Investors are already lining up with billions of dollars committed to use the new Opportunity Zone tax break, and developers are already starting to strike some early deals for Opportunity Zone investments. But by design, there is no centralized process for Opportunity Zones; and there are no requirements that these investments create affordable housing, homeownership, living wage jobs or anything of benefit to current Opportunity Zone residents and businesses. The current legislation includes no federal requirements to disclose who’s using it and where. Nor is there any dollar limit on how much investment the tax break can support.
With few exceptions, right now the only meaningful limits on what developers can build using Opportunity Zone tax breaks are developers’ own ability to convince investors of the returns their projects might deliver — and zoning.
A new study from the Urban Institute, published today, looks at three different cities — Washington, D.C., Cleveland, and Fresno, California — to examine the question of whether the zoning inside their Opportunity Zones already reflects the needs of residents and businesses in those areas.
“In these communities you want more engagement, more voice, more of the community setting its own destiny, hopefully in alignment with the market, developers and the public sector,” says Solomon Greene, a senior fellow at the Urban Institute and lead author of the study. “But Opportunity Zones do nothing to facilitate that — actually quite the opposite. The incentive happens regardless of whether or not there’s a plan in place, regardless of whether or not the community even knows that it’s happening.”
While the idea was floating around for a few years prior, Opportunity Zones were created as part of the Tax Cuts and Jobs Act passed at the end of 2017. The legislation gave governors just a few short months to recommend census tracts for Opportunity Zone designation to the U.S. Treasury. To be considered eligible, census tracts needed to have a poverty rate of at least 20 percent, or a median family income less than 80 percent of area median income, or one of a few other more obscure qualifications. Governors could choose up to 25 percent of eligible census tracts in their states for Opportunity Zone designation.
Out of some 43,000 eligible census tracts around the country, by June 2018 some 8,700 census tracts had received designation as Opportunity Zones, across all 50 states, five U.S. territories and the District of Columbia. Governors’ offices ranged from very open and collaborative to not at all open or transparent in their selection process. Pending any further legislation to amend the law, the designations are set in stone for ten years.
Designated Opportunity Zone census tracts are home to an estimated 35 million people, a majority of whom are people of color. That fact has some fearing a repeat of the decimation of black communities under the Interstate Highway Act and the era of Urban Renewal a.k.a. “Negro Removal.”
In an earlier analysis, the Urban Institute found that some Opportunity Zone census tracts were already receiving significant new investment and showing signs of gentrification, though many others were not. It’s too early to say whether investors will flock mostly to projects in gentrifying areas where properties are already appreciating in value or be more willing to speculate on areas with the lowest values today that might provide more bang for their buck in the end. Zoning and other land-use regulations have a lot of power to help determine that balance.
“Looking out a couple years, it will be interesting to see later if cities really feel if they need to revisit zoning and land use either to facilitate more beneficial projects they want to see or do places like D.C. start to tighten controls if they see projects being incentivized that don’t need it or really run counter to their priorities,” Greene says.
With the new study, funded in part by the Kresge Foundation, the Urban Institute research team found a spectrum of mindsets across the three cities. (Kresge also provides funding to Next City.)
In Fresno, Greene says, the city underwent a major rezoning initiative not too long ago, intended to spur development in the downtown area and long certain transit corridors. City planning and economic development officials were able to work with the California governor’s office to align Fresno’s designated Opportunity Zones with those areas. Governor Jerry Brown’s office actually designated more census tracts in Fresno than the city requested in 2018, which ended up aligning with new Governor Gavin Newsom’s priorities of driving more investment to California’s Central Valley versus the Bay Area or Los Angeles, according to Greene.
With their city still struggling to attract investment, Fresno officials told the Urban Institute that they hope Opportunity Zones can be “an extra tool” to achieve the goals already set forth by that earlier rezoning process, which took place in 2015.
D.C. was at the opposite end of the spectrum, as a city that has seen itself transformed by new investment over the past decade, experiencing the most intense displacement of black neighborhoods of any major city across the country. The district had a unique situation, being without a state government, which gave Mayor Muriel Bowser’s administration total control over which zones it designated.
With the city already in developers’ crosshairs, “there was more of a sense in D.C. that the city could steer the ship and be more selective in terms of what zones it designated and tailoring those investments through public resources including land or subsidies,” Greene says.
As Greene points out, D.C.’s Opportunity Zones include significant land zoned for “institutional” use, such as the area including the former Walter Reed Medical Center or St. Elizabeths East Campus. These are areas that include significant public ownership of property, and significant public engagement on the future of that property.
“I don’t know how robust [that public engagement] was, but officials could say we were already building upon a public planning process,” Greene says. “Where public land or public money is at play, cities can exert more control over what happens in zones.”
Indeed there are other cities and also states, like California and New Jersey, that are exploring ways to sweeten Opportunity Zone deals with additional public subsidy as a carrot to help ensure that there are local hiring and contracting or affordable housing provided through those investments.
Cleveland was somewhere in-between Fresno and D.C. along the spectrum, Greene says. The city was able to align its Opportunity Zone designations with previous plans for economic development in historically disinvested areas, such as Mayor Frank G. Jackson’s Neighborhood Transformation Initiative. Combining $25 million in city funds with $40 million in financing from banks, the initiative targets four under-resourced neighborhoods — Circle North, East 79th Street, Buckeye-Woodhill, and Clark-Metro — that are adjacent to areas of growth. The city planning director told the Urban Institute that the city thinks Opportunity Zones will be “a real benefit, an accelerant to the work that we’re already doing.”
Greene also notes that about half the city overall is zoned for single-family or duplex housing, but only 30 percent of Cleveland’s Opportunity Zones are zoned for one- and two-unit residential structures.
“We thought it would be interesting to take a look at the local zoning to see if cities over-sampled or under-sampled certain types of zoning inside their Opportunity Zones,” Greene says.
Despite these three cities all being in different regions, with different challenges and varying levels of incoming investment, all of them are looking for Opportunity Zones to help achieve existing priorities — as opposed to suddenly feeling the need to expand or re-adjust priorities with the new tax break on the table. But the study doesn’t look into the question of whether existing plans or entire planning departments have been completely co-opted by the real estate industry, as author Samuel Stein argues has happened, in his book, “Capital City.” Greene can’t rule out that possibility at this point, for these cities or others.
“There’s no transparency and no public reporting required [for projects financed through Opportunity Zone tax breaks], so if the underlying planning process is flawed, Opportunity Zones will do nothing to fix it, they’ll probably just make it worse,” says Greene.
One thing the researchers didn’t find was even stronger assertions of local control over development in Opportunity Zones. The prime example of that phenomenon so far has been in Boulder, Colorado, which placed a temporary moratorium on construction and demolition permits in its lone Opportunity Zone. Boulder City Council has since passed various exemptions to the moratorium based on previously-established public priorities.
“We were thinking across these three cities we were going to hear something along those lines, maybe not quite a moratorium but some kind of clamping down, and we did not find that, though we only looked at three places,” Greene says.
Greene says the Urban Institute has no current plans to do additional studies around zoning and land use inside Opportunity Zones for specific cities. It is planning, however, to do more comparative analyses of cities’ zoning and land-use regulations overall. But it’s a lot of work. For the zoning maps in this study, the researchers combined different local zoning designations into similar groups for comparison across cities.
“We do plan to do more maps of cities’ zoning in ways to compare across different cities,” Greene says. “But it’s tough work. In some ways we were relieved after talking to planning departments in these cities that they found these maps were accurate enough to be of use, at least for starting conversations.”
EDITOR’S NOTE: We’ve clarified the paragraph describing how the California governor’s office allocated Opportunity Zones, to reflect an administration change.
This article is part of The Bottom Line, a series exploring scalable solutions for problems related to affordability, inclusive economic growth and access to capital. Click here to subscribe to our Bottom Line newsletter. The Bottom Line is made possible with support from Citi.
Oscar is Next City's senior economics correspondent. He previously served as Next City’s editor from 2018-2019, and was a Next City Equitable Cities Fellow from 2015-2016. Since 2011, Oscar has covered community development finance, community banking, impact investing, economic development, housing and more for media outlets such as Shelterforce, B Magazine, Impact Alpha, and Fast Company.