Arkansas: The Turnaround State
How Opportunity Zones Could Help Disinvested Communities
BY Matthew PettY, Principal, Infill Group
Every city is nostalgic for the way things used to be. Daytrip through a dozen Arkansas downtowns and you’ll see why. There are a few downtowns that are remarkable for their ongoing success, but an honest evaluation shows most are still struggling with foundational challenges. Each decaying parking lot and empty storefront serves as a reminder that something critical to the local economy is still missing. Opportunity Zones may be able to help.
There is no immediately apparent reason these communities don’t thrive. Spend time with the people in these places and you’ll recognize their spirit is indomitable. Hope is alive and the culture runs deep. Yet try as their leaders might, they aren’t recovering to their former vitality. It’s because the private sector can’t achieve the short-term gains financiers usually require.
Where they are designated, Opportunity Zones could help because they make long-term investing more attractive. Instead of seeking a profit just one, two, or three years ahead, investors earn much higher returns if they wait a decade. The new Zones incentivize the kind of long-term thinking cities need their private sectors to adopt to make their communities thrive again.
This isn’t to say private investment will be enough. Distressed downtowns and challenged neighborhoods aren’t the result of a simple market failure, and no new program will be a magic wand that fixes decades of neglect and disinvestment. It’s still true that fixing and maintaining downtowns requires deliberate and unending attention; great places that don’t get ongoing cultural and infrastructural investments become forgotten.
Municipalities alone just don’t have the resources to invest and achieve the required scale, but they can lead catalytic civic projects and implement other tactics to guide private sector decisions. The most critical strategy is to lean in to their role as coordinator of development activity more broadly. In embracing that role, wise city leaders will recognize how they can use Opportunity Zones to launch and sustain targeted revitalization efforts.
The way Opportunity Zones work is by changing the way taxes are treated when a qualifying property or venture is sold. The longer a property is held, the bigger the tax benefit for the investor. Investors realize modest benefits if they hold projects for at least five years and more if they hold it for seven. The biggest break comes after 10 years, when all capital gains associated with a qualified investment are eliminated. Add it up and this benefit amounts to post-tax investment returns that can be more than 1.5 times the returns that would otherwise be achieved.
To qualify for the benefits, a special Opportunity Fund has to be created to invest in businesses and real estate within designated Opportunity Zones. Such a fund could have ownership in a portfolio of projects across multiple Opportunity Zones or it could be a single-purpose fund that invests in a single project. That means within Opportunity Zones, cities can coordinate boutique developers, production house builders and larger equity funds to orient market activity toward long-term improvements in the zones that need investment the most.
New funds are starting up in 2019 as the federal government continues releasing long-awaited rules and guidelines. CatalyticOZ fund in Arkansas is attempting projects in every corner of the state and working exclusively in Arkansas. Their most ambitious projects are in Pine Bluff, formerly one of the most magnificent downtowns in the whole South and now a city with so much grit and determination that it’s impossible not to root for its success.
How does anyone decide to make big investments in downtowns and districts like Pine Bluff’s? Until Opportunity Zones, hardly anyone did. To be clear, there were seeds of reinvestment and revitalization sending out roots; they’ve always been there in the locals hanging on to keep the haircutters open and owners risking it all to serve coffee or keep the barbecue pit smoking. But even as the city signals its commitment to new multimillion-dollar civic facilities, windows are getting shuttered and buildings are being demolished.
“Opportunity Zones turn singles into doubles and turn doubles into home runs,” explained Tom Reilley, a Director at CatalyticOZ, at a fundraising presentation in March this year. “We wouldn’t be able to raise money to invest in these locations otherwise.”
Reilley’s comments reflect an observation many city leaders make about their revitalization ambitions. The private sector can invest anywhere, so city leaders trying to launch and sustain redevelopment efforts understand they have to convince investors their city offers an advantage over others. According to Reilley, Opportunity Zones can be that advantage.
CatalyticOZ’s investments in Pine Bluff aren’t one-off attempts at short-term profits. The math of the Opportunity Zones makes long-term bets the best strategy, and makes investors more engaged in taking the necessary steps to protect and enhance their original investment. Often, that means the investment does best when multiple ventures can be coordinated to complement one another.
For CatalyticOZ in Pine Bluff, for instance, that means restoring one of the most magnificent hotels of the early 20th century, a blues club and bar, constructing new housing and supporting the independent businesses that are already taking root in downtown today. It’s unlikely any of those investments alone would be competitive without developing, aligning and supporting these other endeavors. Taken as a collective effort, these projects add value to one another and thus grow the necessary positive economic ecosystem over time.
Projects that add value to one another are the secret sauce that makes long-term value so attractive in Opportunity Zones and why municipal coordination of Opportunity Zones is critical. It takes the entirety of local and regional economies to sustain great places. Building a powerful and resilient place requires intentional and transparent coordination intended to guide the development sector to those outcomes more quickly and with greater certainty than hands-off or wait-and-see approaches can guarantee.
In simple terms, cities need a good plan for coordinating Opportunity Zone development and everyone needs to know what it is. Cities who don’t coordinate Opportunity Zone development from the front end could miss out on the most important community benefits of the program. Having a plan isn’t just about using time and resources efficiently or making sure the market can take calculated risks; it’s necessary for cities that want to address the principal criticism of Opportunity Zones. Because the tax benefits only accrue for investors who are able to make investments from the profits of other ventures, the program has been criticized as yet another perk that only accrues for the already wealthy. It’s a fair criticism because that’s a likely outcome in cities that don’t coordinate Opportunity Zone activity for the broader community benefits they can create.
The difference between a useful plan and a plan that gets ignored is as simple as whether or not it clearly spells out what the community needs to thrive. If the principal need in an Opportunity Zone is housing, commercial or entrepreneurial reuse of existing spaces, cities must enlist Opportunity Zone developers to deliver precisely those things. And, in places where all three are needed? It is vital for cities to not lose sight of the whole vision when the first project comes along. With each success or failure, cities must refer to their plan, make an evaluation, and ask “What’s next?”
That “What’s next?” question must always be answered in consideration for your community’s long-term goals. Understanding your own long-term aspirations for your Opportunity Zones is what it takes to recruit Opportunity Funds large and small to help you implement your plan. With Opportunity Zones, cities finally have a convincing financial argument to coordinate long-term, complementary investments in their communities. If it’s your job to advocate for investment where you live, you owe it to your neighbors not to let it go to waste.