Opportunity Zones: Uplifting Distressed Communities or Amplifying Inequitable Outcomes?

Logan Cimino & Timothy King Edited by Dayana Esquivel

Logan Cimino is a third-year student studying Economics, Geography, and History. He is from Temecula, California. After undergrad, Logan aspires to become an urban planner and to live in a bustling city.

Timothy King is an undergraduate student originally from Downey, CA. He is currently pursuing majors in Economics and Environmental Studies, as well as a minor in Spatial Studies, in addition to working roles for UCSB's Geography and Environmental Health & Safety departments. After college, Timothy would like to pursue efforts related to corporate sustainability and finance, and he likely plans to stay somewhere in California.

ABSTRACT

Opportunity zones stemmed from the 2017 Tax Cuts and Jobs Act (Pub.L.115-97) that was signed into law by the Trump administration. Their intended purpose was to use a place-based economic incentive to uplift disadvantaged communities from economic distress. Place-based economic incentives are used as policy tools to boost job creation, economic growth, and investment within areas that previously witnessed an economic decline or disinvestment. The intent of this paper is to focus on the construction of many, often luxurious, student housing facilities funded by opportunity zone

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legislation. The effects of the production of these housing facilities on residents and communities alike will be discussed; through a comparison of incomes and rental prices of former and new buildings/tenants. Housing affordability statistics will be showcased through visuals including graphs. Based on the paper’s findings, the researchers chose to draw parallels to the concept of gentrification and recommended policy goals related to student housing production and economic place-based incentives. This paper intends to further the limited academic literature on the positive and negative effects of opportunity zones, and the extent to which these pros and cons outweigh or balance one another.

I. THE HISTORY OF PLACE-BASED ECONOMIC INCENTIVES

IN AMERICAN LEGISLATION

Place-based economic incentives have played a key role in economic development-related legislation for several decades within the United States. The idea of a place-based economic incentive was first popularized on a federal scale by former President Bill Clinton in the 1990s. It has since progressed into what are now known as “opportunity zones” and was established under former President Donald J. Trump in his infamous Tax Cuts and Jobs Act of 2017 (Pub.L.115-97). In order to understand opportunity zones, their historical and geographical context, and their legal significance, it is necessary to elaborate on the history of place-based economic incentives within the framework of American law. Before place-based economic incentives were designated in federal legislation, they became commonplace in the United States at a state level during the 1980s. These enterprise zones were modeled after Thatcherite enterprise zones that were enacted under Thatcher’s reign in the UK in the early 1980s.1 So-called “enterprise zones” rapidly gained popularity across the

1 Leslie E. Papke, Tax Policy and Urban Development: Evidence from the Indiana Enterprise Zone Program, 54 Journal of Public Economics, 37, 39

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United States but were legislated solely at the state-level as opposed to being driven by federal law.2 Enterprise zones were state-enacted policies that aimed at reducing economic inequalities that were geographic in scope. The significant popularity of enterprise zones resulted in federal attention, culminating in national laws being catered to such zones.The first of which was passed under the Cliniton administration as federal empowerment zones. Former President Bill Clinton introduced the concept of an “empowerment zone” in 1993 in response to rising tensions within economically distressed areas across the country. For decades, these areas were deprived of investment and subsequently faced resentment from residents and activists. The Empowerment Zones and Enterprise Communities Act of 1993 set the stage for the rapid spread of place-based economic incentives within federal and state policies. Towards the end of 1994, Bill Clinton announced that both urban and rural zones would be selected as empowerment zones.3 Empowerment zones included major place-based tax incentives that “encourage[d] private investment and direct financial assistance to support local revitalization efforts,” which arguably falls in line with Bill Clinton’s other “neoliberal” legislative policies; those that incentivized deregulating capital markets and increased private investment.4

Bill Clinton’s empowerment zones had a lifetime of twenty years as they were set to expire in 2013. Once officially terminated, Barack Obama continued this encouragement of economic growth on a geographic basis by introducing his so-called “promise zones.” Obama’s promise zones played a key role in his presidential campaign that centered on urban politics and uplifting marginalized communities. Promise zones were single and

2 Leslie E. Papke, Tax Policy and Urban Development: Evidence from the Indiana Enterprise Zone Program, 54 Journal of Public Economics, 37 3 Deirdre Oakley & Hui-Shien Tsao, A New Way of Revitalizing Distressed Urban Communities? Assessing the Impact of the Federal Empowerment Zone Program, 28 Journal of Urban Affairs, 443 4 Deirdre Oakley & Hui-Shien Tsao, A New Way of Revitalizing Distressed Urban Communities? Assessing the Impact of the Federal Empowerment Zone Program, 28 Journal of Urban Affairs, 443, 446

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continuous zones that were deemed to be economically distressed.5 The designation of being a “promise zone” ultimately made a geographic area more favorable for federal and local planning grants. The small-scale approach of the promise zones made them unique to Obama’s urban policy. They heavily stressed localized urban planning measures in contrast to enterprise zones, Clinton’s empowerment zones and Trump’s opportunity zones. In total, Obama established twenty-two promise zones across the nation, many of which served as precursors to the geographic areas selected as opportunity zones just a few years later.

To further examine Obama’s place-based economic incentives, it is important to analyze the federal grants that his promise zones were structured on the basis of. Within the promise zones program, these zones were required to encompass, “an existing boundary of a current Promise Neighborhoods or Choice Neighborhoods implementation grant or a BCJI grant, and the lead grantee and major partners of those activities were required to play a ‘substantial role’ in the activities of the Promise Zone.”6 Together, these grants made up the “The Neighborhood Revitalization Initiative (NRI).” The Byrne Criminal Justice Innovation (BCJI) program was a place-based economic program initiated under Obama in an attempt to reduce crime in areas deemed to be crime hot spots. Meanwhile, the Promise Neighborhoods program was a similar place-based economic grant program butfocused more on education. Instead of attempting to reduce crime in these hot spots directly, the Promise Neighborhoods designation sought to use grants in a manner that promoted increasing educational opportunities and probabilities of students attending college. Both of these programs played

5 Robert P. Stoker & Michael J. Rich, Obama’s Urban Legacy: The Limits of Braiding and Local Policy Coordination, 56 Urban Affairs Review, 1607, 1617 6 Robert P. Stoker & Michael J. Rich, Obama’s Urban Legacy: The Limits of Braiding and Local Policy Coordination, 56 Urban Affairs Review, 1607, 1617

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a key role in the promise zone designation; a designation that is crucial when it comes toaffordable housing. These zones became vital in community revitalization and incentivized the production of affordable housing. Cities across the country such as Los Angeles, Philadelphia, Atlanta, and more, were encouraged to increase their affordable housing stock in hopes to be designated as a promise zone and gain access to much-needed federal grants.7 According to CheyeAnn Corona, a Senior Policy Associate at the Aspen Institute, the United States Department of Housing and Urban Development (HUD) specifically sought out zones that had development plans in place to increase their affordable housing stock, preserve their existing affordable housing stock, or to implement strategies to maintain or encourage their housing affordability.8 Unlike the opportunity zone designation that came along with the 2017 Tax Cuts & Job Act (Pub.L.115-97), this component of the promise zone program revealed, at least to some degree, a legislated intentto uplift residents in zones that would receive any grants, fundings, or investments.

Opportunity zones (OZs) were sanctioned in Donald Trump’s infamous 2017 Tax Cuts and Jobs Act (Pub.L.115-97).9 The premise behind them is relatively similar to that of the aforementioned place-based economic incentives. State governments were permitted to designate up to twenty-five percent of their Census tracts as OZs. Unlike promise zones, which were centered around federal grant funds, OZs are directed to the private sector. Within the opportunity zones, wealthy investors are given“preferential tax treatment” toward their capital gains. Under the current system, investors are able to defer their capital gains taxes until the end of 2028.

7 Cheye-Ann Corona, Examining Promise Zones: Prioritizing Affordable Housing During Revitalization, 28 Harvard Journal of Hispanic Policy, 44, 45 8 Cheye-Ann Corona, Examining Promise Zones: Prioritizing Affordable Housing During Revitalization, 28 Harvard Journal of Hispanic Policy, 44, 58 9 Campustown Opportunity Zone Fund I, https://opportunity-funds.com/wpcontent/uploads/2019/03/1421_geodir_fundfile1_CampusTownOpportunityZone_FundI_s.pdf

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The bipartisan public policy organization, Economic Innovation Group, introduced OZs followingthe Great Recession in 2008. They brought their idea to Congress in a 2015 paper and claimed that the initiative for the program was to funnel private investment into low-income and economically disadvantaged communities; they would support entrepreneurship and new business growth communities, and to help make the country more accessible and equitable in regard to geography.10 However, upon analyzing the program, its current status, and its potential for the future, one may question the extent to which OZshave been able to uphold the supposed good intention of the program’s founders. Particularly in real estate investment, it is important to question and further research the degree to which these investments are making the country more accessible, fostering entrepreneurship and respectable job growth in distressed areas, and benefiting local communities, their economies, and their most vulnerable residents.

II. GETTING OPPORTUNITY ZONES PASSED: THE IDEA, THE LOBBYING, & THE HUSTLE

Sean Parker, an American entrepreneur and philanthropist, was originally inspired to develop the idea of opportunity zones after seeing systemic poverty in the distressed neighborhoods of San Francisco. He began floating the idea for the project in 2013 at the World Economic Forum. This idea provided the rich and powerful elite of our nation with an avenue for their own private investment and betterment; all wrapped up in do-good-for-thepoor packaging. They could masquerade under the idea that they were uplifting economically disadvantaged communities. To support this, Parker with his supporters and confidants founded a nonprofit organization, the Economic Innovation Group (EIG). As a

10 Economic Innovation Group, Opportunity Zones, https://eig.org/opportunityzones

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nonpartisan group, they argued that geographic inequality was equally important as income inequality, through garnering academic validation, via case studies and scholarly articles. Once the EIG was well established, the legislation began to be crafted. There was some push back towards the idea of spatial tax incentives, but the group fought with intense lobbying for both Republican and Democratic senators like Tim Scott and Cory Booker. With their pockets now filled, the EIG had notable senators on both sides of the political spectrum who were willing to back the idea. Parker’s group then shifted its focus to creating the public perception that they were a credible economic think tank by hiring Hamilton Place Strategies, a notable public relations firm.11 The EIG advertises themselves as, “a new national community investment tool that connects private capital with lowincome communities across America.”12 They further present the project as helpful for those systematically disadvantaged when they say that the “economically distressed communities” that they support “encompass 11 percent of the country’s white population, but 35 percent of its black and 37 percent of its native populations.”13 However, as cited by David Wessel, a senior Fellow in Economics studies at the Brookings Institute, some OZ investment opportunities could be easily criticized because there was no mandate requiring “good” intentions. One investment opportunity up for critique is luxury student housing, “eligible only because college kids show up as poor in census tallies.”14 III. LUXURY & STUDENT HOUSING IN OZS: IS IT HELPING OR HARMING LOW-INCOME RESIDENTS?

11 David Wessel, Only The Rich Can Play: How Washington Works In the New Gilded Age. 23-60 (2021). 12 Economic Innovation Group, History of Opportunity Zones, https://eig.org/opportunityzones/history. 13 Economic Innovation Group, Opportunity Zones, https://eig.org/opportunityzones/facts-and-figures. 14 David Wessel, “How a Tech Mogul Pushed Through a Tax Break”, The Wall Street Journal (Sept. 16, 2021 10:04AM) https://www.wsj.com/articles/how-a-tech-mogulpushed-through-a-tax-break-11631801059?mod=article_relatedinline.

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Luxury and student housing are inevitable byproducts of opportunity zone designations. Given that opportunity zones, by nature, incentivize real estate development, it is not surprising to grasp the extent to which housing developers have taken advantage of the program. Student housing is particularly interesting when it comes to opportunity zones. As cited by David Wessel in his book about opportunity zones, Only the Rich Can Play: HowWashington Works in the New Gilded Age, so-called college towns are disproportionately likely to be represented in the opportunity zones program. Because full-time students tend to have little to no income given their fulltime status, the Census bureau tends to overrepresent geographic areas with high student populations as low-income or economically distressed, even if this is not always the case.15 One report from the Americans for Financial Reform Education Fund suggests that opportunity zones are actively and will continue to exacerbate the affordable housing crisis as opposed to helping limit its impact on lowincome populations. The organization also found that the OZ program and patterns associated with OZ real estate development have been actively displacing Black and Brown residents while amplifying gentrification in certain zones.16 One project that arguably demonstrates this disturbing trend is the 32 E. Green multifamily complex in Campustown, Illinois—just outside of the campus limits of the University of Illinois at Urbana-Champaign. The development was funded through a Qualified Opportunity Zone fund, the funds that all OZs are established through. In Graph #1, the median monthly household income for the gentrifying district is about $597 (derived from the

15 David Wessel, Only The Rich Can Play: How Washington Works In the New Gilded Age. 236 (2021). 16 Americans for Financial Reform Education Fund, Wall Street’s Big Opportunity: Opportunity Zones are a corporate tax break masquerading as community development, https://ourfinancialsecurity.org/wp-content/uploads/2020/06/Wall-Streets-BigOpportunity-6-2020.pdf

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annual median household income of $7,166)17 and according to Apartments.com, the median rent for a two-bedroom apartment at 32 E. Green is approximately $1,800.18 Given that rental housing is considered to be affordable if it does not exceed thirty percent of a household’s income19, it can be argued that this complex does not serve the original purpose of OZs; it is unaffordable and does not seem to uplift the pre-existing residents of the Campustown community. In order to deem the apartment complex as affordable to the median household, the median household income of the Census tract would have to be $6000, almost ten times higher than the reported median household income that made the tract available for selection as an OZ in the first place.

Graph #1: 32 E. Green Affordability Statistics

17 Social Explorer, U.S. Opportunity Zones, https://www.socialexplorer.com/3d320463d6/explore 18 Apartments.com, 32 East Green, https://www.apartments.com/32-east-greenchampaign-il/525j2qm/ 19 East Bay Housing Organizations, Understanding Affordable Housing, https://ebho.org/resources/what-is-affordablehousing/#:~:text=Housing%20is%20affordable%20if%20it,area%20median%20income %20(AMI).

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Similarly, the newly constructed Fig 31 apartment complex adjacent to the University of Southern California (USC) is another example of how opportunity zone funded student housing projects could be at odds with the original intent of the program. The Fig 31 complex is also developed through aQualified Opportunity Zone Fund; but unlike 32 E. Green, the Fig 31 complex charges rent per person for their apartments. For their median twobedroom apartment, the property charges $3,325 monthly per person.20 Thus, in order to be affordable, using the thirty percent threshold, the median income for constituents in the area must be over $11,000.21 For context, the median household income for the relevant Census tract is just above $965 (derived from an annual median household income of $11,585).22 Given that the median household income in the Census tract is less than onetenth of this, and that the median household size is not one (there is generally more than one person included in the tract’s definition of “household”), it is abundantly clear that the Fig 31 complex does not meet the requirements to be deemed as even remotely affordable to the current residents of the opportunity zone in which it is located. Therefore, just like 32 E. Green, the Fig 31 USC student housing complex can be seen as an example as to how opportunity zone-induced real estate developments could be exacerbating gentrification in these zones while also avoiding the original intention of the program as a means to benefit current residents in these economically distressed areas.

20 Apartments.com, The 505, https://www.apartments.com/the-505-los-angelesca/80cbr71/ 21 Social Explorer, U.S. Opportunity Zones, https://www.socialexplorer.com/3d320463d6/explore 22 Social Explorer, U.S. Opportunity Zones, https://www.socialexplorer.com/3d320463d6/explore

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Graph #2: Fig 31 Affordability Statistics

By the same token, the 698 Prospect development located in proximity to University of North Carolina Pembroke’s rural campus is another representative of this trend. This is particularly noteworthy given UNC Pembroke’s status as an institution that serves a majority of Black and Brown students. 698 Prospect, like Fig 31 and 32 E. Green, is also funded via a Qualified Opportunity Zone fund. According to Census data, the median monthly household income for the tract in which 698 Prospect lies is approximately $1,515 (derived from an annual median household income of $18,179).23 Similar to Fig 31, 698 Prospect charges rent per person. Despite being significantly cheaper than both 32 E. Green and Fig 31, 698 Prospect still has a median rent that exceeds standards of affordability ($589 per month per person).24 The median monthly income per renterwould have to be almost $2,000, which is still significantly higher than the current median householdincome of just over $1,500. As with the other developments, it

23 Social Explorer, U.S. Opportunity Zones, https://www.socialexplorer.com/3d320463d6/explore 24 Apartments.com, 698 Prospect, https://www.apartments.com/698-prospectpembroke-nc/g50h37y/

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appears as though 698 Prospect goes against the core intent of the opportunity zone program. If luxury student housing is not affordable in relation to the median household incomes that are used to determine whether specific Census tracts are eligible for opportunity zone designation, then luxury student housing serves as a direct example of the limitations of the OZ program to match its supposed intent.

Graph #3: 698 Prospect Affordability Statistics

That being said, there are some housing developments that have been constructed with Opportunity Zone funds that seem to match the program’s intent to uplift residents and communities facing economic hardship. The Ox Fibre Apartments in Frederick, Maryland serve as a prime example. The apartment complex has one-bedroom units that rent for approximately $1,154 per month.25 As can be observed in Graph #4, given the median income for the Census tract ($51,944 per year), this apartment complex does

25 Apartments.com, Ox Fibre Apartments, https://www.apartments.com/ox-fibreapartments-frederick-md/70lstdz/

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fit into the range of “affordability.”26 Hopefully, more Opportunity Zone funds will be used to develop affordable housing complexes like the Ox Fibre Apartments as opposed to the other luxury student housing developments that were discussed earlier in this paper. If affordable developments like the Ox Fibre Apartments become increasingly popular under the guise of theOZ program, it is arguable that the intent of the program will become increasingly actualized within the built environment.

Graph #4: Ox Fibre Apartments Statistics

CONCLUSION

There are plenty of Opportunity Zone investments going towards luxury student housing that do not match the intentions of the project as advertised by the Economic Investment Group. Their website displays a quote from the current governor of Illinois, J.B.Pritzker, that the project funds could “creat[e]... opportunities in communities that have suffered from a lack of investment for decades.”27 However, there is a clear and inherent lack of

26 Social Explorer, U.S. Opportunity Zones, https://www.socialexplorer.com/3d320463d6/explore 27 Economic Innovation Group, Opportunity Zones, https://eig.org/opportunityzones

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regard for the disadvantaged in the opportunities which are being pursued. This precedent goes beyond just the three examples of the University of Illinois, the University of Southern California, and the University of North Carolina. It can be found in the majority of luxury student housing projects based in the many campus towns across the nation. That being said, housing development under the Opportunity Zone program still has significant potential. Affordable developments such as the Ox Fibre Apartments have begun to spring up around the nation with the help of OZ funding. In the future, it may be in the best interests of members of Congress and lawmakers to retrofit the OZ program to mandate or at least incentivize the production of affordable housing developments as opposed to luxury housing options that are out of the range of affordability. Future research should emphasize policy strategies that can guide the revision of this program and highlight plans to ensure that the OZ program is aimed at investments that truly uplift communities and residents that are dealing with ongoing financial hardship.

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SECTION III ENVIRONMENT

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