About a third of people who marry in 2021 will divorce before their ten-year anniversary. [1] That’s right, one in three couples who share vows, promises, goals, and dreams, “till death do us part” will peace-out long before 2031, go separate ways, pursue new opportunities, and be forced to reckon with messy financial and familial entanglements.
For opportunity zone investors, the ten-year hold presents the greatest opportunity for significant reward - assuming the asset has appreciated - and the risk side of the investment can be defined as pretty much each of the preceding 3,649 days. 

For city leaders, elected officials, and economic development professionals (together, local leaders) the time frame, and even the definition of success can vary and be influenced by a wide range of considerations, including but not limited to social, environmental, political, economic, and community priorities. And since political cycles tend to last for four years, not ten, these priorities, and the personnel who carry them out, may change at least one time, and maybe twice - over the course of a ten year investment. 

Here is the groundwork for public and private sector industry participants, including revealing the common goals and divergent priorities, and to daylight some of the assumptions about the ‘other side’, in order to create a shared understanding of what we’re all trying to accomplish, which by the way is one of the top recommendations from marriage experts across the nation.

WHAT SHOULD OZ INVESTORS UNDERSTAND ABOUT INVESTING IN HISTORICALLY UNDERSERVED COMMUNITIES? 

First and foremost, investors and developers need to recognize that this is a ten-year project, and more than that, a ten year partnership. You’re investing in a neighborhood, so you’ve got to believe in the neighborhood’s potential, and focus on the value you can bring to it over time. It’s not enough to simply look at your site, your projected IRR, and your cap rate as you might a three or five year hold. Take note of what’s happening in the neighborhood today, recognize what has gotten the neighborhood through downturns in the past, and most importantly, be sure you’re fully bought-in to the community’s vision for growth and change for the coming decade.

Recognize that with only a few exceptions, you’re investing in a community that has been off the radar of institutional capital for generations. The first responsibility of OZ investors is “humility.” It’s vital to remember that your project isn’t going to save the community, nor are you the savior. Instead, see your role as a partner who is bringing resources, expertise, and of course, capital, to partner with existing residents and stakeholders.

Investors should partner with sincerity from the outset. Go speak with the people who live there and you may find plenty of people who are skeptical of any change at all, and fear it may displace them. Keep in mind, they have reason to be skeptical, as a great number of OZs face challenges that are the direct result of policy decisions made in the past. Let people know how your project will be helpful to them. Let them know you’re here for the long term, and your success is tied to the success of the people in the neighborhood. It’s in your business interest to be well-engaged. Share your diligence and your findings, and consider bringing a local community development partner onto your team with the mindset that you can learn from them, while building trust, which will help the project in the long-term.

You’re working in an area where the impacts (both positive and negative) of your project may be outsized compared to markets where investment is more frequent. Be candid about what is needed to make a project work, and forthright about your long-term commitment and the value you can add. View your project as one piece of the overall plan to improve the economic prosperity, and the lives, of people living and working in the neighborhood.

WHAT SHOULD LOCAL LEADERS UNDERSTAND ABOUT INVESTOR PRIORITIES TO HELP ATTRACT AND SUPPORT THEIR PROJECTS?

First and foremost, investors are seeking return on investment. There are a lot of deals out there in a lot of communities, and OZs alone don’t turn bad deals into good ones.

Savvy investors are looking to partner with local leaders who understand and are focused on helping to reduce project risk. In the early stage, leaders should have a plan to help clear the hurdles necessary to get new business and real estate projects approved and underway quickly. Local leaders should consider sitting down with investors and developers to gain an understanding of what’s possible before doing community input, because it’s very possible that what investors are able to do won’t line up with the community’s wish list.

Many investors spend most of their time analyzing what can go wrong and how to mitigate risk, while public leaders tend to focus on a wishlist of what they want to go right. It’s not enough for local leaders to sit back and be reactive. If you’re a local leader hoping to catalyze new projects that leverage OZ capital, you need a full sense of the tools and partners you can bring to the table. When working with prospective investors, speak to specific incentives, policies, partners, capital resources and the improvements that can and will be leveraged to get projects done, and support growth over time. Be specific about timelines and commitments.

Finally, remember that most real estate projects are done with five year holds with a conceivable IRR. In OZs, investors are betting on an equity multiplier, and that means they’re focused on the area around their projects to be successful, as they may be planning to divest in ten years’ time. Successful local leaders focus on the issues that impact success. Nobody can foresee the future, but leaders should have a clear plan for how the community will grow over time. Bottom line, the tax benefits only work if there is a profitable project.

WHAT ACTIONS MAY LOCAL LEADERS BE TAKING THAT WORK AGAINST ATTRACTING AND SUPPORTING OZ INVESTMENTS

It’s vital that local leaders understand the program for what it is - a private sector tax incentive. In fact, unless the public sector has a defined role as a project partner, there simply is no requirement that the government even be at the table beyond the typical project approval process. Leaders with OZs in their community should understand the program’s goals and its details and educate local stakeholders and elected officials about the possibility to leverage the incentive to attract and support projects that bring community benefits.

To this end, local leaders who wish to leverage the incentive to attract new projects need to adopt a pro-investment mindset, and a strategy to support growth over time. The public sector needs to remember that investment begets investment. Cities don’t stagnate, it’s either investment, or disinvestment. With this in mind, it might be a good idea to take a look at the typical project approval process and see where project entitlements and approvals can be accelerated. Where local leaders have the ability to approve certain projects by-right (reducing entitlement risk), they should look for and communicate those strategic advantages clearly to the investment community.

WHAT ARE THE SHARED GOALS THAT PUBLIC AND PRIVATE SECTOR PARTICIPANTS SHOULD BE FOCUSED ON?

Every OZ provides the possibility to build new businesses and real estate projects that can provide significant return to investors, and create immense value for residents, workers, and stakeholders in communities that for decades have struggled to attract new investment. City leaders and the investment community share a goal of seeing the OZ neighborhood become more prosperous over time. In Evansville, Indiana, the city worked closely with a developer to create a shared set of project goals. The city came to the table with their own internal goals for housing and other community priorities. In doing so, the city and the developer were able to discuss how they could help each other achieve their respective goals, and this made for a great partnership.

When you consider that an OZ project may be held for ten years or longer, it behooves the city and developer to coordinate their strategies and their investments for maximum success. Consider how public investments in infrastructure, education, workforce training, transportation, and the public realm can be aligned with investor preferences for project delivery and appreciation.

In low-income communities, city leaders need to be focused on community assets like housing, jobs, reducing blight, environmental improvements, and improving access to education and healthcare. A good OZ project can support many of these priorities, which is why coordinating public and private sector investment is key to creating financially successful projects that also improve lives. There’s nothing more valuable than getting a proof point, especially in underserved communities. The first investment can be a catalyst for new projects, and the velocity of capital keeps people at work.

WHAT ARE THE COMPETING PRIORITIES AMONG THE PUBLIC AND PRIVATE SECTOR?

Public agencies are responsible to their local constituents and driven to enable a better quality of life for residents and business owners. As such, they have expectations for what a project should contribute to their community. On the other hand, private sector OZ investors are not philanthropic, they need to be able to make a profit, and they have choices as to where to invest their dollars. This raises the issue of value creation, and the tension of how value is shared between the investment community and local residents and stakeholders.

The unique nature of the ten-year hold for OZ investments creates a remarkable opportunity for the two parties to get aligned, in that the overall success of a single project is tied to the prosperity of the surrounding neighborhood, its residents, and stakeholders. What can a community reasonably ask for in terms of affordable housing and other benefits? What should an investor reasonably expect in terms of public contributions, incentives, or other support from the community? This is where the opportunity for real partnership arises as successful investment is good for the investor and the community.

Long term partnerships are key to the OZ investment success, so when evaluating a new community, aim to understand their overall goals for growth, the specific investments they intend to make, and the efforts they will make to support project success.

The shared goal is value creation. How each side defines success, and the metrics they use to measure it should be clearly defined as part of any initial conversation and central to discussions going forwards. At the end of the day, investments in OZs is about creating long lasting relationships.

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Special thanks to Josh Mann of IronOre Investments, Kurt Overmeyer of Seaside California, Gil Keinana of Local Equity, Matt Gadus of House Investments, Kunal Merchant of CalOZ, Michael Episcope of Origin Investments, and Payton Chung of WestOverGreen for their contributions.

[1] According to fatherly.com

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