Cities are Fast at Work Implementing the OZ Incentive

Published by Mark O’Meara on Wednesday, April 3, 2019
Journal cover thumb April 2019

The opportunity zones (OZ) incentive can be used across the country: in downtowns, rural areas, former military bases and in universities, among many other places. 

As cities work to implement this new tool, OZ practitioners from Baltimore, Birmingham, Ala., and Sacramento, Calif., share their experiences. 

One consistent theme across all three cities is the importance of education. 

“Our focus is education. We have been all around the state [of Alabama],” said Alex Flachsbart, president and CEO of Opportunity Alabama, a nonprofit initiative dedicated to connecting investors with investable assets in Alabama’s OZs. “There are four phases of a local organization effort. Phase 1 is education. Phase 2 is to create a marketplace. Phase 3 is promotion around the deals identified and the communities engaged in your ecosystem, and Phase 4 is data tracking and impact improvement, which involves helping the community identify impactful projects and tracking the impact of every project that happens in an opportunity zone.” 
 
“A lot of education is needed. It is important to tell the community how they can get involved,” said Ben Seigel, OZ coordinator at Baltimore Development Corporation. “[We] make sure we work with community leaders and local stakeholders so they are aware of the OZ.” Baltimore Development Corporation is a nonprofit that serves as the economic development agency for the city of Baltimore. It is responsible for the administration of various city and state tax incentives and other business assistance programs. Baltimore accounts for 42 of Maryland’s 149 designated OZs. 

“Valley Vision’s focus with the OZ is education, building that community,” said Meg Arnold, project leader and consultant at Valley Vision, a 25-year-old regional nonprofit organization that plays a key role in civic leadership and engagement across the Sacramento region. “It is important to get as many partners in the region to understand the OZ.”  The city of Sacramento has 29 census tracts designated as OZs, with 43 OZs in Sacramento County overall. 

The OZ incentive will have a big impact. 

“We are tremendously excited about the OZ incentive,” said Leslie Fritzsche, economic investment manager at the city of Sacramento. “The OZ is so flexible. We see this as a great opportunity, a chance to bring some critical investment to our city in areas that need an infusion of capital. We are a growing city rich with opportunities.” 

“We are excited with the footprint of the OZ and excited about the numerous investment opportunities,” said Seigel. “Baltimore is perfectly situated geographically. It has lower costs compared to other eastern metropolitan areas, which means better growth rates for investments. We are also working on close collaboration with our state counterparts, while aligning our OZ strategy with the city’s comprehensive community development framework.” Baltimore is focused on OZ developments near economic anchors such as hospitals, universities and key business districts.

Birmingham is looking to the OZ to help revitalize its aging buildings. 

“The city of Birmingham never tore down its old buildings,” said Josh Carpenter, director, Department of Innovation and Economic Opportunity at the city of Birmingham. “We are in a strategic position to take advantage of the OZ and enable investors to find new purposes for our old assets.” Birmingham has 24 OZs. 

Journal April 2019 OZ Cities

Advice

The OZ is a new incentive and regulations are still being finalized. As practitioners navigate the incentive, they have learned many lessons. 

Arnold said Valley Vision found success in Sacramento by creating a working group of local stakeholders, from city government to local businesses to financial institutions to tax accountants. In February, Valley Vision also held a one-day OZ forum for about 225 guests to educate the community on the incentive and identify implementation issues, such as connecting investors to viable OZ developments. 

The working group’s focus is around, “How to get the word out, how to target projects and how to identify guardrails to ensure investments are made into lower-income neighborhoods and that it truly benefits underserved areas,” said Fritzsche. “It’s important to reach out to the broader community both to educate and to identify projects and needs. Marketing the incentive is important.” Arnold said Sacramento is a very active partner for the working group and the forum. 

Frank Dickson, director for strategic business initiatives at the Maryland Department of Housing and Community Development, said Maryland is taking a similar approach. Maryland Gov. Larry Hogan issued an executive order in January to create the Maryland Opportunity Zone Leadership Task Force, which will host regional summits across the state to discuss possibilities for OZs. Additionally, the task force will develop a state opportunity plan to align OZ goals with state economic and cultural priorities.

Flachsbart added that it’s important to look at the big picture. 

“My advice is to step back. Identify how your local ecosystem comes together. [Figure out] who can fill that gap in the community of providing the education piece, getting folks to the table,” said Flachsbart. “Then develop a strategy and figure out how to scale the marketplace–and, at the same time, think about how the incentive works to benefit low-income people and communities.” 

“The big thing for us is to try to break it up into what you already have,” said Carpenter. “There is no need to recreate new city development plans or initiatives.” Instead, Carpenter suggested building off existing plans and initiatives. 

Cities Prioritizing OZ Investments 

Baltimore, Birmingham and Sacramento are working hard to bring OZ investments to their communities. 

“Baltimore definitely wants to be viewed as the leading city as it relates to OZs,” said Seigel. “It wants to be the most proactive and attractive city for OZs and bring in investments across the city.” 

Baltimore established the Neighborhood Impact Investment Fund as part of a broader community development framework, which, in part, helps bridge the capital stack of OZ investments. Money for the Neighborhood Impact Investment Fund is raised by leasing city-owned parking garages. Seigel said his office is helping OZ developments tap into many other state and local programs, including the enterprise zone tax credit, historic and architectural preservation credit, brownfield credits for real estate developments, grocery store tax credits for building grocery stores, and many others. 

Sacramento is also dedicated to helping attract OZ investments. 

Sacramento is looking into dedicating a portion of the revenue from the Measure U 1-percent sales tax to help finance OZ developments. The funds from Measure U may also be used to ramp up staff to provide ongoing facilitation from the city’s development action team. Sacramento is also dedicated to streamlining the entitlement process for OZ investments. And, the city will use infrastructure and public works money to help finance OZ developments. 

Sacramento continues to fight for more tools to pair with the federal OZ. “At this point in time, we have the opportunity to lobby the state administration to mirror the federal [OZ] incentive with a state incentive,” said Fritzsche. 

“We were impressed by the amount of permit streamlining and support for development proposals we have received from the city of Sacramento,” said Arnold. “Because the census tracts on which OZs are based can include both city and unincorporated county properties, good coordination among local governments is important.”

Dickson said Gov. Hogan’s office in January submitted a proposal to create three new programs to help OZ developments, which still need to go through the state Legislature. The first is More Opportunities for Marylanders, which provides a tax incentive for businesses that create jobs located in OZs. The second is a fund for workforce training for businesses in OZs. And, the third is the Maryland Technology Infrastructure Fund to provide incentives to build advanced faculties and programs to support Maryland’s thriving cyber security and life sciences ecosystems.

Birmingham inspired the creation of a new OZ fund, the Birmingham Inclusive Growth (BIG) Fund. The BIG Fund has two boards (the advisory board and the community investment board) designed to enhance the life of Birmingham’s residents and provide a return for investors. 

The city is one of the largest landowners within Birmingham. Carpenter is looking into how the city can use that real estate to make OZ developments more viable. 

Challenges

While the OZ incentive has no built-in guardrails to ensure the benefit goes to low-income people and communities, many industry practitioners have that focus in mind.

“We want to see this tool used in places and for people that really need it,” said Flachsbart. 

While Arnold is concerned the OZ incentive may bring gentrification, she agrees the incentive should be used to benefit low-income people. “How can we benefit low-income communities in Sacramento?” asked Arnold. 

“The legislation doesn’t require community benefit,” said Seigel. “It is important to make sure locals know about the incentive so they too can use it.”

Flachsbart said, “It’s been hard getting national funds to invest in smaller projects. ... Out of state funds don’t have the risk tolerance for small deals.” 

“My personal concern about OZs is the speed and timing,” said Arnold. “There is pressure with deadlines for investors. They only get 180 days to reinvest capital gains. Community-based organizations aren’t used to that same speed and pressure.” 

Finally, Dickson said, “Further guidance is needed to enable investors to invest in more than just local service based businesses.”