Chicago’s 138 Opportunity Zones aren’t gaining the traction they should. Here's how that could change.
The Opportunity Zones program, tucked within the 2017 Tax Cuts and Jobs Act, was intended to draw private capital into low-income communities throughout the nation by tapping into the massive stockpile of unrealized capital gains wealth, then totaling more than $6 trillion by the Federal Reserve’s reckoning. The initiative gave investors tax incentives to redeploy their gains into Qualified Opportunity Funds which, in turn, provide equity investments in new and expanding businesses, infrastructure and energy projects, commercial real estate, affordable housing, and other needs-driven ventures in nearly 9,000 under-resourced Qualified Opportunity Zones.
But Chicago’s 138 Opportunity Zones aren’t gaining the traction they should and those that have investments that are being funded are predominately real estate ventures, not businesses. With the city’s dwindling population and daunting fiscal challenges, no wonder investors and real estate developers are gravitating toward easier-to-finance deals outside Illinois. Mostly smaller projects are coming together here including DL3 Realty’s redevelopment of the Washington Park National Bank Building in Woodlawn which has fallen into disrepair, North Wells Capital’s renovation of a Jackson Park apartment building, and private equity firm Origin Investments’ 202-unit Pilsen Gateway development.
More alluring sites for Opportunity Fund investors are to be found within the Illinois Medical District, the largest urban medical district in the country and home to 40 healthcare institutions including the University of Illinois at Chicago Hospital, Rush University Medical Center and Stroger Hospital, where a vibrant live-work-learn-play community might one day spread to Chicago’s contiguous South and West sides. But Dr. Suzet McKinney, the District’s CEO, persuasively argues that if Opportunity Zones are to deliver on their promise, investors will need to invite sustained buy-in from community leaders, encourage job-creating business development, and report to the public on their success as changemakers.
President-elect Joe Biden shares Dr. McKinney’s view that greater collaboration and more stringent oversight are bound to benefit low-income communities. He plans to motivate Opportunity Funds to partner with community organizations. He intends to instruct the Treasury Department to review Opportunity Zone regulations to ensure that tax incentives lead to clear economic, social and environmental benefits. And he is committed to holding developers accountable: those who gain the benefit of the program’s tax breaks would be required to provide detailed reporting and public disclosure about their projects’ positive impact.
Mr. Biden’s social equity agenda for the Opportunity Zone program can be put into action through executive orders which don’t require legislation. But if his party gains control of the U. S. Senate, now hanging in the balance, dramatic changes to the program that require the force of law may also be afoot. More affluent census tracts may be stripped of their Opportunity Zone status; Opportunity Fund investments in luxury rental apartments, self-storage facilities and stadiums may be banned; and deeper reforms to bolster job creation and small-business development in economically disadvantaged communities may come to pass.
If the new Administration’s plans to raise capital gains taxes while limiting the use of tax-deferred real estate exchanges, Opportunity Fund investments may become irresistible for wealthy investors. But the financial returns they seek are likely to be realized only if the communities in which they invest are lifted up. May all our interests soon be so aligned.
Marc J. Lane is an attorney and financial adviser, and the author of "The Mission-Driven Venture: Business Solutions to the World’s Most Vexing Social Problems."