviously to be written to frame this as through the least sympathetic characters and anecdotes, while also excluding many of the most sympathetic and obvious examples to point to, in places like Erie that have demonstrated quite a bit of success in unlikely ways.

And I know that they had that information available to them because we made it available to them. You know, from our side, that was part of how we engage. And just anecdotally, I know from many others who spoke with them what was shared with the reporters. So, you know, I’m not expecting anybody to write puff pieces about Opportunity Zones, and I’m not expecting anybody to pull back on skepticism. I think we should all frankly be skeptical, of new things and hold it to a high standard, but I thought the piece was a little cynical. And that’s what I found the most disappointing.

And I also know that comments that were made to the reporters about the nature of the early marketplace, were framed in such a way as I think to give readers an impression that is not accurate. It’s really not what was intended. And so those are concerns but, you know, complaining about press is really a losing game. It is what it is, and I think that’s just something we all have to bake in when it comes to public policy. There’s rarely a piece that people who are, you know, eyeball deep in that policy are going to feel like was perfectly representative of the facts.

There’s always lost nuance, there’s always cherry-picking of the anecdotes and data, those things always happen. The question is, over time will some of the good things that are happening around the country, the kind of things that were shared with the Times’ reporters, will those ever really see the light of day? Will they ever generate national attention?

I think we started to see the answer to that question this week with a big “Wall Street Journal” story about what’s happening in Erie. I was pleased to see that because I think it took a fair and in pretty nuanced approach to the challenges that city has faced. And the question of whether policies like Opportunity Zones can actually play a meaningful role in the eventual and hope for a turnaround in those communities.

It wasn’t a puff piece by any stretch, but it gave a serious treatment to that big question of is it really a policy that can help these struggling cities that have been left behind for so long. And so, that to me is a…that’s a hopeful sign. And certainly, when you look at the state and local press, it’s mostly pretty positive. There’s not a lot of local controversy that’s emerged so far.

But one thing I do want to highlight from the Times piece is that it underscores the damage done to the reputation of Opportunity Zones by a handful of really poor zone selections by governors. So, you know, again, putting my researcher hat on, the vast majority of the tracks that were chosen are defensible, are in the spirit of the law. The economic and socio-economic needs that these communities are facing as a cohort are undeniable.

So whether it’s food deserts, whether it’s incarceration rates, lack of upward mobility, child poverty, life expectancy, we could go on and on and on. These are places that exhibit extraordinarily high need and the dimensions of the need are kind of staggering when you add it all up. So no one policy Opportunity Zones included is going to single-handedly address that.

But as a general matter, did governor’s generally target high need areas? There’s not really a debate about that. The problem is, when you look at the tail end of the distribution, there’s 1% or 2% of Opportunity Zones that just have no business being designated. And this is where the general deference that Congress gave to governors within the confines of the law really ran into the, in some cases, the cynicism of State Leadership saying, “Let’s see how far we can push this.”

And maybe some of that was well-intentioned, and maybe there’s more to the story locally than what appears on the spreadsheet. But, you know, I’m not in the business of defending some of these selections because I think they’re indefensible. And what they’ve done is really cast a cloud over the 98%, 99% of zones that are deserving, and where really incredible work is being done, and it’s skewed the national debate. And that’s what the entire story of “The New York Times” is really premised on that, that there are some zones that don’t deserve to be zones and look at these bad things happening in these areas that don’t conform to the spirit of the law.

Well, that’s true. And it’s unfortunate that it’s true, and it’s unfortunate that they chose to only tell the story of this early policy through the most extreme outliers, but that’s really what the press does. And so, I don’t think…it can’t be that much of a surprise. And I think it speaks to one of the areas where Congress really should be taking a close look at tightening up some of the loose ends.

But that’s to me the principal problem, it’s not what’s happening in the deserving areas, the concern is not…you know, actually, I hear much more from communities that wish they had more Opportunity Zones than I’ve ever heard from a community that says we don’t want one. We wish we weren’t designated. I don’t think I’ve come across one that has expressed any regret. It’s always the other way around, which is good in and of itself. That tells us something.

But there are places that just have no business having been designated and I think that’s what has been the principal challenge from a optics standpoint, is that it’s hard to get people to look past their cynical inclinations, even on the best day. But when it comes to this policy in this day and age, the bar is especially high.

And so, that, to me has been more than anything else the noise that we have to cut through. Because until you cut through that noise, it’s very hard to get people to focus on in what in some cases are truly transformative, and instrumental activities that are aimed at exactly what this law was intended to do, that are already achieving results, that are achieving results in areas that no other federal policy has ever touched.

So, you know, there’s a lot of good, but it’s underneath this overhang of a handful of bad selections have really, you know, spoiled the punch for everybody.

Jimmy: Yeah, so a lot of points unpack from that response there from you. First of all, I agree that there was a lot of fair game criticism in that article. I don’t think there was anything in the article that was factually inaccurate. But I agree with you that the article was very one-sided. And you can kind of tell from the headline almost from the very get-go, I think they referred to it as a Trump Programmer or Trump’s Tax incentive. I forget the exact words. And so they’d already kind of labeled it the way that they wanted to.

When you and I had spoken at SALT several months ago, we had discussed that very point. And you know, how frustrating it was when this gets labeled as an as a Trump incentive. And in many ways, it is because it’s their administration executing the legislation of course, but this is a very bipartisan incentive program that was created by you and Steve Glickman, and others, at Economic Innovation Group of bipartisan research group, so that’s always frustrating to see.

And I was pleased to see that article in the Wall Street Journal the other day on Erie, Pennsylvania, actually, coincidentally came out shortly after my podcast episode with the folks over at the Erie Downtown Development Corporation first aired.

John: That’s good marketing for you.

Jimmy: Exactly. So I’ll be sure to link to that episode in the show notes for today’s episode as well. When I spoke with John Persinger and Matthew Wachter over there in Erie, Pennsylvania. And they spoke a lot about some of the same things you were just saying were very important in making Opportunity Zones a success, getting the anchor institutions engaged and getting support from community foundation’s, local community anchor institutions, the importance there.

John: Yeah. I think just to pick up on that point that what was I think misleading was the framing less than the specific details, although I do have a couple quibbles with some of the uncontested assertions made in the piece. The framing was, this is both in the piece, in the headline, and in the online push from the reporters and editors, was not simply here are some things that are happening that don’t conform with the intended…the spirit or intent of the law.

It’s this is what’s happening and explicitly there’s little evidence that anything good is happening in the intended areas, which is…that is actually false. And so that was…that framing, that juxtaposition I thought was misleading and frankly, a little bit disturbing, because again, that was not written from a place of not knowing many of those other counter examples. That’s number one.

Number two, to your point, it was framed as Trump’s signature idea, which, you know, no fault of his own, it predated him. And so, putting it with this administration was part of that I think the editorial narrative decision to say we’re gonna make this a Trump focused story. Both through the associates who are engaged in Opportunity Zones and in the administration itself and kind of everything top to bottom, tracing back to the president.

And then the third piece being the kind of sensationalizing of the marketplace, calling something a Wall Street boondoggle, I think has to live up to some kind of scrutiny. And I don’t, I mean, for all the talk about Opportunity Zones, actually has not been, to my knowledge, very much traditional, institutional Wall Street activity.

There are not many funds that investment banks or other Wall Street entities have created for their clients. With a handful of exceptions, very few of them are investing directly from their own balance sheet. And Goldman Urban Investment Group is one big exception to that, they’re doing some tremendous work.

But, you know, the boondoggle label, you know, fits the narrative of the story, doesn’t really fit the reality in the marketplace of pretty challenging capital raising environment. Pretty very few larger institutional players have stepped in, so the whole thing was kind of framed to sound sensational and exaggerated.

And it over…if it wasn’t directly inaccurate, it was at least misleading in the sense that it didn’t leave readers with an understanding of just how nascent this marketplace is. And contrary to the tone of the piece, just how hard it has been to get capital to actually move off the sidelines, which to me is the big concern, right?

That this policy is much more likely to fall short of its expectations because of a lack of capital, then from too much capital going to the wrong places. And so, again, I think those are points we could maybe debate with the authors of the piece in terms of why they wrote it that way, but that to me, it furthers a narrative that I think has actually gotten people to focus on the wrong challenge and the wrong impression of reality when the challenge is still very much where it was at the beginning of this whole thing, which is how do you get investors to change their mindset and change their behavior, about where they deploy capital and into what types of activities.

So that same premise that Opportunity Zones was meant to address it is still here with us, that same challenge is still here. And we’ve not yet…we still have yet to learn whether in the long run this policy will be enough to actually meaningfully move the needle in the direction of a longer-term different paradigm in terms of the way that investors look at communities and overlooked areas of the country.

So that’s just… And in there is potentially a critique of the policy that maybe it didn’t do enough, maybe it wasn’t structured aggressively enough, or with the right types of bells and whistles. It’s just too early to say. But I think we all have to approach this with some degree of humility that the answers are not available to us yet. This is a long term exercise, and particularly when the ink is not yet even dry on the regs, it’s hard to draw any kind of sweeping conclusions about what will be successful or not.

Jimmy: Yeah, I agree with you, 100%. I think it’s way too early to be able to render a verdict one way or another. I think we’re still kind of on the ground floor, so to speak. I remember when we spoke last time also, you brought up the fact that it is unfortunate that a lot of attention is going to that 1% to 2% of Opportunity Zones, maybe there’s about 100 of them or so, right, that probably shouldn’t be Opportunity Zones, and that is unfortunate.

And I think, you know, the headlines and New York Times article kind of sites them and sites the developments going on there that would have happened already anyway, as a negative of the program, but certainly, you know, kind of bring our conversation back full circle, you know, I think we’re both saying the same thing that it’s still too early, and in the years ahead, particularly 2020 and 2021 are gonna go a long way toward determining the effectiveness of this tax incentive.

When we last spoke, I asked you a question about whether or not you thought the Treasury Department or the IRS should require some sort of reporting. And at the time, you said it was a no brainer that they absolutely should require that funds report on at least some basic data. Do you have any insight or update on that? And what do you expect the IRS to do in that regard?

John: Yeah. I still think it’s a no brainer. And I still am hopeful that we’ll see some steps in that direction with the final rulemaking or something concurrent to that. I know they’re taking it very seriously. This is, you know, one of those topics that has united most commenters and people engaged in this process, the rulemaking process, so they’re used to hearing about it from all sides.

And since we last spoke, EIG led the submission of a very detailed comment letter on reporting and transparency. We’ve supported a legislative effort, bipartisan legislative effort by the original bill sponsors and others to create a legislative context for that. So to give Treasury explicit authority and direction that was in part missing from the original bill, because of the way that it was passed, it was in the original draft, but not what was passed into law.

So, you know, there’s really no… This is one of those issues that unites everybody. And so I’m pretty optimistic, we’re going to get something in hand here that provides that kind of framework for reporting. But exactly what form that’s gonna take, it may end up being a combination of some independent regulatory action and some explicit legislative action to direct Treasury in that direction.

I will say, too, this kind of points to the nature of policymaking. It’s pretty rare to find a meaningful policy that’s perfect on first draft. And so we should be iterative and policy-makers should be intentional about saying, “Look, as we learn, for many new policy Opportunity Zones included, we should be iterating this in real-time, and improving areas that need improvement in real-time.”

And reporting is one of those obvious areas. And I think there are others. So my hope is that if we don’t see some near term action from Treasury, that we’ll see near term action from Congress, and I’m pretty optimistic.

Jimmy: Yeah, I think I would definitely like to see some reporting there, and I think pretty much everybody would, as you mentioned. I think it’s really the only way that we’ll know whether or not this incentive program is living up to congressional intent and living up to the promises made to the American public. I think the American people want to see that, I think the investors want to see it, and Congress wants to see it as well.

So I think it makes sense that in one way or another, we get some sort of reporting happening at some level from the funds. Well, John, thanks for joining me again today. I really appreciate the time you’ve spent educating our listeners and giving them a little bit of insight into your world and your thoughts on the Opportunity Zone program.

Is there anything in the pipeline that you guys are working on at EIG at the moment that you’d like to share with our listeners? Or can you tell our listeners where they can go to learn more about you and EIG?

John: Sure. Well, first, eig.org is our website and you can find a bunch of resources and research and other information about our work there. We have quite a few things in the pipeline. As it relates to Opportunity Zones, some new analysis will be coming out soon. Some broader work on the nature of community change and tracking that over time and try to understand the scope and scale of how struggling communities have evolved over the course of the last few decades.

So, you know, very much in our Think Tank mode on that front. We’re also going to be working even more closely with community stakeholders at various levels to help them develop a thoughtful approach and empower them to have a real impact with this policy in the year ahead. So I’m very excited about that. I think this is an area where, you know, as the regulatory and the policymaking side of this winds down, the practical side of it really has to wind up.

And so we’re going to play a forward leading role with partners in doing that. And then, you know, separate from Opportunity Zones entirely, we’re looking at other tools, other policy responses that will help communities that have struggled in various ways over the last few decades, we’ll help them reinvent themselves and stabilize their local economies.

And so again, the investment capital is one important piece of that. And frankly, Opportunity Zones is just one form of the capital side of the equation. There are other policies I think would be helpful, but widening the aperture to human capital as well and how this plays into, for instance, the immigration debate, I think, is a really interesting question for us, one that we’ve started to explore this year with a policy called heartland visas, and have gotten really strong bipartisan support and interest for this, and great national attention to it.

And so that’s high on our list. We’re also working on labor market policy to help entrepreneurs and American workers get better wages, become more mobile, start businesses, and that gets to non-compete and no-poach agreements that really imbalanced the labor market, and undermine the basic bargaining power of the average worker.

And so we think these are all policies that interlock, they all relate to each other. And they’re all about empowering a more dynamic American economy, and in the process, creating healthier communities as well. So we have a full plate here, and we’re not taking any plays off, but you know, nothing is more important to us than seeing the Opportunity Zones policy get to a solid foundation for the next decade.

Because again, this is such a long term vision and will only be able to really judge this policy in the full context, 10 or 15 or 20 years down the road, it has to start with a solid foundation, solid regs, transparency and reporting requirements, and the kind of community-based tools that will position this for greatest impact.

And I think if we can do those things, and there’s a high urgency on this, then we are poised to see some really transformative success in the next few years. So that’s what makes this current sprint so important. The foundation we lay now is gonna play out, you know, 10, 15, 20 years in the future, so we have to get this right.

And that’s gonna be our number one focus until that work is done.

Jimmy: Well, that’s great. And John, thanks for providing that context on where we are at currently with the Opportunity Zone incentive and it’s in the life of the program. And yet definitely sounds like you guys have a full plate over there at EIG. So for our listeners out there today, I’ll have show notes for this episode 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. I’ll be sure to have links to “The New York Times” and Wall Street Journal articles that we referenced, as well as to the EIG homepage and their studies on heartland visa, and non-compete study as well.

John, thanks again for joining us today. Really appreciate your time.

John: Thanks, Jimmy.