Opportunity zones have made a huge splash in the wealth-management and family-office space. Firms are moving full speed ahead to take advantage, with some calling the enabling U.S. law a once-in-a-lifetime opportunity.
While the law is part of President Donald Trump’s tax-cut bill, the section creating OZs was bipartisan, originally part of a bill introduced by Sen. Tim Scott (R-South Carolina), with Cory Booker (D-New Jersey) and others co-sponsoring.
“There’s a lot of potential around opportunity zones, but [also] some good reasons to be skeptical,” Brady Meixell, research analyst at Urban Institute, told Buyouts.
Olugbenga Ajilore, a senior economist at the Center for American Progress, argues the OZ program as written, including recent further regulations, lacks guardrails to encourage projects that meet local communities’ needs as opposed to providing the highest possible returns.
“The projects that have the highest return are not the kind of products that are needed in these communities,” Ajilore told Buyouts. “Building a grocery store, putting in a community center, building affordable housing: These are not highly profitable projects because if they were, they would already have been done.”
Stein said this concern was “overblown” because, he said in a recent interview, OZs will develop in stages, starting with tracts where development has already begun.
“Those places that are closest to the developed areas are going to be the ones that get developed first,” he reiterated to Buyouts. “That will create jobs and opportunities for those people that are in the more deeply disadvantaged areas, and it will just keep moving out towards those areas.”
Craig Bernstein of OPZ Bernstein, also making an OZs push, said he felt those areas that have already seen some redevelopment would actually be the better investments.
“[The] best risk-adjusted returns are going to be derived from investing in up-and-coming secondary markets that have already begun the gentrification process, yet still have their best days ahead of them,” he told Buyouts in an email.
The opportunity zones were created using 2010 Census data. In many cases, these tracts have changed considerably. Bloomberg pointed out that much of downtown Portland, Oregon, is an OZ, even as it hosts some of the metro area’s most prosperous neighborhoods, and is one of the places getting the most attention.
Urban Institute’s Meixell said he’s seen this pattern nationally. Other experts agree.
“[Those] areas that have seen substantial population growth, and are above the national median household income, [seem to be] seeing the most amount of interest off the bat,” he said.
Stein, whose Cresset Capital is looking into investments in Portland, said that does not tell the whole story.
“If you go in downtown Portland, which I’ve done, there are some wonderful areas there, but there are still areas … that aren’t great,” he said.
CAP’s Ajilore worries about OZs in regions like the Midwest, the South and rural areas. “There’s nothing in these regulations that is going to drive money to those places,” he said. “It’s going to exacerbate an already unfair system.”
Frank McGrew of McNally Capital, another FO interested in OZs, said some of the onus needs to be on the communities themselves. Sometimes, he said, rural areas were more welcoming to development than bigger cities.
“I would challenge the community leaders to really understand: Are they being forthright and open? Are they helping with regulatory constraints. That’s something they could really help and influence,” he told Buyouts.
Notably, experts and investors say community involvement will be crucial to whether OZs fulfill their potential and that private capital alone will not get the job done.
“Seek community input and engagement,” Ajilore said. “It’s probably the biggest thing I would say to private equity investors.”
Stein also stressed that OZs could not do all the work of revitalizing communities. “I also believe you need government spending, community work and philanthropy in those communities on top of that, and my hope is those things work hand in hand,” he said.