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Opportunity Zones: Jet Fuel for Gentrification UNLESS Modern Equity Solutions Replace Broken Rent Models

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Opportunity Zones: Jet Fuel for Gentrification UNLESS Modern Equity Solutions Replace Broken Rent Models

Capturing the attention of the U.S. impact investing community over the past two years, Opportunity Zones offer a precarious promise of unlocking transformative capital for low-income communities, while they also risk incentivizing extractive, harmful development.

Leveraging Opportunity Zones to Close America’s Wealth Gap

SYNOPSIS

The Opportunity Zones incentive is already attracting significant amounts of investment capital to funds that are taking advantage of American predilection to shelter capital gains. The incentive will drive more capital to “distressed” and under-served communities than government and charity combined. While this may be a good development, there are legitimate concerns that Opportunity Zones will enrich investors at the expense of community residents, and result in gentrification.

This interview (or, can be transformed into a different format), will explore how the Opportunity Zone incentive can be used for the mutual benefit of investors and the community. It recognizes that the incentive has done the difficult work of channeling much needed capital to low-income communities. The easier, but critically important work, is managing the investment in a manner that closes America’s wealth gap. This means empowering communities to establish equal relationships with investors because absent that, Opportunity Zones will exacerbate gentrification and further marginalize already vulnerable people.

Finally, the discussion highlights specific areas, such as New York’s public housing system, where the Opportunity Zone incentive can be used, once and for all, to fix massive income inequality.

Q: What are Opportunity Zones?

A: Quoting from the Opportunity Zones website;

The Opportunity Zones incentive is a new community investment tool established by Congress in the Tax Cuts and Jobs Act of 2017 to encourage long-term investments in low-income urban and rural communities nationwide. Opportunity Zones provide a tax incentive for investors to re-invest their unrealized capital gains into dedicated Opportunity Funds.

In short, a lot of money is going to flow to places that have not been receiving investment. That’s a very good thing.

Q: SOCAP’s introduction to this theme states that;

Capturing the attention of the U.S. impact investing community over the past two years, Opportunity Zones offer a precarious promise of unlocking transformative capital for low-income communities, while they also risk incentivizing extractive, harmful development.

Why?

A: Opportunity Zones are attracting much-needed capital to “poor” areas. Again, that’s a good thing. It is our responsibility as social entrepreneurs to leverage Opportunity Zones to close America’s wealth gap. How? We must make Opportunity Zone investments work for both the investors and the communities. If not, let’s recognize that this will be an uneven relationship between investors, who stand to gain in tremendous ways, and communities, which will be on the losing end of traditional business relationships. The social and conscious capital sector should support communities in establishing equal partnerships with investors. This may be the greatest contribution social change advocates can make.

To create a level playing field for communities, we must steer clear of what does not work. In our efforts to “fight gentrification” we must resist the urge to “create and protect affordable rental housing” and “to expand the role of charity.” This must be about equity and commerce.

Q: Hold on. Affordable rental housing and charity are two of the most cherished ideals of the socially-conscious community. Are you suggesting they should be thrown out?

A: In a manner of speaking, yes. They are prime examples of unintended negative consequences.

Let’s start with charity. The United States may be one of the most aggressive, commercially-driven capitalist countries in the world but it is also one of the most philanthropic. At face value that seems like a good thing but it is not. We have created a society that promotes and applauds phenomenal accumulation of wealth especially when combined with philanthropy.

Here’s the problem; on annual basis less than 3% of created wealth goes to charity. Charity can never attract enough resources to address society’s most pressing problems. When a business or individual earns 100% from the rich and poor alike and only gives back 3%, it creates a massive liquidity problem. That’s trickle-down economics and it is not working. We must create business models that transcend charity-as-a-solution. Instead of waiting for businesses that operate in communities to share some of their wealth after the fact, we must create models where the sharing of wealth is baked in from the outset. That implies home ownership which is a long topic.

Q: We shall get to home ownership but what do your concerns regarding charity have to do with Opportunity Zones?

A: Let’s admit that most charity dollars come from the tax incentives that accrue to donors. Opportunity Zones raise that to another level. They leverage the American predilection for minimizing or eliminating taxes. The legislation will channel far greater resources to low-income areas than government and charity combined. That’s the positive. The negative is as stated in SOCAP’s summary is that;

Opportunity Zones offer a precarious promise of unlocking transformative capital for low-income communities, while they also risk incentivizing extractive, harmful development.

How then do we leverage an opportunity that will drive a huge amount of money seeking capital gains tax advantages to address economic disparities? Quid pro quo. Think about it this way. The residents of Opportunity Zones are giving investors a platform to shelter capital gains and do very well over the medium and long term. This is literally what is happening.

“You can shelter capital gains in my community because we are designated an Opportunity Zone. For that privilege you must share your success.”

That to me is a fair exchange. Opportunity Zone residents must get a substantial equity stake before the work begins. Our sector should empower opportunity zones all over the country to be capable of negotiating such mutually beneficial partnerships. We should consider creating templates that communities can implement and even provide business and legal assistance to communities. Absent that, gentrification will occur on a massive scale and further marginalize already vulnerable people.

Q: I want to get back to rental vs home ownership but can you first speak about gentrification? It is an incendiary topic among the socially-conscious and active community.

A: There are no doubt legitimate concerns about gentrification. Huge amounts of money are going to be directed at communities that have been ignored or denied investment capital. When that happens, existing dwellers get displaced because they can no longer afford to live in their communities. This takes two forms. One is that most low-income households do not own their homes. As tenants, they soon are unable to afford the higher rents. The second is that those who own their homes cannot afford the inevitable tax increases that follow. Both of these problems can be fixed easily if we are intentional about addressing poverty.

Starting with the more difficult one, let us agree that rental is NOT a solution to affordability. Every attempt at affordable rental housing has failed over the long term in North America for a simple reason; tenants have no equity in the community. Let us make universal home ownership a right, an imperative. When people rent it should only be by choice not out of necessity.

How can we implement universal home ownership? It is easy. Technology is giving us numerous ways to design innovative home ownership models. The implementation approach matters much less than the objective, which is to ensure that community residents are lifted by the rising tide of increasing property values instead of getting drowned and thrown out. I am stating for the record that even if a household cannot own a home by virtue of their inability to qualify for a mortgage, we can and must design ownership models that enable them to convert their rent payments into equity. This is the 21st century, the era of the shared economy. There are likely 20 different ways we can do this. We just have to commit to it.

For owners, usually seniors that cannot keep up with property tax increases, the solution is even easier. It may be difficult but it is not impossible to impose tax hike freezes for specific individuals. When such selective freezes are not possible, tax-abatement funds can be created to pay for property tax increases. The Westside Future Fund in Atlanta has established such a fund.

These two measures alone eliminate “gentrification” as a phenomenon where “the rich” displace “the poor.”

Q: These are great sounding ideas but have they been tried anywhere before? Can you cite any precedents?

A: Yes and no. Yes, because there are precedents that prove that home ownership is much better than rental, and no because I am suggesting solutions at an unprecedented scale. We are change-makers. We must we ready to take unprecedented action to solve massive problems.

Home ownership as a wealth-enhancing and community improvement methodology is already proven.  I can cite personal examples from the work I did with Options for Homes in Toronto. I must give a shout-out to Michel Labbe, the founder of Options for Homes for generating incontrovertible proof, over a 20-year span, that home ownership is possible for the low-end-of-market, a segment that ordinarily would not qualify to own homes.

The benefits of home ownership are not debatable. The challenge is to overcome the belief among well-meaning people that “the poor cannot own homes; they must have affordable rental housing.”

The fallacy of this belief is clearly evident. Look at every large rental housing program in the United States and Canada. They are all dismal failures. The oldest, largest, and arguably most successful, is New York City’s Housing Authority (NYCHA). NYCHA has more than 177,000 apartments serving more than 400,000 people. It also administers Section 8 rent subsidies for an additional 235,000 people. NYCHA is broke. Its housing stock is literally falling apart and needs more than $32 billion just to return the homes to acceptable standards. I should add that NYCHA is considered one of the most successful public housing systems in the US. It is certainly the largest. Those in other major cities have even poorer records. Some have been torn down entirely.

There is one simple reason why these systems have failed. They subscribe to the incorrect belief that the poor cannot afford to own homes. I contend that the poor cannot afford NOT to own homes. Our focus should be on how to help the poor own homes. Again, that is much easier than many think when we agree to slay some sacred cows.

Q: How do we get started?

A: Simple. Let us create a fund that proves this case in one or several places.

For the Atlanta area, my current home, we can easily deploy a $1 billion fund. The mayor of Atlanta recently announced a $1 billion affordable housing initiative. That doesn’t even include some of my more innovative approaches, nor does it include the greater Atlanta area. So, I submit that the greater Atlanta area could easily absorb $5 billion. The first step is to set up the fund. The second is to deploy that capital in an intelligent manner to make home ownership for all a reality. Come back in 10 years and marvel at the impact on households. I can predict, based on my experience in Toronto and plain common sense that household wealth statistics will be impressive.

I cannot resist the allure of New York City. It is the largest and seemingly most difficult one to address. A 2018 survey estimated that NYCHA needs more than $32 billion just to bring its housing stock to an acceptable standard. Here’s the problem. Where will that money come from? If that money is found and invested, what will the results be? I can tell you right now that it will be money down the drain. The only beneficiaries will be the contractors that do the work. The residents may enjoy better living conditions for a few years but we all know that over time NYCHA will be back seeking additional funds. Look, rental housing as a philosophy is a transfer of wealth from the poor – the tenants – to the rich – the landlords. To change that fundamental reality we have to make the tenants owners. Am I suggesting that we turn NYCHA’s tenants into owners? Yes. For $35 billion? No, it will cost more. We are likely talking about an investment of $50 billion. I contend that when we make the tenants owners and invest $50 billion in their homes, we can generate a portfolio worth more than $100 billion. I know how to do this.

Care to join me?

Confirmed Panelists

INTERVIEWEE:

Paul Musembwa, CEO, Warp Developments & Co-Founder, Our Shared Future 2050

LinkedIn Profile: https://www.linkedin.com/in/paul-musembwa-2020/

 

 

Unconfirmed Panelists

INTERVIEWER OPTIONS:

  • Afdhel Aziz, Chief Purpose Officer, Conspiracy of Love
  • Derreck Kayongo, CNN Hero, Founder, Global Soap Project, International Speaker; Co-Founder, Our Shared Future 2050
  • Trisha Stezzi, CEO, Significance, Co-Founder, Sideshift; Co-Founder, Our Shared Future 2050
  • Other could be explored

NOTE: This session could also be structured as a Panel Discussion as well, in which case, we’d talk to you about recommendations for other panelists.

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