Historians have meticulously documented how government policies and racial discrimination combined to result in billions of dollars invested in the creation of white-only, middle-class suburbs across the United States, while systematically denying the same investment to black people and black communities. You can read about it most recently in Richard Rothstein’s “The Color of Law.”

The consequences of this history remain firmly entrenched, as evidenced by today’s racially-segregated metropolitan areas and astounding levels of racial-wealth inequality. With government backing to build their homes and cement what was, in most cases, the primary source of wealth, white homeowners left other groups in the dust. In Boston, according to a study funded by the Federal Reserve, white households have a median net worth of $247,500, compared with just $8 (not a typo) in median net worth for U.S.-born black households. In Los Angeles, another Federal Reserve-funded study found that white households in that city have 100 times the median net worth of black and Latino households.

The next big chapter of this history is probably being written as you’re reading this, thanks to the new federal policy known as “Opportunity Zones,” passed as part of the Tax Cuts and Jobs Act at the end of 2017. A broad array of affordable housing developers, community development lenders, venture capitalists, real estate investment platforms, local housing and economic development agencies, bankers, and others have already lined up to utilize the new policy. It’s intended to drive billions of dollars in private investment into communities of color and other low-income communities that previous policies have left behind. Whether the policy will actually benefit the current residents of those communities remains to be seen.

“If residents and intermediaries are able to organize effectively — and I don’t mean marching in the streets, but effective organizing in the sense of finding right tables to be at — to have sustained negotiations about the types of projects that are suitable, and developing the right criteria to ensure that the types of projects built or invested in benefit the local community first … If you’re able to do that, then you actually see benefits for everyone else as well,” says Christopher Brown, financial policy director at PolicyLink, a nonprofit research and advocacy organization that works in cities across the country. “The fear is that the status quo will persist, and we know how that will shake out.”

Regulatory Guard Rails, or the Lack Thereof

Even the name, “Opportunity Zones,” sounds straight out of a history in which phrases such as “urban renewal” eventually came to symbolize the exact opposite of what the words seem to mean. “[Urban renewal] means negro removal,” author James Baldwin once said, referring to the federal policy of encouraging cities to bulldoze entire neighborhoods at a time — neighborhoods often fully populated by black residents — to make way for highways, hospitals, large-scale public housing projects that later failed, or other public works. Opportunity Zones have a chance to avoid similar mistakes of the past, but the nature of the new policy leaves precious little time and not much legislative prerogative to put measures in place to avoid those mistakes.

In efforts to avoid those mistakes, Opportunity Zone proponents and critics have used another key phrase: “guard rails,” as in, this new policy doesn’t have any. Or at least, not yet. Some have compared the tax incentive to the mortgage-interest tax deduction, in that anyone with capital gains income will be able to claim it when filing their annual tax returns, without any transparency. Unless the Internal Revenue Service (IRS) says differently in its pending guidelines, the main method of enforcing whether the tax incentive meets its intended goal will be after the fact, through individual tax audits, potentially years from now.

Clearer guard rails, critics say, could help ensure that those benefits materialize while preventing any displacement as a result of new capital flooding into communities already facing displacement pressures. As the policy currently stands, analysts such as those at the nonpartisan Urban Institute fear the tax incentive could draw investors to finance luxury condos, hotel development or other investments with little benefit to and potential displacement of existing residents of opportunity zones.

While investors await key guidelines about the program from the IRS, including the actual forms to claim the tax incentive, some are already pushing ahead to source or cultivate deals for opportunity-zone investment — with varying degrees of regard for the needs of existing residents in those zones.

“I’m optimistic that this policy could result in investments that would not have happened and jobs that would not have happened,” says Teri Williams, president and chief operating officer of OneUnited Bank, the largest black-owned bank in the U.S. “I am concerned that it would benefit investors and not the community if we don’t have a say in how it’s done.”

The Opportunity Zone Selection Process

The Opportunity Zones policy works by offering capital-gains tax breaks to investors in exchange for investing capital-gains income into eligible businesses or projects located in designated opportunity zones. The idea was first laid out in an April 2015 white paper published by the Economic Innovation Group, co-authored by a researcher from the left-leaning Center on Budget and Policy Priorities along with a researcher from the right-leaning American Enterprise Institute, both based in Washington, D.C. Senators Cory Booker (D-NJ) and Tim Scott (R-SC) were primarily responsible for getting the policy into the Tax Cuts and Jobs Act. The inclusion of the policy in the tax reform act was a surprise to many and left many questions on the table, not all of which have been resolved.

“Although all the details haven’t been spelled out, it appears to be relatively simple to execute, so it gives our communities not only the opportunity to attract new dollars but also the opportunity to set up their own funds,” Williams says.

A Miami #BankBlack event organized by OneUnited (Credit: OneUnited)

OneUnited did manage to get a word in regarding the designation of at least some opportunity zones.

Rather than putting the power to designate opportunity zones into the hands of a federal agency, the new policy gave governors of states and U.S. territories the power to designate up to 25 percent of eligible census tracts as opportunity zones. To be considered eligible, census tracts must have poverty rates of at least 20 percent or median family incomes no greater than 80 percent of the surrounding area. Or they must be adjacent to such census tracts. Governors had until March 21 of this year to submit their proposed opportunity-zone designations for certification from the U.S. Treasury, or to request a 30-day extension.

According to John Lettieri, co-founder of the Economic Innovation Group, the opportunity-zone designation process was designed in part to avoid the abuse present in a previous federal program, the EB-5 Immigrant Investor program, wherein developers of luxury real estate have been able to gerrymander wealthy areas into customized investment zones that include enough distressed census tracts to satisfy that program’s requirements.

In contrast, “these are not places that were gerrymandered together,” says Lettieri. “Every census tract itself had to meet a prescribed threshold of need. It was a design feature to exclude that possibility.”

At the same time, however, the policy required no public engagement in selecting the zones. Some states had more open processes for selecting opportunity zones than others.

In Florida, where the Office of Governor Rick Scott took input on opportunity-zone designations from local communities, Miami-Dade County’s economic development agency worked with OneUnited to request that the state’s opportunity zones include black communities where the bank and the agency have prioritized economic development. Although based in Boston, OneUnited has branches in Miami and Los Angeles and offers banking services nationwide online.

“We were actively advocating in Miami-Dade for the communities that we operate in, which are Liberty City, Overtown, Miami Gardens, Opa-Locka, and North Miami, to get them into opportunity zones,” says Williams. “We were glad to see that most of the communities, or at least the low-income areas in those communities, were designated as opportunity zones.”

By June, all 50 states, five U.S. territories and the District of Columbia had designated their opportunity zones. Out of 42,176 eligible census tracts, 8,762 received designation as opportunity zones. This includes 230 “contiguous” census tracts, which are census tracts not eligible based on demographics, but which are adjacent to one or more eligible census tracts based on demographics. The legislation allowed for up to five percent of designated opportunity zones to be contiguous census tracts.

According to an analysis by the nonpartisan Urban Institute, governors designated census tracts that were a majority people of color overall, and disproportionately lower-income compared to the overall set of eligible census tracts. Some 78 percent of designated census tracts were also located in a metropolitan area. In other words, as Lettieri points out, mostly Republican governors happened to over-select for populations and areas that aren’t remotely Republican-leaning.

Will Low-Income Communities Really Benefit?

For some, the precise targeting of opportunity zones in low-income communities and communities of color is exactly the reason for concern. Too many of those areas, they say, already have too much capital, so the challenge is how to ensure that even the existing investments benefits historically marginalized residents.

“You have areas in California where you’ve always had an influx of capital,” says Paulina Gonzalez, executive director of the California Reinvestment Coalition, a network of 300 nonprofits advocating for and working in low-income communities and communities of color across the state. “It’s interesting to see opportunity zones where capital has never been an issue.”

The coalition is now circulating letters for its members to sign, directing municipalities or the state of California to consider enacting local or state-level guard-rail measures such as requiring community benefit agreements or mandating local hiring for any opportunity-zone investments, or creating inclusionary-housing overlay zones to ensure any opportunity-zone investment projects set aside at least some affordable housing. Currently, the policy has no such guard rails at the federal level.

“We believe the state, in designating these zones, has a responsibility to protect the communities that are already there and make sure they benefit from these zones,” says Gonzalez.

PolicyLink, which also launched the All-In-Cities Anti-Displacement Network earlier this year, is circulating its own letters for various strategic partners to sign and send to governors’ offices and the Treasury, outlining recommended guard-rail measures to protect against displacement. The recommendations include a call for federal regulators to clearly define what constitutes abuse in the Opportunity-Zone regulations. The idea is to short-circuit any projects that would result in evictions of tenants or small businesses, dramatic rent increases, and the loss of deed-restricted or naturally-occurring affordable housing.

“That’s the biggest risk,” says PolicyLink’s Brown. “Low-income folks [are] struggling and barely holding on as it is, particularly in urban centers where displacement pressures are already mounting. [Opportunity Zones] can only exacerbate that risk, because now we’re talking about a flow of unchecked capital without any proper guard rails.”

In its analysis of designated opportunity zones, the Urban Institute sought a rough measure of how many of those zones already were experiencing changes that could indicate the unwilling displacement of communities of color. Among the metrics they reviewed were the average housing cost burden, changes to median family income, and changes to the percentage of residents with a bachelor’s degree or higher as well as the percentage of non-Hispanic white residents. The Urban Institute found that only 3.2 percent of designated opportunity zones had experienced a sizable upward shift in these displacement metrics from 2000 to 2016. In comparison, 3.7 percent of all U.S. census tracts had experienced comparable demographic shifts over the same period.

Such demographic shifts weren’t uniform across the entire country, however. In Washington, D.C., 32 percent of overall census tracts experienced sizable upward shifts in the Urban Institute’s measures for potential displacement, as well as 21 percent of census tracts in New York City, 37 percent of census tracts in Oakland, Ca., and 40 percent of census tracts in Seattle. Not all of these census tracts had been designated as opportunity zones, but the disparities illustrate the challenges facing opportunity zones in some metros versus others.

“Areas where you have real displacement concerns, real gentrification concerns, it’s a real problem, but it’s not the primary challenge in most places,” says Lettieri. “The biggest challenge that most of these places are facing are disinvestment, depopulation, decline.”

Who’s Lining up to Take the Opportunity-Zone Plunge?

Lettieri’s Economic Innovation Group estimates that investors hold some $6.1 trillion in unrealized capital gains that would be eligible for opportunity zone tax incentives, although no one expects the incentives to attract all of that eligible money into opportunity zones. One number floating around community-development circles is an expected $30 billion of investment coming through opportunity zone tax incentives. Compare that to the annual $8 billion or so in annual Low-Income Housing Tax Credits, or the $3.5 billion allocated annually through the federal New Markets Tax Credit program, or the $3 billion or so for Community Development Block Grants currently proposed by Congress for next year’s budget.

Whatever the final number is for opportunity-zone investment, a diverse array of intermediaries is lining up to connect investors to eligible projects in opportunity zones, everything from affordable housing to economic revitalization to small-business growth.

BRIDGE Housing, a nonprofit that develops, owns, and manages affordable housing up and down the West Coast, has announced a target to raise $500 million from opportunity zone investors. That money will primarily go to affordable-housing projects already in its pipeline, typically developed in partnership with local or state affordable-housing agencies that provide additional subsidized capital to ensure projects are financially feasible while remaining affordable for low-income households. The nonprofit has around $3 billion in projects currently in development, representing some 5,000 units of new affordable housing construction and 4,000 units of existing affordable housing rehab projects. About a third of those projects are in opportunity zones, according to Cynthia Parker, CEO of BRIDGE Housing.

“I think some of the projects that would not have been feasible could be feasible through this program,” Parker says.

The Low-Income Investment Fund is also reaching out to potential opportunity-zone investors, some of whom, it says, have directly contacted its borrowers (mostly nonprofit or mission-driven affordable housing developers around the country). The community development lender says it has made more than 350 investments in what now are designated opportunity zones, out of more than 1,200 total investments across its history.

“We’re talking to 3-5 investors a week [about opportunity zones], whether we’re reaching out or people reaching out to us,” says Amy Laughlin, vice president for structured products and capital markets at the Low-Income Investment Fund. “I would say we’re getting a fair number of inbound calls because investors are really excited about the tax benefit available to them.”

Enterprise Community Partners, one of the largest nationwide developers, owners and financiers of affordable housing, projects that it will influence about a billion dollars’ worth of opportunity-zone investment, some of it managed internally and some managed by outside investment firms. Through its advisory services arm, Enterprise estimates that its relationships with local economic development agencies reach about 27 percent of opportunity zones across the country. The group anticipates serving largely as an intermediary between those agencies and potential opportunity-zone investors for economic revitalization projects.

Enterprise has also been active on the policy front, calling for measures to ensure more transparency around opportunity-zone investments. “We need to understand if this comes up for renewal, extension, or enhancement, what is the taxpayer return on investment,” says Rachel Reilly, director of impact investing at Enterprise Community Loan Fund. “Today, I can’t project what types of activities are going to occur, but the concern further underscores the need for that reporting and level of transparency.”

The Local Initiatives Support Corporation (LISC), a prominent nationwide community development lender, hasn’t committed yet to a specific number for capital raised through Opportunity Zone tax incentives, but it does anticipate managing or participating in multiple opportunity-zone investment funds, focusing on housing, economic revitalization and direct investment in small businesses. The nonprofit lender does about $1.4 billion in projects a year. It expects that many opportunity-zone investors will be relatively new to the community development space.

“I do think what you’re going to have is a significant chunk of investors who, if not new to community development, will for the first time be investing in substantial amounts,” says Maurice Jones, CEO of LISC.

LISC made a splash with new community-development investors last year when it became the first community-development nonprofit to issue a public bond offering, raising $100 million from investors in the same manner as a typical profit-driven corporation. According to Jones, those investors were all entirely new to LISC, and they made those investments knowing full-well that LISC would be considering the social impact of those investor dollars alongside financial returns. As a positive indication of investor interest in projects that consider social as well as financial outcomes, LISC received more than $100 million in bids for last year’s bond offering.

Transparency and accountability are a concern for LISC as well. “I’m hoping that the treasury rules help provide transparency about who’s involved and what they’re doing, because this will only work if we really know what people are using this tool for and how they’re using it,” says Jones, who testified earlier this year in the only Congressional Hearing held about opportunity zones since its passage.

Local and state government agencies could potentially play a key role in creating transparency and accountability around opportunity-zone investments, according to Katie Kramer, vice president at the Council of Development Finance Agencies. The council’s members include housing finance authorities and economic development agencies from across the U.S.

Kramer has spent much of this year educating members about Opportunity Zones and how their agencies can play a key role, both in convening opportunity-zone investors and community representatives as well as in providing additional capital or incentives to ensure that opportunity-zone investments benefit target communities.

“What’s scary for some of our members is [that opportunity zone] investors are not required to conduct their investments in a way that’s accountable to communities,” says Kramer. “We hope that we can compel them to conduct their investments in that way by being alongside them.”

Meanwhile, Fundrise, an online platform for real estate investment, announced plans to raise $500 million for opportunity-zone investment through its platform. Fundrise CEO Ben Miller says he only heard about the new policy in May, but the platform began raising capital for its opportunity-zone investment fund this month. The minimum investment is currently $25,000, though Fundrise has considered going as low as a $10,000 minimum investment. The mission of the platform has been to make real estate investment more accessible for less wealthy families; for its conventional platform (not targeting opportunity zones), the minimum investment is $500.

Not content to wait for final regulations, Fundrise provided some of its own cash reserves as seed capital to its opportunity-zone investment fund, allowing it to acquire ownership in two opportunity-zone properties, one in Washington, D.C., and another in Los Angeles. Fundrise sourced both projects through real-estate broker networks, a slight departure from its typical model of serving as a source of capital for other developers. While Fundrise would not say whether it has plans for community engagement around these or future opportunity-zone investments, it certainly won’t be hard to track where it makes investments — all portfolio properties are listed online, with notes on project progress.

The Great, or Maybe Not-So-Great, Unknown

Other potential investors, who won’t be as transparent or engaged with communities, mean uncertainty about the eventual impact of the policy.

There is a major incentive for long-term investment built into the legislation. The longer opportunity-zone investors hold on to those investments, the larger the incentive — for example, investors who hold onto their opportunity-zone investments for at least ten years pay zero capital-gains taxes on any additional capital gains earned from those investments. So an investor could invest a million dollars of capital-gains income with an eligible company located in an Opportunity Zone today, and if in ten years that company goes public, and that investor’s shares are worth $10 million, if that investor decides to sell those shares at that time the investor only pays capital gains taxes on the first million dollars (at a reduced rate, also part of the legislation).

“I think a lot of this activity will just happen, and we’ll find out later,” says the Urban Institute’s Brett Theodos. “I would expect relatively little overall investment running through an opportunity fund to be managed by a group that has a community-engagement process.”

“You might not even know that investment is flowing into your community and I think that would be a really unfortunate result,” says Kramer at the Council of Development Finance Agencies. “There’s nothing to require investors to cooperate or collaborate, so it’s really incumbent on local governments to create those conversations.”

At the same time, without requirements to jump through the kind of hoops found with the Low-Income Housing or New Markets tax credits programs, nor the annual allocation limits like those programs have, the wide-open nature of opportunity zones has many toeing a fine line between hopeful and heartbroken.

“It’s a double-edged sword, since it really is light in terms of the guard rails to it,” says John Lewis, executive vice president at the bank holding company for The Harbor Bank of Maryland, a black-owned bank based in Baltimore.

While banks are not eligible to be recipients of opportunity-zone investment, black-owned banks such as Harbor Bank or OneUnited are making plans to serve as a relationship broker between businesses or projects in their circles and potential opportunity-zone investors.

“For a firm like us, we’re going to leverage this policy through our relationships in disinvested areas,” says Lewis.

The challenge is that black-owned banks, experienced community development lenders, or development finance agencies won’t be the only ones using the new investor tax incentives to make investments in those same areas.

“The good money is going to bump up against the bad money,” says Brown. “Unfortunately economic development does not always allow the good guys to prevail.”

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 monthly Bottom Line newsletter. The Bottom Line is made possible with support from Citi Community Development.