Opportunity Zones haven’t fully reached their potential, but don’t write them off yet
- Invest NW CO
- Sep 18, 2020
- 4 min read
BY ALEXANDER GOLDING . AND CHARLIE METZGER
September 16, 2020 1:00 PM MDT
Just a few miles down the road from the apartment complex where Louisville police shot Breonna Taylor, a Black-owned business is transforming the way property owners file insurance claims for weather damage. WeatherCheck, cofounded by Y Combinator graduates Demetrius Gray and Jermaine Watkins, identifies weather-related property damage so that homeowners can file claims with their insurers. To date, the firm has 4 million rooftops in its customer base and it employs 11 people, double last year’s headcount. This success happened because of investments spurred by a federal program called the Opportunity Zone (OZ) initiative.
The OZ initiative made WeatherCheck’s growth possible. However, most minority-owned businesses aren’t as fortunate: A study conducted by PitchBook and All Raise found that just 1.9% of startups in Silicon Valley were founded by all-women teams, and a Harvard Business Review article by entrepreneur James Norman reports that less than 1% of all venture-funded teams are all Black.
A significant barrier for members of historically marginalized communities who seek to start or grow businesses is lack of access to capital. This prevents them from generating significant wealth and perpetuates systemic inequality. Investments into entrepreneurs in disenfranchised communities provide a crucial path for creating lasting positive change, and the Opportunity Zone legislation builds bridges for such investment.
The Commerce Department defines Opportunity Zones as low-income census tracts “where new investments, under certain conditions, may be eligible for preferential tax treatment.” Under the program, investors may defer, reduce, and potentially eliminate their capital gains tax if they invest their gains into such communities for a certain length of time. These benefits can make good investments even better. Analysis done by the Economic Innovation Group estimates this legislation can transform more than $6 trillion of unrealized capital gains into fresh funding nationwide.
The program’s detractors argue that the initiative is little more than a handout to wealthy elites. Though partially correct (many OZ projects are not designed to help marginalized communities), investors often simply don’t have experience structuring mission-driven investments that generate market-rate returns.
This is a coordination problem. It is solvable. Committed investors, engaged philanthropy, and smart state and local policy can create access to capital for marginalized communities that fosters genuine impact and fights poverty.
Many successful impact investors already follow this playbook. Two of the best examples are Arctaris Impact and Four Points Funding. Both firms extensively invest in Opportunity Zone businesses that hold to the original intent of the OZ legislation. More investors should follow their lead.
For 10 years, Arctaris has invested successfully in low-income neighborhoods, often in partnership with government and philanthropy. In many of these investments, the fund has agreed to stringent impact requirements in exchange for public funding and philanthropic dollars: exactly the kind of restrictions that critics of the OZ legislation argue are missing from the federal guidelines. This capital has helped to de-risk the fund’s investments, allowing it the flexibility to invest in firms that banks might turn away.
Such businesses, according to the Federal Reserve’s Small Business Credit Survey, tend to be minority-owned. An analysis of this data by the Federal Reserve banks of Cleveland and Atlanta found that Black-owned businesses have the lowest approval rate out of all loan applicants at just 61.2%. When compared with the 80.2% approval rate for white business owners, the difference is clear: Black entrepreneurs do not have anywhere near the same level of access to capital.
Arctaris’s portfolio includes a variety of minority-owned companies located in Opportunity Zones. A great example is an investment it made a few years ago in a New York City–based, African-American–founded digital publishing firm that was seeking significant relationships in greater Detroit (an Opportunity Zone). Because they could not obtain bank financing, the company’s founders believed their only option was borrowing from hard-money lenders at exorbitant rates. With Arctaris’s funding, however, the company opened a Detroit office and eventually hired 52 full-time equivalent employees in that Opportunity Zone. Eventually, a larger minority-owned business bought them out, resulting in a win for the business, the fund, and the Detroit community.
Impact-focused OZ investment is not restricted to urban communities. Colorado-based Four Points Funding invests largely in projects in the state’s rural corridors, which are often left out of the national conversation about economic development and equity. Among these investments is a warehouse food hall in Craig, Colo. The building will be anchored by a coffee shop called Inclusion Coffee, whose mission includes providing job training and employment for young adults with disabilities. It will also house a coworking space and conference center.
Four Points is intentionally offering incentives that lower startup costs for local entrepreneurs. The use of OZ tax incentives augmented the project’s risk-return profile and will help bring more highly skilled staff and small businesses to a rural community: another win-win.
Experienced practitioners like Arctaris and Four Points prove that OZs can generate both impact and returns. Investors committing to the spirit of the legislation can provide capital to entrepreneurial leaders who need it badly. Those leaders, in turn, can uplift communities, right societal wrongs, build wealth for historically disenfranchised neighborhoods, and create quality jobs.
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