Our continued visits to Opportunity Zones across the country (most recently Austin, Dayton, Kansas City, Norfolk, Baltimore, and San Antonio) and our conversations with literally dozens of practitioners reinforce our sense that the new federal tax incentive is (unexpectedly and slowly) driving the creation of a new system of community economic development. The process of invention is messy, haphazard and chaotic even by U.S. standards, made more complicated by the fact that a new class of investors and a relentless market orientation has been introduced into a system that has been largely dominated by a closed loop of actors motivated by either federal bank regulation or social impact.
Opportunity Zones have emerged at the tail end of a top-down, federally driven system of community development that primarily focused on expanding and preserving the supply of affordable housing as a means to regenerate neighborhoods and on bank debt, bank equity (enticed by federal tax incentives) and federal subsidies (e.g., CDBG, HOME) as the vehicle for finance. This system has no doubt delivered substantial impact and it is beyond frightening to imagine what many communities would look like without it. But community development as currently structured doesn’t have the scale necessary to address the quintuple whammy of technological displacement, deindustrialization, depopulation, housing foreclosures and institutional racism, nor the tools or mechanisms to deal with the education, skills and wealth gap that divides our cities, metropolitan areas and nation.
The introduction of Opportunity Zones into communities that are slowly realizing they need very different competencies and capabilities to be economically successful is throwing kerosene on fires that have been burning slowly for a while.
With that framing, here are some early observations.
The New Community Development
The goal of the new community development is to enhance social mobility and build wealth for the residents living in disadvantaged communities. This requires a fundamental shift in emphasis from the existing system that is (1) housing-centric, (2) low-income concentrated, (3) subsidy-dependent, and (4) grant-driven.
Instead, the emerging system is (1) neighborhood-centric, (2) mixed-income, (3) dependent on a coordinated “capital stack” of market-driven equity, debt, and smart philanthropy, and (4) entrepreneur-driven.
This change demands an evolution from intermediaries that are federal program-driven and domain-dependent (i.e., “We do housing;” “we do small business loans”) to institutions that are locally-driven, interdisciplinary and unlock multiple types of capital within one neighborhood.
It also requires a fundamental rethinking of investment from a “two-pocket” mentality that separates market investment and social philanthropy (i.e., 95% of assets sit in endowments that invest in Wall Street, 5% go to grants in local community) to a “one-pocket” reality that marries private and civic capital and channels the vast stores of local wealth (e.g., pension funds, university endowments, corporation balance sheets, high net worth family investments) back into local communities.
And it requires new entities that are able to source investable projects and support entrepreneurs on a continuous basis as well as cooperative financial structures that enables value appreciation to be captured by the many rather than the few.
The “Street Corner” Thesis
At the heart of the new community development is a thesis about how neighborhood markets evolve in ways that serve the interests of low-income residents. We call this the “street corner” thesis because it focuses on creating a dense ecosystem of businesses, properties, and residences at strategic intersections or along strategic corridors of a community. This aims to create an area of multi-purpose and mixed-use strength that has the potential to transform a neighborhood by combining commercial real estate, local serving businesses, growth companies with a social purpose, workforce housing, health clinics and other amenities. You get the theory: co-locate and concentrate mixed economic and social activities in small nodes and get the synergistic effect that naturally comes from density and diversity of uses. The model for this is emerging in new community institutions like Access Ventures in Shelby Park, Louisville, and emerging collaborations in places like Vine City in Atlanta and historic African-American communities in Kansas City. We plan to publish case studies in the next several weeks.
Finding the Street Corner
There are literally thousands of street corners that have the potential to be turned on, reanimated and re-energized all across the United States. Finding them has been made easier by new data analytics and geo-spatial mapping that enable all cities to pinpoint small geographies that are near critical employment centers in a city (e.g., central business districts, university or hospital enclaves) and have real estate that is either owned by the government or non-profit actors (e.g., churches, service providers) or is tax delinquent or in foreclosure. To date, cities have used big data to make the allocation of public resources (e.g., community policing, fire inspections, code enforcement, street and sewer repair) more efficient and effective. We think big data and machine learning can be used to make community development smarter and more impactful.
Populating the Street Corner
Many low-income communities often seem to be physical manifestations of HUD programs rather than vibrant expressions of local entrepreneurship and creativity. Our firm belief is that there are tens of thousands of entrepreneurs living in these communities who need the concentrated support and physical space to realize their dreams and tens of thousands of entrepreneurs creating or running companies outside communities that would welcome the opportunity to co-locate given their social mission and business plan. Finding these entrepreneurs is doable; it is a high touch qualitative act rather than a quantitative analytic exercise that requires walking the streets, kicking the tires and talking to a substantial number of people. This is market making that taps the natural expertise of community organizers.
Towards a Transformative System
The street corner thesis, of course, is only one element of the new community development. It is equally if not more important to equip the next generation of workers with the skills necessary to realize their unique human potential and access or create quality jobs. It is necessary to develop new financial mechanisms to unlock capital for entrepreneurs that are currently seen as un-bankable even though their business propositions are often more-sound and less risky than those in favored parts of cities. And it requires new governance structures to enable renters, workers and entrepreneurs to benefit from value appreciation that naturally occurs when formerly disinvested communities gain a foothold in the mainstream economy.
Our thinking here is still nascent, evolving as the Opportunity Zone market takes hold and deals that are both investor ready and community enhancing get financed and move forward. We welcome any and all comments, suggestions and criticisms.
Ross Baird is CEO of Blueprint Local and author of The Innovation Blind Spot.
Bruce Katz is the inaugural director of the Nowak Metro Finance Lab at Drexel University and the co-author (with Jeremy Nowak) of The New Localism: How Cities Can Thrive in the Age of Populism.