Racial Equity Sketches: #4, Policy

Racial Equity Sketches: #4, Policy

Racial Equity Sketches
(Original Content by the Commission on Economic Inclusion)

#4: A Letter of Interest
Ibanca Anand

Before Reading: Keep in mind that although Opportunity Zones are a real federal incentive, the below correspondence is fictional. The investor and mentioned neighborhood businesses are fictional, and any resemblances to living people are purely coincidental. Though many of the strategies mentioned in the response email are based on real initiatives, either in Cleveland or other cities, the story below should not be taken as a reflection of reality or standard procedure. Rather, it is an exercise that imagines what types of interactions could yield the best results, if Opportunity Zones were to work in the favor of equitable economic development. In other words, the sketch imagines what could be possible.

To: Cleveland

From: Webb, Melanie B.

Date: July 25, 2019 14:03:22, PST

Subject: Potential Opportunity Zone Investment


Hi there,

I recognize that my note may not be standard protocol. However, I was interested in gaining your insights for an investment I am considering in Cleveland using the new Opportunity Zone incentive.

First, a bit about me. I am an investment banker turned equity investor based in the Bay Area, with a portfolio of over 15 successful company investments (mostly in California). Admittedly, most of my interest in the past has been captured by scalable, high-tech businesses. In the last few years, though, I have been having a slow change of heart. I think back to my life as a young adult, paying my way through college working a variety of odd jobs…and I wonder, would any of the companies I currently invest in have hired that younger version of me? Probably not.

What excites me about Opportunity Zones is that they encourage me, and people like me, to think differently about what we consider “valuable” investments. But frankly, I’m also nervous about it. I’ve noticed some of my friends putting dollars toward luxury high-rises in communities where there’s no way most residents could afford it—unless, of course, those residents change. Perhaps worse still, I’ve seen people invest in things like storage facilities that create minimal jobs and opportunities for anyone but the investors themselves. I am committed to going about this differently and have expressed the same to my tax advisor.

So, why Cleveland? Well, because, once upon a time, Cleveland was home. My parents moved the family when I was just five years old, but they lived their whole lives in the city, as did their parents. I have just a few scattered memories—picking out apples at the West Side Market, watching the sunset by Lake Erie. What I have more of are the family stories. Of my grandpop losing his job at the same time as 150 other employees, of shopping malls shutting down, of a landscape of empty factories whose signs were never taken down. The loss that Cleveland experienced decades ago was felt in the bones of my family.

I am thrilled to see that economic realities are changing in Cleveland, and I would love to be a part of that transformation in whatever small way I can.

My ask from you is to provide your input on a half-baked investment idea I have. I have read through your comprehensive prospectus, as has my tax advisor. We have a few strategies in mind, but the one I am most excited about is a business incubator space in the Opportunity Corridor district. My family grew up in the Slavic Village neighborhood where part of the corridor will be located, so this project would be extremely close to home. I would love to bring a more vibrant retail landscape to the area after the decades of business closures and disinvestment. Moreover, I have some ideas for businesses that can go in the space based on what I’ve seen succeed in the Bay Area. These include a doughnut shop (everyone loves doughnuts!), a fitness studio, and perhaps a coffeeshop. I have great connections with local shops here that are looking to expand to other cities and can likely get them on board to be the incubating businesses.

That said, I would like to hear your initial input before moving forward with concrete plans. I believe your boots-on-the-ground perspective might better inform our direction with the business incubator space. Together, I’m sure we can make something great happen in this district.

I look forward to hearing from you.

Best, Mel

Melanie B. Webb
President
Grava Capital

 — 

To: Webb, Melanie B.

From: Cleveland

Date: August 29, 2019 09:35:18, EST

Subject: RE: Potential Opportunity Zone Investment

Dear Melanie,

Many thanks for your inquiry. We are delighted to hear of your interest and look forward to partnering with you in bringing a successful, meaningful investment (or two!) to fruition.

The OpportunityCLE prospectus is a great starting step—glad to hear you’ve already reviewed it. Have you also seen our online platform, the Opportunity Exchange, which lists and evaluates neighborhood projects seeking investment with a social impact score? You may find some good leads there, and it also lists the appropriate contacts for next steps. Investing in a project that already has neighborhood anchors, supporters, and even other investors backing it could be an easier route.[1]

Since you mentioned Opportunity Corridor and the idea of a retail space, we wanted to bring a specific possibility to your attention.

Some context first: A few months ago, we launched an educational campaign around the city to inform residents about the influx of capital that may be coming to Cleveland because of the federal Opportunity Zone incentive. The purpose of these sessions was to increase engagement and source ideas from residents on what changes they wanted to see in their neighborhoods. This led to the creation of special task forces in some neighborhoods—comprised of local stakeholders including nonprofits, residents, activists, politicians, students, and entrepreneurs. These task forces have mobilized quickly, producing an astounding amount of recommendations. We are committed to actualizing many of these wish list projects with additional local incentives to complement the Opportunity Zone incentive. Ultimately, we believe that investments emerging from these recommendations will be the most rewarding and successful, since there is already local demand for the identified needs.

The task force in the Opportunity Corridor district has been especially active and has already identified an empty plaza space that they’d like to fill with some locally-owned businesses. This closely reflects the idea you have for a business incubator. Your investment in the building’s improvement can directly influence the establishment of the space, which can surely become an anchor retail space for the neighborhood.

You did mention some possible businesses for the space, which sound like good ideas! Nevertheless, they may not have the requisite local demand to succeed, based on an analysis of the neighborhood CDC’s most recent survey on resident needs and wants. Luckily, though, the task force has already identified local entrepreneurs that are on a growth trajectory and looking for retail space. These could be perfect fits for your incubator. Moreover, they already have traction in their neighborhoods and investing in them could see impressive returns!

We’ll mention some of those businesses below, to give you an idea.[2]

  1. EZ-Clean, a laundromat (65% of the residents within a 1-mile radius are renters, many of the homes do not have washing and drying machines, and there are no other functioning laundromats in the neighborhood. The businessowners are committed to providing employment specifically to formerly incarcerated individuals)

  2. We-hicles, a local rideshare service for the elderly (the entrepreneur is also looking to expand her fleet, so if you’d be interested in a capital expenditure investment, let us know)

  3. Nick-o’-Time, a retailer for watch straps (started by a young enterprising teenager named Nicholas, these wristband straps have been a major hit locally. The young man is committed to hiring other local teens that choose not to go to college and mentor them on how to become entrepreneurs themselves)

  4. FRESH, a cooperative grocery store (the neighborhood has a few community gardens and urban farms that have traditionally sold their products online or through subscriptions, but they are interested in operating a storefront grocery store to provide their produce directly to their neighbors under an employee-owned model)

and a handful of others, which we can discuss in detail further. All these businesses are supported by a robust technical assistance and entrepreneurial support ecosystem. Moreover, these businesses have participated in a specially-designed two-day curriculum that educates them on financial milestone planning, Opportunity Zones, and how they can maximize potential investments in their business. In short, they are sure to be promising ventures.

As mentioned, we are committed to supporting the projects with greatest potential social impact by adding further incentives. Through a combination of other legislative tax credit programs (e.g., New Markets Tax Credits, Low-Income Housing Tax Credits), added funding from partner philanthropic foundations, and other financial de-risking mechanisms such as municipal bonds, we will give preferential treatment to investments that include any (or all) of the following:

  1. Economic Impact (high number of jobs created)

  2. Local Hiring (high percentage of employees are City of Cleveland residents)

  3. Diverse Hiring (high percentage of employees are women and/or people of color)

  4. Local Procurement (high percentage of suppliers are City of Cleveland companies)*

  5. Diverse Procurement (high percentage of suppliers are women or minority-owned companies)*

  6. Wage Quality (lowest-paying job still above hourly living wage of $23.61 for Ohio family of 4)[3]

  7. Signed Community Benefit Agreement with local community development entity

  8. Public Reporting of investment information including amount, jobs created, wages paid, etc.

*Note, we are happy to make recommendations for local & diverse suppliers.

Given the nature of the proposed plaza project, we think it would be relatively simple for you to meet the above conditions for added incentives.

Moreover, this project could be eligible for our Opportunity CLE Development Fund, a recently-announced $50 million fund that will further strengthen the feasibility of select projects by offering below-market interest rate loans.[4] This loan was created specifically to target investments that have high potential for social impact.

Finally, we want to convey that we are being mindful of potential displacement, with a focused eye on the impact on racial equity. We like to share data around racial demographics in the census tract(s) of your designated investment. The Opportunity Corridor census tracts, and the population percentage that is nonwhite in each tract, is given below.[5]

  • Census Tract 1135.00 - 95.5%

  • Census Tract 1136.00 - 92.4%

  • Census Tract 1138.01 - 97.5%

  • Census Tract 1141.00 - 99.2%

  • Census Tract 1143.00 - 100%

  • Census Tract 1145.01 - 96.3%

  • Census Tract 1146.00 - 59.1%

  • Census Tract 1147.00 - 100%

  • Census Tract 1192.02 - 69.6%

  • Census Tract 1193.00 - 99.2%

  • Census Tract 1196.00 - 97.2%

In abiding by some of the practices outlined earlier in our email, your project would help close, rather than further divide, some of the racial inequities in our region.

Again, thank you for your interest. We are encouraged by your apparent thoughtfulness and intentionality, and of course, share the same vision for a prospering, vibrant Cleveland teeming with opportunities for all that call our city home.

Our best,
Cleveland

[1] The prospectus & the online database are both real efforts. Read more about them in the Afterword and by visiting the hyperlinks.

[2] All small businesses mentioned are fictional.

[3] See MIT Living Wage Calculator: http://livingwage.mit.edu/states/39

[4] The Opportunity CLE Development Fund is a real effort, announced in June 2019 by the Greater Cleveland Partnership and managed by Cleveland Development Advisors. Read more about it in the hyperlink.

[5] This table is not fictional and is based on 2017 Census data (American Consumer Survey) for the tracts in the Opportunity Corridor district.

 —

 AFTERWORD

This fictional correspondence between a wealthy investor, Melanie B. Webb, and “Cleveland” (no singular organization/entity is identified) attempts to illustrate what the Opportunity Zone incentive is, what it could mean for communities, and what healthy management of incoming investments might look like.

Opportunity Zone incentives were announced in late 2017 as a provision within the 2017 Tax Cuts and Jobs Act. The provision provides the ability for those with capital gains to defer taxes on those gains if they invest the money into designated low-income areas called Opportunity Zones. About 57% of neighborhoods in America qualified to become one.[6] Ultimately, after short-listings from local/state governments and subsequent Treasury Department approvals, 12% of all census tracts received the official Opportunity Zone designation.[7]

The purpose of the incentive (or, at least, one of them) is to drive capital to places experiencing under-investment or even disinvestment. The effort to establish Opportunity Zones was driven in large part by research done by the Economic Innovation Group (EIG), which revealed that economic growth was unequally distributed geographically—where one grew up largely dictated their chance at the American Dream.[8] The EIG’s Distressed Communities Index—a data tool developed to assess which parts of the country were struggling most across eight holistic factors—put Cleveland at the top of the index in 2016.[9]

What could be done about this vast geographic inequality? Opportunity Zones offer a possible solution: incentivize private investment in regions that don’t currently receive the attention of the wealthy.

So how exactly does it work? In short: for those that have capital gains (from an investment they made or stocks they sold), taxes on those gains can be deferred if they money is invested in an Opportunity Zone. If the investment is held for 5 years, 10% of the tax liability gets removed; if held for 7 years, 15% gets removed; and a 10-year-investment grants a 100% pardon on any taxes owed on that capital gain. According to the Tax Policy Center, only 5.8% of Americans will pay any tax on capital gains.[10]. In Ohio, the richest 1% own 64% of the capital gains in the state, according to Policy Matters Ohio.[11] Evidently, the investors that receive the tax benefits from this legislation are, without a doubt, far wealthier than the average citizen.

That said, the legislation could also provide much-needed economic stimulation for the designated Opportunity Zones. It is estimated that the incentive can unlock up to $6 trillion, which is currently sitting in the bank accounts of those with capital gains.[12] With an opportunity that large, cities and towns across America have quickly mobilized to position themselves as welcoming of investment. Cleveland included.

There are regulations around investments, such as an improvement of property clause and a ban on investing in “sin” businesses (e.g. casinos), but these regulations are quite minimal compared to past federal place-based economic development legislation.[13] That’s why, as multiple studies and essays have noted,[14] Opportunity Zones require more engagement and management on the part of local authorities to ensure that investments line up with the city’s own priorities for economic development.

“It really is important that cities, counties, philanthropy, and [Community Development Financial Institutions] understand what they’re trying to get in a particular neighborhood, what that neighborhood needs, how the existing tools intersect with this incentive, and what new tools are needed to either further incentivize opportunity,” says Brett Theodos of the Urban Institute.[15]

This is especially critical when it comes to the ability of investments to gentrify neighborhoods and deepen racial disparities.[16] As the fictional response letter shows, the neighborhoods falling within Melanie’s desired district are overwhelmingly black and brown neighborhoods (some census tracts within Opportunity Corridor are in fact 100% minority). Comparing the 64 census tracts designated as Opportunity Zones in Cuyahoga County with recent Census data, we find the following:

Out of 64 tracts, 54 are majority-minority, 35 tracts have a non-white population of over 80%, and 20 tracts have a non-white population of over 95%. Census tracts 1135.00, 1141.00, 1143.00, 1147.00, 1184.00, 1193.00, and 1965.00 have a minority population greater than 99%.[17]

Thus, being not only conscientious, but also actively vigilant in resisting capital flows that do not benefit minority communities is critical.

This will not be easy. Since there are no federal requirements to report Opportunity Zone investments and investors are not mandated to get a city’s permission, managing the influx of capital will be a difficult task (causing a healthy amount of skepticism around the policy[18]). However, through mechanisms like land trusts and zoning, local government officials could serve to regulate harmful investments (Cleveland is currently building a robust strategy around zoning and Opportunity Zone incentives). Furthermore, to the extent that investors engage local organizations in their process (like Melanie has done in this story), certain opportunities can be presented and advocated for by local leadership.

In the words of Bradford Davy, Director of Regional Engagement at the Fund for our Economic Future, “there will be a subset of investors that are mission aligned and want to see their investment do good. How can we work with them to do even better and provide both projects and incentives to meet their civic goals as well as their investment ones?” That is, how can we help those that want to do good, do even better?

The correspondence between Melanie and Cleveland above represents a possible answer to that question. Though the response letter is fictional, some of it is rooted in reality. Cleveland did create an impressive prospectus, which divides the 64 qualified census tracts in Cuyahoga County into 11 unique districts. The prospectus was released by OpportunityCLE, a partnership between the City, County, Cuyahoga Land Bank, Greater Cleveland Partnership, Cleveland Development Advisors, & the Fund for our Economic Future. Beyond the prospectus, an online platform was also released. As mentioned in the sketch, The Opportunity Exchange serves as a database of potential projects along with their social impact scores. Moreover, the city is working with the Urban Institute to develop a scorecard that evaluates projects according to how well they meet the needs of Cleveland residents. Projects that receive high ratings on this scorecard will receive special consideration for the Opportunity CLE Development Fund, launched in June 2019, and mentioned in the letter.

Certainly, many efforts are underway. Where could we improve? During a visit to Cleveland, Ja’Ron Smith—special assistant to President Trump for domestic policy (and a Cleveland native)—emphasized that the success of Opportunity Zones lies on how well the community is engaged. “When done the right way, this could revolutionize our country,” Smith explained, mentioning the importance of listening sessions and community boards.

In April 2019, leaders in Birmingham, Alabama launched an educational campaign to engage residents in the Opportunity Zone legislation (inspiration for the campaigns mentioned in this sketch). Their aim was to allow neighborhoods to identify and recommend what changes they wanted to see in their communities, so that those projects could be actualized through investment.  According to Birmingham’s mayor: “Sometimes, complex policies developed in the halls of Washington D.C. can seem remote to the residents they are affecting. As a local government, we have the power and the obligation to bridge that gap. We want our residents to be empowered to identify projects and drive development in the places they know best.’’[19]

Today, the neighborhood task forces, use of CDC surveys to identify local needs, curriculums for small business owners to access investment, conveying demographics of the neighborhood to investors in advance, and aggressive incentives for high priorities like who gets the jobs and how well they pay…Today, these measures may be fictional.

They need not be fictional tomorrow.

 —
References

[6] https://www.brookings.edu/wp-content/uploads/2018/10/Looney_Opportunity-Zones_final.pdf

[7]https://www.urban.org/sites/default/files/publication/99586/how_chicago_and_cook_county_can_leverage_opportunity_zones_for_community_benefit_1.pdf

[8] https://eig.org/wp-content/uploads/2017/03/American-Dream-White-Paper-V5.pdf

[9] https://www.nytimes.com/2016/02/25/business/economy/poorest-areas-have-missed-out-on-boons-of-recovery-study-finds.html

[10] Tax Policy Center Table T18-0052

[11] https://www.policymattersohio.org/files/research/opportunityzones.pdf

[12] https://www.forbes.com/sites/jenniferpryce/2018/08/14/theres-a-6-trillion-opportunity-in-opportunity-zones-heres-what-we-need-to-do-to-make-good-on-it/

[13] https://www.citylab.com/equity/2018/05/the-problem-with-opportunity-zones/560510/

[14] See for instance, this post by Fuse Corps and this post by The New Localism.

[15]https://www.urban.org/sites/default/files/publication/99586/how_chicago_and_cook_county_can_leverage_opportunity_zones_for_community_benefit_1.pdf

[16] Check out this interactive map at PolicyMap, which allows you to see demographic and economic data in designates Opportunity Zones.

[17] Using 2017 American Consumer Survey data, % non-white in each census tract. (Analysis done by author).

[18] For instance, https://www.brookings.edu/blog/up-front/2018/02/26/will-opportunity-zones-help-distressed-residents-or-be-a-tax-cut-for-gentrification/.

[19] https://www.birminghamtimes.com/2019/04/woodfin-unveils-opportunity-zones-initiative-for-city-renewal/

About the Series: The Commission has launched a year-long storytelling project called Racial Equity Sketches, in which we demonstrate how racial equity is interconnected with issues affecting both the business community and our larger community. These fictional stories are meant make economic development concepts accessible and to imagine what making “an equitable decision” could look like. Through them, we hope to reveal that equity is not always a major comprehensive strategy, but rather the compilation of many small, informed & thoughtful decisions. Each story is also followed by data and resources for further reading.

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