New Financial Tools for Place-Based Impact Investing and Opportunity Zone Funds

Stephen MaltaOpportunity Funds, Opportunity Zones, Place-Based, Research0 Comments

By Stephen Malta and Lauryn Agnew

Congress has given us a new tool for Place-Based Impact Investing (PBII), a field that is evolving rapidly.  These investment tools fit the needs of the whole spectrum of investors whose risk, return and impact goals merge for community and economic development to revitalize underserved neighborhoods. The combination of these new financial tools provide investors with the opportunity for local impacts and competitive returns, and can defer and reduce capital gains tax liabilities.  

Recently, Darren Walker, President of the Ford Foundation from his seat as Chair of the Impact Investing Alliance expressed very clearly that we need to disrupt ourselves, get uncomfortable, admit we can’t grant-make our way out of this with just the 5% of our assets, and think differently about how we deploy our capital. He advises:

To make more capital work for more people and make the markets work for more people…if you work at foundation, ask your president, ask your board, why aren’t we using our endowment? Not PRIs because PRIs are grant proxies. So it’s a 5% equation there. If you have a relationship with these organizations, make demands.  If you have an account at Morgan Stanley or Merrill Lynch, buy products or demand products. Hold them accountable, hold us accountable to our mission. Demand that we actually deliver with a sense of urgency on our missions. If you and we do that, we can realize a world where capital is used for purpose and impact is at the center of the very work that we do.”

A movement is now building in the United States as more community foundations make large commitments from their endowments towards mission-related investments with place-based impact investing.  With developments that have emerged in the UK, the case has been made in the US for a more disciplined measurable outcomes-focused impact investing revolution, and now we are turning towards a catalytic year ahead for equity investments in the regions of the United States. At the federal level, the policy environment for impact investing has changed with the enactment of new bipartisan legislation, the Investing Opportunity Act.

Since the Investing in Opportunity Act was passed as a provision of December’s tax code, Opportunity Zones are now emerging. These are urban and rural zones designated (see map) by state governors that have been overlooked by private investment.  On Monday April 9, 2018, the U.S. Treasury and IRS announced its first approval of Opportunity Zones for 15 states including California and 3 US territories. On Wednesday April 19, 5 additional states were approved along with a territory. The remaining 30 states had a deadline of April 20th to make their census track designations, of which all of these states participated in requesting the extension.

Jeremy Keele, who was instrumental in driving this federal legislation as former CEO of the Sorenson Impact Center and who had recently stepped down to launch his own fund, shares his closing remarks on stage at the Winter Innovation Summit:

“This is not a heavily prescriptive piece of legislation in the sense that it is 500 pages long and spells out every little detail of this thing.  This is really a private sector mechanism that has been nudged into action or into force by policy. “This [new playing field] will be what we make of it…“we” meaning the practitioners in the room and in other places like this who are actually thinking about how you invest in these kinds of communities, how you create the kind of products and intermediaries that can absorb this kind of capital, how you raise this kind of money, and how you deploy it effectively to get better outcomes in the community which I think is what we all hope to see out of this.”

Over this coming month, all 50 states will have their designations announced for the opportunity to attract some of the $6 Trillion dollars that may be eligible to flow into these low-income communities (see map), that likely would not have received this capital. Investors are incentivized to flow private capital into these underserved communities through the capital gains deferrals and reductions, which are dependent on the time frame the investments are held.

While we have yet to see how much capital will flow from this potential $6 trillion pool of capital gains, a new major community impact opportunity has been unlocked. This opportunity is timely, and partly due to the efforts of the global impact investing community, we are more sophisticated and disciplined towards raising capital, measuring and reporting impact, and innovating impactful business models across the entire continuum of financial returns.  The United States will be watched for how we embrace these impact investing tools.

These new financial tools can leverage community capital towards local measurable impact in our communities with place-based impact investing. Involving stakeholders from within a community to respond to their own local community issues can be particularly effective towards creating positive community change.  Financial collaboration can be delivered at a regional level, to address regional issues that require an inherent regional collaboration to solve. Regional Place-Based Impact Investing research has modeled investment strategies for competitive financial returns and local impacts across all asset classes (Infrastructure, Real Estate, Private Equity, CDFIs, Stocks, and Bonds). The next step involves creating centralized community places—or “centers”—for stringent due diligence of local investment options across all classes that conforms inclusively to the full spectrum of investors, including those bound by a fiduciary responsibility.  

A regional Center enables all investors from the individual investors to single organizations and institutions to invest in their own communities.  The burden of due diligence for each investment keeps single investors from building diversified multi-asset class impact portfolios to effect positive change. Centralizing stringent institutional level due diligence for clearing local regional investment options across asset classes is a solution.  A Center can also convene for community collaboration and host the frictionless vehicles to make allocations towards regional investment inclusive of Opportunity Funds (O Funds), absorbing and deploying greater amounts of capital.

However, amidst major positive opportunity, a Brookings Institute article points out serious sentiments of caution, particularly around gentrification. The new legislation requires substantial improvements on real estate investments of existing property in Opportunity Zones of 100% over the cost basis within 30 months.  These substantial improvement requirements, while absorbing more capital for community investment, could indirectly encourage gentrification. However, there are successful examples of civic revival and inclusive prosperity as communities champion their own revitalization efforts.

Framing this new situation, John Lettieri, President of the Economic Innovation Group (EIG) discusses this new financial tool for community investment:

“This is not a moment to waste…And so the implementation process this year in particular is so important. It means that you need foundations, you need community organizations, you need investors, you need policymakers at the state and local level along with the federal level to all be thinking in concert with each other about how you build—it’s just a tool—right? It’s what you build around that.  What’s the strategy? How do we use this to catalyze a whole host of other activities that make it more than just the sum of its part in terms of a financial incentive, but make it a catalyst for a different type of behavior among ecosystem-wide on a systemic scale too. That’s what is so important about this is it’s really for the first time a systemic way nationwide to open up a different type of aperture for investors to engage in this big question.”

These zones enable deferrals and reductions of capital gains by rolling only the capital gains into an O-Fund within 6 months. This provides a significant opportunity for investors to exit highly appreciated assets while deferring and reducing capital gains taxes. The UK also has instituted a policy environment with a similar type of tax relief, offering 30-50% tax reductions to steer capital towards social impact.

Looking ahead, with further announcements from the Treasury and guidance from the IRS over 2018, O-Funds will soon begin to form.  These new O-Funds can compliment the emerging Place-Based Multi-Asset Class Regional fund strategies to provide more options and opportunities for revitalizing underserved communities. These tools direct resources and capital towards partnerships where public, private, and philanthropic capital can collaborate to strengthen the resilience, prosperity, and sustainability of our communities.


Additional Resources about Opportunity Zone Programs:

An interactive map of the zones

Steve Glickman, Co-Founder & CEO of Economic Innovation Group (EIG) on the Opportunity Zones program 

The Opportunity Finance Network

Enterprise Community Partners: Opportunity Zone Program Resources

Council of Development Finance Agencies – Opportunity Zones

Special rules for capital gains invested in opportunity zones

The Investing in Opportunity Act Factsheet

Treasury, IRS Issue Guidance On Opportunity Zones To Spur Private Investment In Distressed Communities

Opportunity Zone Webinar with Fran Seegull, John Cochrane, Rachel Reilly, and Andrea Armeni

Council of Development Finance Agencies

2017 SOCAP Policy Panel with Jeremy Keele and Jim Sorenson

White House Working Session – Including Steve Case and Jim Sorenson

Live Panel – Authors of The New Localism: How Cities Can Thrive in the Age of Populism – At the Winter Innovation Summit 2018

Article – Cities: Don’t Just Wait for the Feds by Bruce Katz and Jeremy Nowak

August 1st, 2018 podcast with Steve Glickman, Co-founder and CEO of the EIG on the Opportunity Zones program

Senators Tim Scott and Cory Booker Discuss Opportunity Zones Before Nation’s Counties moderated by John Lettieri

Leave a Reply

Your email address will not be published. Required fields are marked *