This incentive is supposed to help poor areas. It's aimed at Mass Ave. and Fletcher Place.

Emily Hopkins | IndyStar

Show Caption Hide Caption Do 'opportunity zones' favor wealthier neighborhoods? The "opportunity zones" program was meant to spur investment in poorer neighborhoods, but an IndyStar investigation found much of the money in Indianapolis has gone to wealthier areas.

A federal program aimed at increasing investment in poor census tracts is benefiting some of Indiana's most trendy locales, including Downtown Indianapolis, where a 1,972-square-foot luxury condo with sweeping views was on sale this month for $749,000.

Meanwhile, some struggling areas, including more than half of Martindale-Brightwood, have been left out of the program. (You can snag a boarded-up cottage there for $15,750.)

That is just one of the contrasts discovered in an IndyStar analysis of the so-called opportunity zones included in President Donald Trump's 2017 tax cut legislation. The program offers a tax break to investors who direct capital toward communities that ostensibly need it most.

But the law provides governors with great latitude on where to direct that tax break. And, in the two years since it passed, the program has garnered widespread criticism as governors have designated tracts in areas already attracting investment. And no one is tracking the outcome. As developers seek the most profitable investments, some question whether the program was designed to benefit the country's poorest areas in the first place.

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Many raised eyebrows at program

A New York Times investigation in August found that zones across the country were placed in affluent or up-and-coming areas. In Phoenix, The Arizona Republic found that the zones include areas where major investors such as Nike and Amazon are already planning developments. Other criticism of the program points to specific wealthy individuals, such as NBA owner and billionaire Dan Gilbert or Michael Milken, a former Wall Street executive who spent time in prison for violating federal securities and tax laws.

A review of Indiana's opportunity zones raises similar questions over who will benefit.

IndyStar found that, for the 156 opportunity zones submitted by Gov. Eric Holcomb and approved by the U.S. Treasury, much of the benefit could end up going to upstart neighborhoods that are on average wealthier and whiter than the 156 poorest tracts in the state.

Most glaring is the inclusion of a large swath of Downtown Indianapolis, which has already seen an explosion of high-rise mixed-use developments subsidized by the government.

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State and local leaders defend the decisions, saying they chose the sites not only based on the neighborhood's need, but on the likelihood that the areas would attract investment. Locating the zones in neighborhoods that can sustain investment is an important factor in making sure the program is successful, they said.

“We wanted to recommend areas and census tracts … (where) we really felt like the table was set for investment,” said Jeff Hasser, administrator for the city’s real estate economic development team.

Skeptics of that approach say that attracting more capital to areas already experiencing growth can have unintended negative consequences, such as displacing existing residences.

Still, advocates for poor areas are hoping the program will bring grocery stores and other basic benefits. But some local advocates wonder if this will be yet another example of truly needy people being left out.

"Every time you look around, they’re doing improvements downtown. So that part is not fair," said Amy Harwell, president of One Voice Martindale Brightwood.

Whether the program is successful at driving investment to the poorest communities — or a cash grab for wealthy investors — may never be known.

The 2017 law does not require any data collection or tracking of outcomes. State and local officials could impose such requirements, but those who spoke with IndyStar said that they will defer to Congress.

How it works, how areas were chosen

Opportunity zones, created in the 2017 Tax Cuts and Jobs Act, create designated areas where investors can defer or avoid paying taxes so long as they invest those funds in a “distressed” census tract.

The philosophy behind the legislation is simple: Get investors to sell assets and invest the profit into the communities that need it most.

It works like this: An investor who bought some stock a few years ago for $5,000 and sold it today for $100,000, could be made to pay between $14,000 and $19,000 in capital gains tax. By reinvesting the $95,000 capital gain from the stock sale in an opportunity zone, on the other hand, the investor could delay or avoid paying that tax. The investor also would not have to pay taxes on any of the profit they make from the opportunity zone investment, as long as it was held for 10 years.

Low-income census tracts were eligible if they had a poverty rate of 20% or above. Tracts with less than a 20% poverty rate could be eligible if they are located next to low-income areas.

Under the law's guidelines, 56% of the nation's census tracts were eligible to be targeted. That gave states broad discretion when deciding where to direct investment, according to Brady Meixell, research analyst at the Urban Institute.

“I think that raises a flag that there is not substantial place-based targeting. It’s a very broad pool of communities,” that were eligible, Meixell said. “I don’t think that anyone would argue that 56% of the country is disadvantaged."

What IndyStar found

A review of Indiana’s zones found that several had decreasing median home values and incomes, and increasing poverty rates. But just as many zones were located in areas that were seeing improvement.

IndyStar's analysis found:

Just over half of the opportunity zone census tracts were already experiencing growth in median income between 2011 and 2015. About a third of the chosen census tracts were already seeing increases in home values.

In Marion County, major existing developments are located in opportunity zones, including the IUPUI campus, Lucas Oil Stadium, Riley Children’s hospital and Mass Ave. More than $5 billion in new construction has been permitted in Marion County zones since 2014, according to city data.

The legislation gave states a huge amount of discretion in how the benefit would be distributed. In Indiana, 817 tracts were eligible and only 156 were chosen.

Meixell said the results suggest zones chosen by the state were not meaningfully targeted towards disadvantaged communities.

In his own analysis, Meixell found that less than a third of opportunity zones across the country are located in areas with the lowest amount of investment. Or, on the other hand, 28 percent of the opportunity zones are located in tracts that had the highest levels of existing investment when compared to all eligible tracts.

In selecting Indiana's opportunity zones, officials considered data analysis and input from several stakeholders, including from regional leaders, state officials and the public, said Tim George, the governor’s director of policy.

“I would say our process was very much an all-hands-on-deck endeavor,” George said. “I think some stood out right away as being, you know, definite census tracts that would be designated. But there was a lot that we wrestled with.”

George said that part of the balancing act was making sure the program was targeting communities that could accommodate and attract investment.

Officials did choose some tracts located in distressed, poor communities. One zone in Hammond has a poverty rate of 73%, for example.

But the economic realities of the 156 chosen tracts vary widely.

Some have poverty levels in the single digits, and others have high proportions of high-income earners. In several tracts in Marion County, white residents have been replacing black residents, a sign of gentrification.

In one Indianapolis census tract — encompassing Fletcher Place and the Eli Lilly and Company campus — a third of the households made $100,000 or more. The census trac is home to at least two newer apartment developments.

Being designated as an opportunity zone doesn't guarantee that investment will come, several officials and experts noted. Meixell points out that tracts in Youngstown, Ohio — or any of the tracts in Indiana, for that matter — are competing for the same investors as an opportunity zone located just outside Central Park in New York City or one in central Berkeley, near Silicon Valley.

“With the opportunity (zones), we believe we are increasing the attractiveness of Indianapolis,” for investors, said Jeff Hasser, administrator for the city’s real estate economic development team. “We wanted to recommend areas and census tracts … (where) we really felt like the table was set for investment.”

Likewise, George said that balancing the need of the community with the potential to attract investment was a guiding principle during the selection process.

“We didn't want to designate a bunch of areas that didn't need the opportunities and designation because they were doing fine anyway,” he said. “But we also didn't want to designate a bunch of census tracks that, even the designation of wouldn't help them because they wouldn't be able to attract investment.”

But Meixell warns that locating this kind of place-based incentive in areas that are already seeing growth could displace low- and middle-income residents in those neighborhoods.

“This works great for an impact investor. You want to do well by your community,” Meixell said. “But if you’re purely profit motivated, you could take an existing affordable housing, knock it down and build luxury housing, and still get a tax credit.”

No way to track investment

One drawback to the program, some advocates and critics say, is its lack of any system to track where the massive government tax breaks will go. Unlike other federal programs that funnel money into community development, the only information about opportunity zone investments will be gathered through the Internal Revenue Service and therefore be confidential.

The original legislation did include a robust framework for reporting opportunity zone investments, according to Kenan Fikri, research director for the Economic Innovation Group, which was instrumental in shaping the policy. Those provisions were stripped from the legislation as it was added to the sweeping 2017 tax bill.

“The opportunity zone (legislation) is the biggest and boldest experiment in space-based policy that the federal government has embarked on in quite some time. Part of an experiment is evaluating what happens in the field,” Fikri said. “It’s frankly going to be hard to know absent some kind of mandate.”

On Nov. 6, Sen. Ron Wyden, D-Ore., introduced legislation to closer regulate the opportunity zone program by imposing public reporting requirements and barring investments in high-end developments like stadiums and luxury apartments.

As is, the federal legislation does not bar states or localities from tracking opportunity investments made in their jurisdictions, but Indiana and Marion County officials say they will defer to Congress on the matter.

“That's one of the bigger frustrations on the part of states, that there aren't real reporting requirements built in to the program,” said George from the governor’s office. “Signals from Washington, D.C. make it appear that there will be some reporting requirements whether through federal legislation or another round of regulations. But nothing is certain yet on that.”

Tracking the impacts of this type of program without reporting requirements can be extremely difficult if not impossible, said Leslie Papke, an economics professor at Michigan State University.

“All economists will be able to do is to look at the activity before and the activity afterwards,” but it would be at least 10 years before new census data would be produced, said Papke, who has studied state enterprise zones, a similar type of incentive program. “In the meantime, all of these tax breaks are being given away to these people sitting on their unrealized capital gains.”

Some potential opportunity zone projects are being captured by the Opportunity Investment Consortium of Indiana, a partnership of several economic development agencies organizations including the Indiana Housing and Community Development Authority, the Indy Chamber of Commerce, Cinnaire, the Indiana Bond Bank and others.

Through the consortium’s portal, maintained by the city’s LISC chapter, investors can connect with potential project managers for opportunity zone investments. More than 20 projects have been registered through the portal, said the nonprofit's executive director, Tedd Grain. The projects vary in size and scope, he said, and they include multi-family housing, small business expansions, a school and a new arts and culture space, among others.

But details about the projects are private, and it’s unclear if the information will ever be used to evaluate the program. And there’s no reason that a developer or investor needs to use the portal — deals can be made completely in private, and anyone from city officials to neighborhood residents may never know if a nearby luxury development or new grocery store resulted in hefty tax relief for an out-of-town investor.

Residents should ‘attract the right developers’

Harwell, the Martindale-Brightwood activist, said she would work with investors who are interested in bringing investment to her neighborhood.

"If I know who (the investors are) and where they will be, I will be sitting at their front door," she said.

About half of Martindale Brightwood has been designated an opportunity zone. Harwell said the community would like to see a proper grocery store built in the area, or investment in small businesses.

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Imhotep Adisa, executive director of the Kheprw Institute, said that he is watching the program closely.

“At first glance our research does not lead to any optimism that this capital gain tax benefit will lead to any significant impact in the communities that it purports to serve,” Adisa said in an email. The majority of investors will invest in low-risk opportunities, he said, which means real estate developments that can have little positive impact on the people living in poverty.

Adisa, whose non-profit focuses on youth development, is also looking for ways to find impact investors who are interested in social rather than financial impact.

A proactive community can be help build positive relationships with potential investors, said Gary Hobbs, CEO of the real estate firm BWI. His firm focuses on impact development — projects that might not elicit a huge financial return, but that have social value to the areas in which they're located.

BWI already has an opportunity zone fund, and Hobbs said he’s in the early stages of making deals in opportunity zones in Indianapolis. His firm also announced that it would use the opportunity zone program for the $68 million redevelopment of the former Anderson High School.

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Hobbs, who was also involved in shaping the policy, said the opportunity zone designation is, most importantly, a way to attract interest from investors who may not have otherwise looked at Indiana.

The best thing for a concerned community in an opportunity zone to do, he said, is to get educated about the process and try to attract the desired investment.

“It’s a lot easier for me to go to those communities that have a plan rather than a community that doesn’t have anything,” Hobbs said. “The easy route is to put the luxury hotel and luxury apartments downtown. Those are going to get done. But you’re going to have the investors who say, ‘I think I can do it over on Martin Luther King (Street).’ There’s not necessarily a financial return but a social return.”

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Some communities have already produced packets that promote their opportunity zones and their preferred investments. Fort Wayne's prospectus highlights several city-owned properties ready for investment. In Indianapolis, the Indy Chamber also highlights sites ready for redevelopment. And the John Boner Neighborhood Centers community is preparing a prospectus for several neighborhoods that are also part of the federally designated promise zone.

Jessica Love, executive director of Prosperity Indiana, said her organization is approaching the program from a positive standpoint.

“You hear about what could go wrong with the program,” Love said. “What could it be if it works as best as possible?”

Like Hobbs, Love said that communities who advocate for themselves will be more likely to invite the development that’s desirable to them.

“A community is best positioned to grow the way they want to if they are proactively thinking about it, this is what we have available, and to pitch deals that make it easy for developers to say yes,” Love said.

Stephen J. Beard contributed graphics to this report.

Emily Hopkins is a data reporter for IndyStar's investigative team. Reach them at 317-444-6409 or emily.hopkins@indystar.com.