“First as tragedy, then as farce.” It’s a familiar phrase for a story that, at this point, is all too familiar. Affordable housing is once again under attack, this time by a federal scheme that threatens to turn poor neighborhoods into mini-tax havens for the wealthy. They’re called Opportunity Zones – specially designated census tracts meant to encourage real estate investment in poor areas by offering tax breaks for investors. But what began as a kairos for wealthy philanthropy is slowly turning out to be a boondoggle for the most distressed communities in America, who yet again find themselves at the end of a long history of failed place-based initiatives.
The theory was that OZs would supercharge capital investment into businesses in poor neighborhoods, spurring job growth and reducing wealth inequality. Largess aside, investors would receive sizeable tax breaks on their capital gains (profits made from selling investments like real estate), either in the form of deferring capital gains tax or outright elimination of capital gains tax.
What does it take to become an OZ? A neighborhood has to have a poverty rate of at least 20% or a median family income at or below 80% of the area’s median income. In 2018, then-Governor Ralph Northam nominated 212 neighborhoods across Virginia. Thirty-two of which are in Hampton Roads, with Norfolk receiving 16, more than any other city in the commonwealth. These include some of the poorest neighborhoods in Norfolk, such as Park Place and the surrounding ODU area, Military Circle, and the entirety of St. Paul’s Quadrant.
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The brainchild of billionaire Sean Park (of Napster fame), OZs were drawn up by Parker’s ambiguously-named lobbying pop-up: Economic Innovation Group. EIG’s thesis found a willing audience in the Capitol, whose bi-partisan appetites were whet by the promise of a bill that could both alleviate austerity and give tax cuts to the wealthy. Tim Scott signed on with Corey Booker, who was eager to administer a dose of poverty-busting panacea to what he referred to as “domestic emerging markets.”. To some, it was a win-win: the most extensive place-based program since the 1990s and another notch in the belt for the all-boats-rise stalwarts. To others, it was a thinly veiled attempt to pay lip service to the poor corners of America while pushing a mission that put mammon over alms. Others outright called it “gentrification on steroids.” But when it quietly slipped into the 2017 Tax Cuts and Jobs Act, barely anyone blinked. Save for the 1% whose ears perked up at the dog-whistle tax cut, or as one Goldman Sachs analyst told me, “we prefer the term tax advantage.”
Private investment firms raised almost a billion dollars within the program’s first year. By the end of 2021, firms were sitting on a war chest of over $20 billion, with $15.5 billion allocated for residential, not commercial, investment. (For its part, the IRS says firms raised $29 billion in 2019).
“Only the Rich Can Play.”
For Norfolk, OZs might seem therapeutic to the city’s history of redlining, which saw a dearth of economic investment in poor majority-Black neighborhoods throughout the 1900s. Indeed, 20% of Norfolk’s residents live in an OZ. Of that 20%, 60% are Black. OZs should be directly benefiting residents in Norfolk’s most distressed areas. The problem? Preliminary data suggests otherwise.
With the first batch of OZ studies out now, the results tell a disturbing, if unsurprising, story. Rather than benefit poor residents, OZs are fueling gentrification and doing little more than carving up pockets of poor cities to serve as mini tax-havens for the wealthy to park their cash. A study in Urban Affairs Review found that neighborhoods already gentrifying were nearly twice as likely to be chosen as an OZ compared to non-gentrifying but equally qualified communities. The study measured gentrification by increased home prices, household income, rent, and college-educated residents. And while some of the data is mixed, the most comprehensive study on OZs to date shows OZs are also contributing to gentrification. Real estate prices in OZs jumped 4-6% relative to other neighborhoods, both eligible and not. Such spikes in real estate often come with rent hikes, putting increasing pressure on the impoverished residents of OZs.
Norfolk reflects the national trend. Preliminary data from the National Community Reinvestment Coalition, a non-profit that promotes community investment, finds that 10 out of 16 OZs in Norfolk are in or adjacent to gentrifying tracts, measured as a change in home value and income, college education, and wealth inequality.
Worse still, a recent report to Congress revealed that 84% of OZs had received $0 worth of investment. Instead, half of all OZ investments go to the “best-off 1% of zones.”
Cash-out these numbers and the picture becomes clear: Investors are using OZs for parking their cash in lucrative residential real estate markets, reaping tax cuts, while communities most in need of investment are left behind.
The activity mentioned above should come as no surprise given the fine print – or lack thereof – governing OZs. Buried beneath the promise of opportunity lies a maladjusted structure that fails to stem the tide of rampant housing speculation. OZ investors are not required to disclose which purchases came from OZ money, nor are OZ investors mandated to report on the community impact of their investments. OZ investors are not liable to follow any social-impact guidance for making investments, nor are OZ investors required to say where their money originates. Furthermore, the OZ program is only open to institutions- individuals are not eligible to participate. That entails that the vast majority of OZ residents have no option of becoming stakeholders in the future of their neighborhood. These lack of guardrails on OZs have transformed poor areas into places where, as David Wessel put it, “only the rich can play.”
Sean Washington, Norfolk’s Assistant Director of Economic Development, acknowledges “it’s challenging.” Without guardrails, cities like Norfolk have little recourse to keep OZ investments focused on community benefit, except for city-owned land. “(OZs) were never a silver bullet,” Washington said, “it was meant to be a tool if you know how to leverage the tool.” Leveraging this tool has meant building a “bottom-up” strategy to make community voices heard. In a year’s worth of forums and workshops with neighborhood leaders, non-profits, and churches in OZs, Washington sought to generate “holistic community engagement” on how to get the most community benefit out of the OZ program. For OZ residents, their mandate was clear: “business focus first,” Washington said, “really being able to answer the question of economic mobility,” and “closing generational wealth gaps.”
Norfolk plans to create its investment fund to make good on that mandate. Internal documents obtained by the author detail Norfolk’s plan to build an investment consortium to support local businesses in OZs. Structured as a non-profit and governed by a seven-member board (one from each ward), the Norfolk Opportunity Zones Consortium would draw funding from local non-profits, such as the Hampton Roads Community Foundation. (Disclosure: Hampton Roads Community Foundation is a financial supporter of the Urban Renewal Center). Though Washington acknowledges the plan is a “draft version,” derailed due to shifting COVID-19 response, the goal was to provide businesses with “well-rounded support from a funding standpoint to be successful.” When asked whether the consortium would invest in affordable housing, Washington acknowledged it’s possible, but it’s outside the fund’s focal point. At the time of print, there’s no timeline for when the fund will become operational.
When it comes to Opportunity Zones, we can ask ‘opportunity for whom?’ For now, the answer is clear. OZs allow the wealthiest among us to turn poverty into a tax cut. All the while, the beleaguered program shows minimal signs of being reformed. Congress made efforts to amend the program, but such efforts have stalled. In the meantime, investment firms continue buying up housing in the poorest neighborhoods across the country, exactly where and for how much, no one knows. We’ve been here before: Public Housing, Urban Renewal, Empowerment Zones, Enterprise Zones, and now Opportunity Zones. History is repeated, first as tragedy and this time as farce. Because this time it comes with a sales pitch about opportunity.
Alex Fella
Alex Fella is a writer and researcher, his work focuses on the built environment and the natural world. He is the Director of Research at the Urban Renewal Center and the founder of CityWork, an organization that empowers nonprofits with research and data mapping. He is a 4th year fellow at the Canadian Psychoanalytic Society & has a master's in Philosophy from Yale University. He enjoys fixing old cars and rooting for the Montreal Canadiens
