Opportunity Zones: Past, Present, and Future, with Rachel Reilly

Rachel Reilly

With a new President taking office next month, what does the future hold for Opportunity Zones? And what policy reforms under a Biden-Harris administration would improve the policy such that it more closely adheres to legislative intent?

Rachel Reilly is former director of impact strategy at Economic Innovation Group, a bipartisan public policy organization that helped to create the Opportunity Zone legislation.

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

Episode Highlights

  • A retrospective of the last three years of the Opportunity Zone initiative.
  • The future of Opportunity Zones under a new Presidential administration.
  • The three potential areas of reform under a Biden-Harris administration: 1) community engagement and community benefit; 2) evaluating the efficacy of the program; 3) transparency and reporting requirements.
  • How the popularity of Opportunity Zones at the local level strengthens the initiative politically.
  • The disconnect between the policy thesis of incentivizing private capital to flow into distressed communities and the application of the policy: why it is so difficult to actually connect private capital markets to distressed communities.
  • Examples of good behavior with Opportunity Zones.
  • A discussion of the “fund of funds” concept, and why it should be re-examined.
  • Conclusions from recent EIG reports on Opportunity Zones

Featured on This Episode

Industry Spotlight: Economic Innovation Group

Economic Innovation Group

Founded in 2015, 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 and Rachel:

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. How can we make sure that opportunity zones adhere to legislative intent going forward? Here to discuss this topic and more with me today is Rachel Reilly. Rachel is formerly of Economic Innovation Group. And she recently joined me on OZ Pitch Day earlier this fall. Rachel joins us today from her home office in Washington, D.C. Rachel, thanks for joining me, and welcome to the podcast.

Rachel: Thanks so much, Jimmy, excited to be here.

Jimmy: Good. Well, glad to have you here as well. And thanks again for delivering the keynote address at OZ Pitch Day, which was just a week ago, when we’re recording this now. I’m not sure exactly when this episode is gonna air but we’re talking just a week after OZ Pitch Day, it went quite well. And thanks again for your help with that.

Rachel: Absolutely. Happy to help and thanks for the invitation.

Jimmy: Absolutely. So, today’s episode, Rachel, I really want it to be somewhat of a retrospective on the last three years of the opportunity zones’ policy initiative. I wanna talk about the history of opportunity zones but first, can you tell me just what did it feel like right after enactment and why did you personally get involved?

Rachel: Yeah. Thanks, Jimmy. It’s so interesting. So, when opportunity zones was enacted, I was working at a nonprofit called Enterprise Community Partners and had actually started working with the Economic Innovation Group team, about a year before. So, had met John Macquarie and Steve Glickman in early 2017. Because we’re talking about the investing and Opportunity Act, which was the piece of legislation that originally introduced the opportunity zones concept. And so, when we got the notification, the night before the tax credits and JOBS Act was passed that opportunity zones had made it into that final bill. It was really exciting and I think that for me personally, it was an opportunity for an enterprise as an organization to provide information to the community development sector about a new tax-advantaged vehicle for driving private capital into distressed communities.

Largely, the community development sector had been keeping an eye on a number of other different tax credit programs that were up for grabs, or I guess being focused on in the TCJA. So, opportunity zones kind of flew under the radar. And so, as soon as January rolled around, we were first out of the gate with webinars and presentations, because we thought it was really important to address them first-order priority. Number one being to provide 101 to the community development sector and others, just around what opportunity zones was. The fact that this was equity investment, and not traditional debt or grants was a really important distinction. And we had a really important piece of business coming up, which was around designation, actually designating the census tract. And I felt that chain development sector was really well-positioned to help inform that process. And that was a time determined process and I wanted to have the right information in the hands of folks that can help influence those decisions.

And so, it was a sprint right out of the gate. It was a really exciting time. And I think that, by and large, we did a great job getting the information out to the right people.

Jimmy: Well, I couldn’t agree more. And I’ll have you know that I actually attended one or two of those early Enterprise Community Partners webinars, and I have you in my note, still from a couple of years ago, when I personally was first learning about opportunity zones. Rachel, I don’t know if you know this, but I’ve wanted you on this podcast for quite some time. So, I’m glad I finally got you here. Thanks for joining me today once again. You know, you mentioned that the intent of this program is to really drive private capital into distressed communities. But that’s a really, really difficult process. And I think it’s really underestimated how difficult it is to drive private capital into distressed communities. And I wanna touch on that a little bit later in the episode today. But first, Rachel, can you give our listeners just a brief history of opportunity zones? For longtime listeners, this might be review for you. But for those who are just learning about opportunity zones, I think there’s gonna be a really valuable backstory. Basically, Rachel, how did we get to where we are today with opportunity zones?

Rachel: Yeah, so the opportunity zones tax incentive was created in order to attract private investment into distressed communities. And really interestingly, and folks may know this history that the original building Investing and Opportunity Act had reporting requirements in that bill. And so, reporting requirements were always part of the original design and I mentioned it because it becomes really important and important part the history of the policy and very relevant today. They were stripped out of the final TCJA due to parliamentary procedure. So, not because there wasn’t bipartisan support for reporting requirements but just because there wasn’t a revenue impact. And I could go on for a long time about that but I would bore folks. So, immediately, once it was enacted, there was a lot of advocacy around getting reporting requirements reinstated into the policy. I’ll leave that as an aside. But so, after enactment, there was an effort at every level in every state to designate census tracts that are now opportunity zones, and governors went about that in a myriad of ways.

Some had very open processes, where they sourced opinions from a number of different stakeholders. And some governors just chose to lean on their experts that they had in their cabinets and at their different agencies, and make those decisions themselves. By and large, decisions were made by the end of either April or June 2018, we had our, you know, and investors knew where they could make eligible investments. And then, of course, we had the rulemaking process. So, at the same time, that you’re trying to stand up a brand new marketplace and get investors and find managers acquainted with them comfortable with making investments into distressed communities comfortable with the new policy, you had treasuring the IRS trying to put…you know, understand the rules for the road or create some certainty around this new policy.

And so, there are two rounds of proposed rulemaking. And, you know, we first saw the first round of proposed rulemaking delivered in October of 2018 and then the second and I believe, 2019, I think February 2019, I may be getting my dates wrong, it’s a blur. But either way, what we saw was that the real estate market stood up first, for a number of reasons. Because the real estate market is organized, because due to the place-based nature of the policy, it is a lot easier to make investments in real estate, you know, that real estate is still gonna exist within an opportunity zones in 10 years. As well as you could stick to the statute and make real estate investments. And it was a lot more clear, as opposed to needing more regulatory guidance vis a vis or relative to operating businesses. So, there’s a number of reasons why you saw real estate progress quicker as an asset class relative to businesses. But by the end of that entire process, once the regulations are finalized in December 2019, I felt like we got a lot of certainties we needed to make investors feel comfortable around making investments in both real estate assets and operating businesses.

And by that time, there was a lot of momentum and investment happening in opportunity zones. And we saw that continue through the first couple of months of 2020. And then, of course, the pandemic hit. Like all capital markets there was a, I would say, a pause or a temporary slowdown. But I was really encouraged throughout the remainder of this year to see a lot of really exciting announcements, new initiatives around opportunities zones as well as transactions seem to either pick up or regains team around May or June of 2020. And there was some sort of polling of the marketplace where maybe folks that were engaged in 2019 decided to stick 2020 out. But I think that that makes a lot of sense. You know, the folks that were dedicating staff, time and resources to opportunity zones, they decided to pursue opportunities and through the pandemic. And I think that those are still the types of folks that you want at the table pursuing opportunities as in 2021, as well.

Jimmy: Well, thank you, Rachel, that was an excellent recap of how we got to where we are today with opportunity zones. And again, that may have been review for a lot of you listening, but I think it’s very helpful nonetheless just to do that review. So, you kind of set the stage here for us now, Rachel with how we got to where we are with opportunity zones. But I want now to talk about where we’re headed with opportunity zones. We’re in an interesting period here where we are in a lame-duck session with the current presidential administration. And we’re transitioning into a new presidential administration under Joe Biden here in the next several weeks. What opportunities own reforms is his administration considering? And in your view, how would it be best to execute these reforms?

Rachel: Yeah, so Biden-Harris administration has been really clear that there’s sort of three areas for reform. The first is around community engagement and community benefit. The second is around evaluating the efficacy of the program. And the third is around transparency and reporting requirements and public disclosure. And so, you know, as we move forward, I think that even in Congress, as we look to the lame-duck session and the 117 Congress reporting requirements will remain that first-order priority. It’s actually unfortunate that it hasn’t been reinstated into the policy already. I think that there are a lot of opportunity funds that will say that it’s a non…it’s an uncontentious issue that they’re reporting requirements. And it’s just a matter of figuring out what that framework looks like. And once that framework is established, I think it’ll also offer a lot of certainty to the marketplace, it will…that transparency will help eliminate some of the negative speculation that I think has plagued the marketplace as well.

I think we all know about some of “The New York Times” headlines and those sort of national narratives and stories. But once we have that transparency, I think it’ll be to the benefit of all. And as far as community benefits and community engagement, you know, I’ve been really encouraged by a lot of the opportunity funds that are out there, and a lot of the funds that formed in 2020, and started really deploying capital in 2020, have already instilled this, within their investment strategy in their investment thesis is, you know, community engagement can be as simple as working alongside local government. And I think that that’s gonna be really important moving ahead, especially as local governments look to revitalize their economies in the wake of the pandemic. You know, in order to demonstrate that it can be simply a letter of support from your local mayor, or being able to point to how your project aligns with a comprehensive plan around what the community is localized as a needed asset.

You know, there’s a number of different ways to go about it, but I don’t think it’s as necessarily burdensome as some may originally think it is. We’re already seeing really great best practices that have arisen in the marketplace. You know, we look at places like Alabama with opportunity Alabama, opportunity Virginia, opportunity Appalachia, all the opportunities where they’ve established local ecosystems to help facilitate opportunities and transactions that are aligned with the needs of the communities. And simply just working through those intermediaries or working in partnership with those intermediaries could also be a signal of the community engagement or community benefits. So, again, I don’t think it’s a huge threshold to have to meet, but I just think it is something that needs to be done with intentionality. And that is something that the Biden-Harris administration will have to articulate or make more explicit as they move forward with their reform effort.

Jimmy: But one thing that I do wanna make clear to everybody listening is that the opportunity zone initiative is not going anywhere. Right, Rachel? I just love to reiterate that point over and over again, because I do get people asking me, or people expressing some level of skittishness about the election results and worried that Biden may do away with opportunity zones entirely because he is going to reform a lot of the TCJA.

Rachel: No, that’s correct. And I think that it has a lot to do with the fact that opportunity zones remains very popular at the local level. That’s been recently demonstrated by a resolution that was passed by the U.S. Conference of Mayors, by a bipartisan group of mayors saying that they have found opportunity zones to be very helpful and making investments into their economies, but they also call for very similar for measures. And so, as long as the opportunity zones policy is supported at the local level, I think you’ll see that reflected at both the federal level and through Congress. And so, no, I do not see opportunity zones going anywhere. And in fact, I do hope that the policy is extended and when I say that, I mean, the 2026 deadline, I hope that that receives an extension this year.

Jimmy: What do you think might come out of that, if that extension does take place? Currently, the program starts to sunset on December 31, 2026. That’s the last date for capital gain recognition that is eligible for deployment into qualified opportunity funds. That’s the date that you’re referring to there. What are the chances that it does get extended? And what would that extension look like? We’re talking about a permanent extension or maybe just by a couple of years, or what are you hearing?

Rachel: Yeah, I mean, you have to look at the time associated with making reforms vis-a-vis investor interest in the program. And, you know, 2021 is gonna be the last year that investors are gonna be able to capture that 5-year benefit. And so, assuming that there may be diminished interest in opportunity zones after 2021, which I’m not sure there will be but one has to assume, I don’t know if you spend a lot of time implementing reform measures, and then only to be able to capitalize on a few months with it. And so, that’s why I do hope that it is expanded. And also, it’s taken communities a little bit to catch up and understand how to best utilize opportunity zones especially since we only received the final regulations in December 2019 and then I experienced, you know, a full year of a pandemic. I think, in order to properly understand and allow opportunity zones to reach its full potential, you would want to see some extension of that 2026 deadline. And it could look something like two years in order to mirror the two-year process it took to get the rulemaking process finalized.

Jimmy: And then effectively, that would push back that 2021 deadline by another 2 years as well. The 2021 deadline referring to the amount of time you have to take the 10% basis step-up on your QOF investment, which effectively reduces the amount of capital gain that you recognize from your original gain. Rachel, getting back now to something you touched on earlier in our conversation, the policy thesis of incentivizing private capital to flow into distressed communities seems pretty straightforward. And that’s why opportunity zones exist, that’s its purpose or its goal. But on an application level, why is it so difficult to actually do that? Why is it so difficult to actually connect private capital markets to distressed communities?

Rachel: Yeah, I mean, there’s a number of reasons. And there’s a whole industry called chain development financial institutions dedicated for just this purpose. These are neighborhoods and communities that have been overlooked by the capital markets for decades, and a lot of investors don’t have a footprint in those communities, they don’t have local market intel on what is happening in these neighborhoods. And, for those reasons, don’t feel like they can properly assess risk. And so, they may have a risk perception that could be aligned or could be accurate, but it also may be skewed, because they just don’t have assets in that community, or they don’t have boots on the ground to properly assess it. And so, you know, first and foremost there’s an intel issue and then there’s, I also think, just an ecosystem or capital delivery problem. A lot of times, you don’t want to deploy a huge sum of capital into one community, at the same time the market can afford it. But a lot of times, the capital markets need to deploy capital and volume.

And so, being able to tranche out the amount of money that you’re investing in any one distressed community over a period of time and being able to diversify the types of investments that you’re making, that’s the strategy that you should be looking at if you’re investing in one place at one time. But that also takes a huge amount of, I would say, due diligence, a commitment to that place. And so, that’s why I found it so interesting that a lot of anchor institutions, major employers have stepped up and said, you know, “Well, I have a direct vested interest in my community and I know that I will be located in this place over the long term.” And so, that is time that is well spent and that is money that is well placed. And I actually have that local inside intel to properly evaluate risk. And so, you look at places like Erie, Pennsylvania where Erie Insurance has committed tens of millions in opportunity zones capital spec community, and it’s a real winning formula.

But, you know, these communities they’re just, they’re fragile ecosystems. And a lot of times the capital stacks are multi-layered and deals are just not straightforward. It just takes a lot more attention, a lot more patience. And if you’re not structured to do that, or you’re not motivated to do that, it’s tough to get it done but hence the taxman signups?

Jimmy: Yeah, it is definitely tough to get done. It really takes a huge effort. Absolutely. And opportunity zones shouldn’t really be viewed as a panacea for all economic distress, but it can be a big step in the right direction. Rachel, what ultimately is your hope for the opportunity zones policy? And what do you think is needed to improve the policy?

Rachel: You know, I have been so encouraged by the number of folks that have gotten to the table to help promote good behavior with opportunities zones. You know, you look at states like Colorado, where you have local leaders that have started accelerators to help operating businesses, gain the technical expertise they need to tap investors. You look at a project like Cargominium in Columbus, Ohio, where they’re working with the local nonprofit to deliver homes for folks that are formerly incarcerated, and provide wraparound services to those gentlemen as they’re re-entering. And doing it in a way where they are best positioned for success. Like, there’s just a lot of really great work and great projects that are happening. And so, my hope is that those types of activities are replicated, and those models are scaled. You know, there’s always conversation around, well, if you’re gonna have an impact, then are you gonna have to take a concessionary return?

And I think it’s a real moment to unpack that a little bit and understand, especially if you’re doing a mixed-use project, around how you can have an impact by how you’re programming your project, through community uses or, you know, with tenants that are delivering a community benefit, but also, they’re solid high-quality tenants. So, a great example of that is in the South Bronx, in New York, there is a mixed-use project where the anchor tenant is a charter school. And that charter school is serving the community. There is a high demand for charter school services in that neighborhood. And so, the property owner views data charter schools as a high-quality tenant because they know that there’s gonna be a continued demand for those services. And so, especially as, you know, in the wake of the pandemic, the retail sector and the commercial sector, and even the office sector in a little bit uncertain. I think that there’s a real moment to think about how you’re plugging in community uses into mixed-use projects, where you know that there’s gonna be a demand for those services over the long term.

And so, I think that there’s like a market-based approach to this. And then I think there’s also, again, to the reform piece, sort of a either regulatory or statutory based approach. I’m a big proponent of looking at the fund to funds. In the statute, there’s statutorily fund to funds is not allowed. And I do think that that should be reexamined because it allows smaller amounts of capital to be deployed. And I think that that’s particularly helpful for operating businesses. It could help a broader array of uses and communities. So, those are just a few ideas, but I am hopeful and I do think that having an administration that is laser-focused on these sorts of refinements is nothing but helpful.

Jimmy: You mentioned fund of funds. I’ve been thinking a lot about that lately as well, how nice it would be if you could put together a fund of funds a single qualified opportunity fund that could diversify into several different other qualified opportunity funds. It is possible for qualified opportunity fund to hold other qualified opportunity zones businesses that are held by other funds but it’s a little bit more complicated to do that. And yeah, it would be really nice to see that statutorily changed. I agree. Rachel, you were formerly the director of impact strategy at the Economic Innovation Group. EIG being one of the early proponents of the opportunities on legislation, and they continue to champion the policy initiative. EIG recently published a handful of opportunity’s own related reports over the last few months. Can you discuss some of these reports and their highlights and conclusions?

Rachel: Yeah, definitely. So, the first report that we published, it was supported by the Chan Zuckerberg initiative. And the title of it is Advancing Education and Child Development in opportunity zones. And really, what it looked at was, I think, a population that had not really been paying much attention to opportunity zones, but also held them as potential for having being most influenced by the investment happening in opportunity zones, and that was the youngest resonance of opportunity zones children. And so, we looked at a few things. Number one, we looked at the needs of opportunity zones children. So there’s 7.5 million children living in these communities. We looked at the conditions under which they’re growing up. And then we also, based on the market activity, we had already seen happening in the opportunity zones marketplace. Made some recommendations around how the investment could be used to help strengthen their local ecosystem.

So, things like, you know, financing spaces for education and daycare, investments into businesses that helped improve the delivery of that, of learning and care. There are a number of different recommendations. And then we also outlined the ways in which different sorts of stakeholders, so local government, anchor institutions, and funders could also help to promote some of these activities. And so, the real ecosystem 101 and I was also really excited to be able to highlight some OZ projects that were hoping to raise capital from investors, as an entry point for investors who were ready to take immediate action. So, there was an affordable housing project in Atlanta that catered specifically to teachers, a charter school in Hawaii, as well as a mixed-use project that on the ground floor had a daycare center for homeless mothers and children in Birmingham, Alabama. So that was the first report. And then last week, EIG delivered a diagnostic playbook called “Delivering Opportunity” that looked at opportunity zones in the state of Indiana.

And really did something that I think could be interesting for a lot of states, especially in this moment as they have kind of gone through the first round of, you know, developing initiative, doing some capacity-building work. And it could be a real moment for reflection upon, like, how is that working? And where do you need to go next? And so, what that report does is it divided Indiana’s opportunity zones into different typologies, identified the different assets within those opportunity zones. And then also made recommendations around what the state needed to do next alongside local stakeholders in order to provide a competitive advantage when raising capital and targeting that capital to places that maybe hadn’t received OZ investment today. And that really, the recommendations really revolved around, you know, addressing knowledge gaps, better coordination amongst key stakeholder groups, and doing outreach to local investors. So, it’s helping your local base of investors.

Jimmy: Excellent. Well, Rachel, I wanna thank you for joining us today. Before we go, where can our listeners go to learn more about you?

Rachel: Yeah, so I am still providing information about opportunity zones as well as impact investing and all the things you may be interested in over on Twitter. So, if you’re on Twitter, the handle is rachel2_riley, that’s probably the easiest way to get ahold of me right now.

Jimmy: Excellent. Well for listeners out there today, I will have show notes on today’s episode on the Opportunity Zones database website. And you can find those show notes at opportunitydb.com/podcast. And there you’ll find links to all of the resources that Rachel and I discussed on today’s show. I’ll be sure to link to information on potential Biden administration reforms to opportunity zones, and EIG’s reports on opportunity zones, as well as link to Rachel’s Twitter account so you can reach out to her, get in touch and continue to read about the work that she’s doing in the opportunity Zones space. Rachel, again, thank you so much for joining me today, was a pleasure.

Rachel: Jimmy, so happy to do it. Thanks for having me.