As cities consider how to engage private capital to attract its share of the $6 trillion of potential capital gains in the stock market for opportunity zone investment, the one refrain that should echo in their thoughts is that “scale matters”. The scale of potential projects will influence the type and nature of interested investors but also the impact and support of the project from the community at large. Most cities are focused almost exclusively on single asset projects – private transactions sponsored by professional investors where the city works to help attract additional capital to complete funding. Smart cities need to develop a multifaceted strategy that includes single asset projects but also includes master planned, large scale projects down to community development, neighborhood scale investments.
The opportunity zone legislation allows for investments at any size – from $5,000 to $50 million or more. Because the regulations took some time to be clarified and they mimic, in many aspects, that of New Market Tax Credits, much of the opportunity zone investment to date has been real estate oriented and focused on multifamily and mixed-use projects in census tracks that have already become investment targets of private capital. For cities to encourage investments in census tracks that have suffered long stretches of disinvestment, municipalities will need to look to larger, planned areas as projects that couple multiple single asset projects centered around public investments that reduce private capital risk and enhance return.
Cities need to develop a strategy to encourage investments at the other end of the scale spectrum - neighborhood and community scale investments. Given the current bias towards real estate deals, it easy to understand why most cities may have overlooked community scale projects. But there are some key advantages to promoting investments at this scale. Firstly, community scale investments do not require professional or accredited investors and therefore encourage broader participation. Secondly, this scale of investment can have a more immediate and direct impact on the economic growth and social equity of a neighborhood.
One of the open secrets is that the nature of OZ transactions is private and only requires the nominal involvement of local government rending municipalities blind to much of the ongoing activity. As such, local governments must make their involvement a necessary ingredient in order to both collect data on transactions and to ensure that projects address critical city concerns of increased resilience and social equity. Cities must provide some added value to the process for private investors and/or help to reduce risk or enhance return to successfully nudge themselves in the middle of these transactions.
Scale matters. Single asset projects reign king today as they are most likely to be “investment ready”, but cities must begin planning to create a pipeline of projects at a larger, master planned scale now to be ready for future OZ investments. Simultaneously, municipalities need to aggressively pursue smaller, community scale projects that more immediately address local needs and demonstrate the tangible benefits of the opportunity zone legislation.
The opportunity zone legislation allows for investments at any size – from $5,000 to $50 million or more. Because the regulations took some time to be clarified and they mimic, in many aspects, that of New Market Tax Credits, much of the opportunity zone investment to date has been real estate oriented and focused on multifamily and mixed-use projects in census tracks that have already become investment targets of private capital. For cities to encourage investments in census tracks that have suffered long stretches of disinvestment, municipalities will need to look to larger, planned areas as projects that couple multiple single asset projects centered around public investments that reduce private capital risk and enhance return.
Cities need to develop a strategy to encourage investments at the other end of the scale spectrum - neighborhood and community scale investments. Given the current bias towards real estate deals, it easy to understand why most cities may have overlooked community scale projects. But there are some key advantages to promoting investments at this scale. Firstly, community scale investments do not require professional or accredited investors and therefore encourage broader participation. Secondly, this scale of investment can have a more immediate and direct impact on the economic growth and social equity of a neighborhood.
One of the open secrets is that the nature of OZ transactions is private and only requires the nominal involvement of local government rending municipalities blind to much of the ongoing activity. As such, local governments must make their involvement a necessary ingredient in order to both collect data on transactions and to ensure that projects address critical city concerns of increased resilience and social equity. Cities must provide some added value to the process for private investors and/or help to reduce risk or enhance return to successfully nudge themselves in the middle of these transactions.
Scale matters. Single asset projects reign king today as they are most likely to be “investment ready”, but cities must begin planning to create a pipeline of projects at a larger, master planned scale now to be ready for future OZ investments. Simultaneously, municipalities need to aggressively pursue smaller, community scale projects that more immediately address local needs and demonstrate the tangible benefits of the opportunity zone legislation.
