Impact Alpha, Dennis Price - Article July 18, 2018
A tweak to the tax code has set off a race between rival approaches to investing in some of America’s poorest urban and rural neighborhoods.
ImpactAlpha has identified at least 10 impact fund managers that are racing to take advantage of the Investing in Opportunity Act, which allows investors to defer, and even reduce, taxes on capital gains rolled into 8,700 designated opportunity zones.
The early movers are seeking to shape the future of opportunity zone investing, and with it, the character of neighborhood and community development in the U.S. for at least the next decade.
The provision, included into last year’s tax-cut bill, already is jumpstarting cooperation and mobilizing capital for deployment in American cities and rural communities on a scale not seen in some time.
“The first funds to market will shape what comes next for opportunity zones,” Village Capital’s Ross Baird toldImpactAlpha. “The people who wrote and championed the bill intended it to create impact and wealth in distressed communities. We need the impact investment community to rally to create use cases and models the country can learn from.”
In contrast, a go-it-alone approach that chases low-risk, high-return investments could attract extractive businesses, create few jobs, drive rent increases and displace existing residents.
Champions of impact investing are working together to ensure that investment strategies align with community goals. The idea is to coordinate among community stakeholders, set social and environmental objectives and fund local businesses that create good jobs, raise wages and build wealth for local communities as well as investors.
Early movers have the potential to shape both market entrants to come as well as the final rules that will govern the program, set to come down soon from regulators. On Monday, the Kresge and Rockefeller foundations accepted finalletters of inquiry from fund managers seeking a share of $25 million in grants and unfunded guarantees for opportunity funds “designed to benefit low-income people and communities.”
Tomorrow, the Beeck Center for Social Impact and Innovation at Georgetown University, along with the U.S. Impact Investing Alliance, will convene investors and community groups at the Federal Reserve Bank of New York to begin to develop a shared framework to guide opportunity zone investments.
“Opportunity zones are a fantastic opportunity to think about place-based investing with private capital in low-income communities,” says Lisa Green Hall, a senior fellow at the Beeck Center.
AOL founder Steve Case, who championed the tax provision, is building a team at his Revolution venture capital firm to develop real estate in opportunity zones for use by tech startups in areas far from the coastal tech hubs. And Bridge Housing, the nonprofit affordable housing developer, is creating a $500 million opportunity zone fund to finance affordable housing in West Coast markets.
Among the other impact-oriented opportunity funds:
Louisville-based Access Ventures, together with the Local Initiatives Support Corp., a national community development financial institution, and Village Capital, are planning an investment vehicle of at least $100 million. The fund would invest in an asset-class mix small businesses, commercial rental space, and affordable housing in opportunity zones in three to five cities across the U.S.
The fund, which is yet to be named, would build on the neighborhood-based approach that Access Ventures pioneered in Louisville’s Shelby Park neighborhood and take it to other opportunity zones in cities like Norfolk, Va.; Kansas City; and Fresno, Calif.
Together, Access Ventures, LISC and Village Capital have made roughly 1000 investments what are now opportunity zone communities. In Shelby Park, Access Ventures has bought and restored a dozen commercial properties and redeveloped 14 vacant residential units into affordable housing in one of Louisville’s poorest neighborhoods. Its $2.4 million investment over four years, in co-working spaces, bakeries, local tech companies and more, has created 200 jobs.
LISC is developing additional nine-figure real estate funds to invest in multifamily housing, health clinics, charter schools and workforce housing in opportunity zones across the country.
LISC’s Beth Marcus said LISC’s pipeline of deals in low-income communities gives it an advantage. Over 40 years, LISC has invested $19 billion in affordable housing, retail and community facilities.
“Everyone’s talking about raising capital for opportunity funds,” Marcus told ImpactAlpha. “But where will they deploy it?”
Enterprise Community Partners, the Columbia, Maryland, financier and advocate for affordable housing, is planning a family of opportunity zone funds, according to Rachel Reilly, the firm’s director of impact investing. Enterprise has invested $36 billion over 30 years, creating nearly 529,000 homes.
Reilly tells ImpactAlpha that Enterprise also will use its investment platform to support other opportunity fund managers. Through its own fund and intermediation services Reilly says Enterprises believes it can generate $1 billion in opportunity zone investments deals over the next decade.
The Low Income Investment Fund in San Francisco is also planning an opportunity fund. “Like all our work it will have deep intentionality and outcomes tracking,” Tyler Jackson, the firm’s impact investment officer, tells ImpactAlpha.
LIIF, a community development finance institution, has invested $2.1 billion in low-income communities, mainly through debt, over 30 years. Jackson says LIIF “works closely with communities and borrowers where our dollars flow” to make such investment inclusive.
In Philadelphia, TPP Capital Management is launching the $100 million TPP Real Estate Development Fund as an opportunity fund to revitalize the blighted Tioga neighborhood adjacent to Temple University’s Health Sciences Campus.
The minority-led real estate investment firm will primarily focus on infill development, the restoration of vacant or under-used buildings, and bring in a mix of affordable, workforce and market-rate transit-oriented housing.
“We’re looking at all stakeholders,” says founder Anthony Miles. TPP will partner with farmers markets, vertical farms, university-assisted K-8 schools, a teaching kitchen for culinary medicine and co-working spaces and funders for minority-owned businesses, he says. “Gentrification goes wrong because developers are not thinking about all stakeholders, including the existing residents.”
Miles said TPP will offer at least 30% of the housing units at discounted rates to firefighters, police officers, teachers, healthcare and other services workers in exchange for their engagement in community programs like neighborhood watch and after-school tutoring.
In Colorado, Stephanie Gripne of the Impact Finance Center and Carl Palmer of LegacyWorks Group are teaming up for the Impact Days Opportunity Funds. Impact Days Opportunity Funds in various states would raise capital through direct public offerings, and offer different returns to different types of investors.
Gripne’s CO Impact Days is a statewide marketplace that brings together would-be impact investors and Colorado social ventures. Gripne says CO Impact Days has facilitated tens of millions of dollars in direct investments into more than 200 ventures in the arts, education, environment, health and human services.
Shekar Narasimhan at Beekman Advisors is exploring an opportunity fund of more than $100 million that would focus on incubating and investing in small businesses in small towns in Virginia and North Carolina initially, and then expanding to adjacent states. “I want to do this intentionally,” says Narasimhan, previously with Prudential Mortgage Capital Co. Narasimhan tells ImpactAlpha he’s talking to local, state and community leaders to scale investments in entrepreneurs launching bakeries, restaurants and construction companies that can build wealth and create jobs.
In Oregon, solar entrepreneur David Brown and investor Allen Alley are launching the Obsidian Opportunity Funds to extend solar power within the 86 opportunity zones in Oregon.
“I think (Opportunity Zones) will be very popular in renewable energy,” Brown told the Portland Business Journal. Long-term solar projects are well-aligned with opportunity zone incentives for holding investments over time, he said. Tax savings on new solar investments, said Brown, could be “like getting 33% more profit.”