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Inertia is not inevitable: John Lettieri on how Opportunity Zones are revitalizing economically-distressed communities

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This episode of Hub Dialogues features host Sean Speer in conversation with John Lettieri, the CEO of the Washington-based think tank Economic Innovation Group, about the early signs of progress with Opportunity Zones in the United States to boost investment and job creation in economically-distressed communities.

You can listen to this episode of Hub Dialogues on Acast, Amazon, Apple, Google, Spotify, or YouTube. The episodes are generously supported by The Ira Gluskin And Maxine Granovsky Gluskin Charitable Foundation.

SEAN SPEER: Welcome to Hub Dialogues. I’m your host, Sean Speer, editor-at-large at The Hub. I’m honoured to be joined today by John Lettieri, the co-founder, president, and CEO of the Economic Innovation Group, a U.S.-based think tank focused on, among other things, the geography of well-being, and policy strategies to boost economic activity, dynamism, and opportunity in distressed communities.

Under his leadership, the Economic Innovation Group has been at the forefront of a number of innovative policy ideas to boost economic development in rural and economically distressed communities, including Heartland Visas, non-compete reform, and the subject of today’s conversation, Opportunity Zones. The Economic Innovation Group championed the creation of Opportunity Zones to boost investment in distressed communities when they were first enacted in 2017 and has continued to work to improve, refine, and measure the model in a rigorous way.

John and his colleagues recently authored a new paper entitled, “Examining the Latest Multi-Year Evidence on the Scale and Effects of Opportunity Zone Investment”, that illuminates the progress of Opportunity Zones over the past few years. I’m grateful to speak with him about Opportunity Zones, why many in the policy establishment were instinctively skeptical, and how the progress is proving them wrong. John, thanks for joining us at Hub Dialogues.

JOHN LETTIERI: Thanks for having me, Sean.

SEAN SPEER: John, if we can start with some basic information about Opportunity Zones for our listeners, when did they start? What were their intention and purpose? And, in broad terms, how do they work?

JOHN LETTIERI: The Opportunity Zones were enacted as part of the 2017 tax reform bill that made large-scale changes to the U.S. tax system. This was one of the more, I would say, overlooked portions of that at the time, and in comparison to the size and scale of that law, Opportunity Zones are a relatively small part. But they were the first major advance in what we would call place-based policy in a generation.

For that reason, were noteworthy and somewhat novel. Opportunity Zones are not the first time that the federal government in the U.S. has attempted to stimulate private investment and economic activity in struggling areas of the country, but the model that’s employed, the incentive structure and the model for this law, does make several radical departures from what we’ve seen with older legacy programs. For that reason too, it’s noteworthy. 

In effect, the law, the incentive, really didn’t take shape until late in 2018. Almost a full year after the law was initially passed. Two things had to happen. First, there had to be the designations of the areas that would be eligible for the incentive, and two, the regs had to be released in initial draft form, which didn’t happen until October of 2018. You have mid-year 2018, the certifications of over 8,000 Opportunity Zones around the country and in U.S. territories.

If you look just at the 50 states and DC, it’s close to 8,000, and then another several hundred on top of that when you include Puerto Rico and other territories. That had to happen midyear, Treasury certified that, and then at the end of the year, towards the end of the year in October, you saw the very first sketch of draft proposed regs from Treasury and IRS. That really was the starting gun for the regs that’s become the OZ market. The way it works is by providing favourable capital gains tax treatment for certain qualifying investments in the designated areas. The designated areas themselves generally had to comply with the preexisting standard of what’s called a low-income community.

This has been used in other U.S. programs like the New Markets Tax Credit. It looks at poverty or income as the primary measures of what qualifies, and so it sets a statutory threshold that every state had to comply with, and then within that, states had to downselect from their total pool of eligible tracks to their selected pool, which could be about 25 percent of their total eligible tracks. What governors actually did in this case, was go, in general, far beyond what the statute required.

The clear majority of tracks didn’t just meet the low-income community threshold, it met an even higher threshold that Treasury keeps called the severely distressed community threshold. Over 70 percent of the designations met that higher threshold. And they cross every socio-economic measure you can think of. Opportunities Zone communities are far more distressed and high-need than the average U.S. community.

The targeting, while not perfect, and we can talk about that later in this conversation, was overwhelmingly on point in terms of the fundamental characteristics that lawmakers had in mind when passing this law. Those are the places that qualified. In terms of what qualifies for investment, just very briefly, the idea was to encourage investors who have unrealized capital gains—they have investments on which they’ve made gains but have not yet realized those gains—to convert all or some portion of those gains into productive investments in these communities.

The idea was to remove as much friction as possible and to create as much incentive as possible to take things from one side of the ledger—passively held capital gains that are not being put to productive economic development use—to take those in whatever form they are—they could be a real estate holding, they could be equities, they could be art, they could be anything you can think of that would generate a capital gain—and to reinvest those proceeds into underserved areas, and to tap into a pool of investors and a pool of capital that had not yet been participants in economic development in these lower-income areas.

Bear in mind, this is emerging from the wake of the Great Recession where we see a highly uneven geography of economic recovery in the wake of the Great Financial Crisis that we saw in the late 2009, 2008 period. That recovery was remarkable for a number of reasons, but what really stood out to us at the time was we had a relatively small handful of places that were soaring back and a very large share of U.S. communities that were treading water at best, or continuing to fall behind even as the national economy was technically in a recovery.

We know that one major aspect of well-being is access to capital and whether private investment, in particular, is being productively put to use. When you looked at the challenge and you look at the toolkit that the federal government had, there’s a real mismatch there. Looking at previous examples of place-based policy and place-based interventions, we set out to try to apply lessons learned about the shortcomings of those previous policies and bring that toolkit more into the modern era and say, “What’s a powerful new thing that the federal government could provide that would help encourage capital to get off the sidelines into these communities and do so in a way that could achieve the scale and diversity of use case that had alluded previous attempts.” That’s really the environment out of which Opportunity Zones were born.

SEAN SPEER: That’s a great answer, John. A comprehensive picture both of the original objectives and then thinking through the policy design including the selection of the zones.

One of the reasons I’ve always been drawn to this concept is how decentralized it is. The inducements themselves are relatively neutral, they decentralized most decision-making in the hands of investors. Then as you say, John, the selection of the zones themselves was decentralized to state-level governments both to identify which zones would participate in their respective states.

But, as I understand it, some states then also sought to supplement the federal inducements with their own policies in order to make investment in Opportunity Zones more attractive and possible. Do you want to elaborate a bit on the extent to which this has produced some experimentation at the state level as well?

JOHN LETTIERI: It sure has. You see this both in policy and in economic development and practice in terms of the way different states have built a strategy around their Opportunity Zone designations and done things, as you mentioned, from adding additional state-level incentives to practical support to the non-profit sector and the philanthropic sector helping to connect communities and local needs and opportunities within those communities with outside capital. You see a lot of different experimentation happening at multiple levels in states. I should also say, you also have states going in the other direction.

A few states have decoupled their state-level capital gains treatment from the federal incentive and essentially stepped back from that. We’re going to be able to see over time what kind of implementation strategies worked and which ones didn’t. For the most part, states have overwhelmingly tried to be additive. You have a state like Ohio that’s added a state-level tax credit. I think there’s certainly been a lot of uptake of that. I think the early indications are that that policy has been quite successful at putting Ohio in a more favourable position when it comes to where dollars are going to go around the country.

That’s because every state has its own tax code. It has its own tax rules. Not every state mirrors the federal treatment of capital gains. Most do, but many don’t. States like California, New York, for example, where a lot of capital gains are generated, and a lot of those taxpayers live do not automatically conform. They have to opt in, so to speak. California never did, New York did for a period of time and then decoupled.

You have states like Ohio, again, that have added additional layers of incentive with their own requirements, by the way. What Ohio’s been able to do is get a lot of information on the what and the where of Opportunity Zone activity in their state, because they have this additional layer that allows them to capture that. You have states like Alabama that have an impact investment-oriented incentive that’s a relatively high bar to meet, but a pretty generous incentive if you meet it.

You see a lot of that type of experimentation around the country. You have different priorities as well. You have sub-states that have really prioritized rural economic development. A state like Colorado, I point out has done, I think remarkably well. We see this both in the data and the anecdotes that the balance of investment and the share of Opportunity Zones within the state seeing investment, it’s quite broad.

I think that owes to both a good selection process from at the time of Governor Hickenlooper, but also a good follow through from the next governor, Governor Polis, who’s really devoted a lot of resources and energy from the State Economic Development Authority to seeing that put to use in productive ways off the beaten path. Not in the obvious areas like Denver alone, but also in the western slopes of Colorado and places that have really seen not a lot of economic development activity in recent years.

There’s a wide diversity, which makes sense because of the needs across the country. A country as vast and diverse as the United States is going to have a wide range of local needs and opportunities. This has been one of the challenges of federal policy to help spur private capital, is that you often have a very narrow, very top-down, and prescriptive approach that if you just look at it on paper, I think very few people would say this has a chance of reaching a wide diversity of places because not all places have the same needs.

They don’t all have the same capacity to implement new tools like this. You need something that is malleable enough to be relevant in a lot of different community contexts from urban to rural, from legacy cities to other newer major metropolitan areas. We just haven’t typically been able to square that circle in federal policy. This is an attempt to do that, to make it more valuable, to give a lot of agency to state and local governments and other stakeholders to put the tool to use in a way that makes sense in their context. That’s part of the experiment here we’re going to see over time how well that actually works.

SEAN SPEER: I’ve even seen cool local initiatives in places like Erie, Pennsylvania, where local investors have developed prospectus that they are then committing to match at some level the investment coming in from different Opportunity Zone funds. As you say, the model really has seized on the strengths of American federalism and let a thousand flowers bloom.

JOHN LETTIERI: Just very briefly, Erie I think is going to go down as one of the most interesting economic revival stories of modern times in the United States. I think it’s one of the most unexpected and counterintuitive local success stories, not just for Opportunity Zones, which it certainly is, but just more broadly. It challenges a lot of notions about the inevitable inertia of post-industrial legacy cities in our country.

On this slow and steady decline, Erie was at the top of nobody’s list as a place to see emerging or early emergent success with this brand-new federal policy. Yet it has, and I think it’s become the case study for how to match a local strategy and local stakeholders with a federal tool, and to mix all those together in a way that saw profoundly positive, and is continuing to see, profoundly positive results.

I just want to put my thumb on the scale for that one. Just from a research perspective, from an economic development case study perspective, I think there are very few places in the country that are more fascinating than what’s happening in Erie right now.

SEAN SPEER: I promise, John, we’ll get into some of the early results, including those set out in your recent EIG paper, but just a couple more contextual questions for listeners who may not be as familiar with the Opportunity Zone model. First of all, in terms of the 8,000 or so zones across the country, just paint a bit of a picture. One way to conceptualize them is more like neighbourhoods than it is communities. Is that right?

JOHN LETTIERI: The unit is the census tract unit. That’s a few thousand people per census tract. They’re often, though, clustered together. You see the selections tend to be clustered with other selections. What you end up having is a clustering within a city, often very adjacent to downtown, and concentrations, little pockets of Opportunity Zone selections that all work together to form not a full labour market but a bigger representation than just that individual census tract itself.

Which is what the law actually didn’t require, but encouraged governors to do, to think about how to select contiguous clusters of zones that could function as more of an epicenter of economic activity. Because as you know, the real world does not conform to arbitrary census tract lines or the boundaries we draw on a map and so this is again why the federalist approach to Opportunity Zones, we think was an important feature because it allowed for local knowledge to influence the selection process and say, “Okay, well, on paper, it may seem like this, but in the real world, there’s a train track or there’s something that is adjacent to this area that would make it not makes sense to select this place or that would make it much more useful if we selected this and that.” There’s a lot of that kind of thinking and local knowledge that you see showing up in the actual selection process.

SEAN SPEER: Investment in Opportunity Zones is delivered through what are called Qualified Opportunity Funds. John, can you talk a bit about them? How many are there roughly and what’s the mix between those that are conventional investment funds, principally focused on high returns versus those that are motivated, at least in part, by a social responsibility mandate? How do these work, how have they emerged, and what’s the magnitude of investment we’ve seen so far?

JOHN LETTIERI: That’s a great question. Unfortunately, all of my answers will have to be caveated with there are some that we know and there’s a margin that we don’t yet know, in answering those questions. Qualified Opportunity Funds are the mandated intermediary and they can be just about any kind of corporation or partnership structure that you can imagine but they have to exist for the purpose of making qualified investments in Opportunity Zone areas.

That’s the distinguishing feature. They certify with Treasury and the investments that they made. They raise the capital. It could be from a single investor, it could be from a large pool of investors. Again, there’s a lot of flexibility on type and structure. The uniting factor is they exist to deploy the vast majority of their capital in Opportunity Zone areas, according to the statute. Those intermediaries through 2020, which is the most up-to-date IRS data that we have, there are several thousand of them. There are 25,000 individual and corporate investors in Opportunity Zone funds and the funds themselves number upwards of 7,000 plus.

The 25,000 of investors in those funds is split between the individual side which has 21,000 investors and the corporate side which has 4,000. By the standard of economic development policy and place-based incentives, that’s massively larger than what we’ve seen with other policies. Again, if you think about the continuum that the policy was attempting to set off, the chain reaction, large-scale participation, like what I just mentioned, drives large-scale capital formation, which drives broad geographic dispersion.

That’s really important. If you want to reach a lot of different places in a lot of different ways you need to have that full chain. To get to the national scale it matters to have a lot of investors but those investors are also distributed across every state. Again, investors have a local bias in terms of where they want to put their capital to use.

Not every investor wants to go to the same few markets, and not every investor is going to be comfortable going to those markets. Having a wide array of local investors around the country also means you have a much higher chance of reaching a wide array of local communities. That’s exactly what we see in the data.

Through 2020, you have close to 50 billion in Opportunity Zone equity capital raised and deployed, and that corresponds with other capital by the way. Most of the investments that we see in real estate, for example, they’re not just equity investments, or it’s equity plus debt finance—and plus other types of equity by the way not just Opportunity Zone equity. There’s a multiplier effect that I would very conservatively say, let’s say for every dollar of OZ equity, there’s probably another dollar plus of non-OZ capital that’s going into those same investments.

The equity in any deal is always the hardest and most important part to get. That’s been the missing piece that the Opportunity Zones were attempting to fill. You’re talking about just through 2020, probably upwards of $100 billion in total investment going into these qualified investments. If you fast forward to where we are today in the second quarter of 2023, I would not be surprised if that number has doubled.

Every bit of anecdotal data and partial measurement that we have so far says there’s ample fundraising through ’21 and ’22, and continues to go up. The number is going to be significantly larger than it was where the latest IRS data drops off. That just puts again into picture, just through 2020 to see almost 50 billion in OZ equity. That too is an order of magnitude larger than what we’ve seen with previous placed-based policies, like the New Markets Tax Credit. It’s reached almost 4,000 communities by that point.

Almost 50 percent of U.S. Opportunity Zones saw investment by the end of 2020. That too, it took the New Markets Tax Credit 18 years to reach that number of communities. OZs did it in less than three. Again, it gets to the fundamental questions about how do you spur more scale, more geographic distribution, more malleability, and how it can match with local needs in real-time, not having to apply and wait to be gifted a tax credit, but to be able to put that capital to use when the market presents an opportunity and when there’s willingness from investors. The speed to market is a big feature of OZs.

We don’t have definitive evidence of what it will be in the long term, but the question about would it get off the ground and reach escape velocity in those first few years, we now have definitive proof that it did that.

SEAN SPEER: After the legislation was passed and as zones were selected, as you set out, John, it took a while for the government to roll out some of the accompanying regulations and guidance to fully operationalize the model. My understanding is that in a way this distorted the early investments because one of the few areas where the model was established was real estate. It contributed to an initial criticism that Opportunity Zones were basically evolving into a real estate investment vehicle, even though that was, in large, part a function of simply the rollout of the policy. Do you want to talk about some of those early policy issues and how they may have contributed to an initial set of criticisms about Opportunity Zones?

JOHN LETTIERI: It’s a really good question. It’s a criticism I’ve lodged myself, so I don’t want to completely debunk it. As you said, I think early on what treasury was attempting to account for in its early preliminary draft Regs was, “Let’s take care of the simple questions first.” Most of those simple questions unlock activity in the real estate sector. You think about why that’s the simple part.

It’s because real estate is not mobile, so investing in real estate-oriented operating businesses provides more certainty in the compliance sense that you don’t have as many variables to account for and there’s not as much compliant risk as a result of that. Compared to non-real estate operating businesses that can move, can get sold, and can have all kinds of other factors, multiple locations.

There are things that have to be taken into account to ensure that you’re not subsidizing activity that’s primarily happening elsewhere. An effort to safeguard the way that the incentive is being used, it takes longer to work out those questions related to non-real estate operating businesses. That is certainly one part of the reason that real estate got out of the gates quicker. It’s also just true that the real estate industry is much better and more used to dealing with federal incentives like this.

There’s a long legacy of them. Although this one is different, it’s still enough of a piece with what’s happened previously that that industry was better able to mobilize. Just, again, fewer variables, more of a track record within the industry of using these types of incentives. They were able to get to ground early. That’s not a bad thing in and of itself. I think the bad thing to me is that, beyond that initial practical reality, the Trump administration made a conscious policy decision, I would say, to deprioritize the non-real estate side of the equation in the way that regs got written.

While they eventually got to a lot of good answers that helped, and this is—the final regs didn’t get published until the end of 2019. Two full years after the law was passed, you finally got answers to the core questions that would hold up or facilitate market activity in a non-real estate context. That’s a long time to wait. A lot of impressions are formed within that time, I think, but more to the point, a lot of the eventual answers they got to were still pretty unsatisfactory for the part of the investment spectrum that wanted to invest more like a venture capital type of fund. Things with recycling capital back out of exits and back into the Opportunity Zone qualifying communities, those questions were resolved partially in many cases but not fully to the satisfaction of what investors would’ve wanted.

Which is funny because the one of knocks on regulatory process is that it was universally investor friendly. That’s just not the case. I have the scars to prove that from talking to a lot of folks in that community. Those are policy decisions of the Trump administration that had an effect on the disposition of how the policy was put to use. I think they got a lot of things right. I think the statute got a lot of things right but no law is perfect and no implementation process is perfect.

This certainly wasn’t either. I think there are a lot of lessons learned for the next iteration that are of particular importance to my organization as we think about how do we really make sure that the next version is even more useful in an operating business context outside of the real estate industry itself. That is not to say, by the way, Sean, that there’s not going to be a lot of investment happening into health-care businesses, robotics businesses, life sciences, but there are a lot of different types of industries and businesses that are getting direct capital and there’s a lot of real estate investment that’s predicated on commercial tenants and commercial activity.

It’s not a clean line between real estate and non-real estate. Those things often work in tandem. If you look on the ground in a lot of these communities, they’re desperately in need of habitable space for both workers and businesses. The real estate side is in some ways establishing that beachhead for follow-on investment to come in. Those are all good things.

The full ceiling of what we would’ve wanted, speaking for EIG, wasn’t achieved but I’d say 80 percent thereabouts was achieved. That’s a good starting point for this version of the experiment that we’d want to carry forward, apply some lessons learned and try again with an even more refined version in the future.

SEAN SPEER: Well, I should just say in parenthesis, John, it speaks so well of you and the team at EIG that throughout this process you’ve continued to make the case for refinements and improvements both to the law and the regulation to close that gap between 80 and your optimal policy view. I think it, yes, as I say, speaks really well of you and your organization.

If I can stay on the topic of some of the earlier aversion that we saw to Opportunity Zones in policy circles. The criticisms ranged from, on one hand, that they amounted to a market intervention that would distort economic decision-making, to those on the other hand, who claimed that they were a boon to wealthy investors. Why do you think there was so much group think in the policy establishment when it came to Opportunity Zones, John?

I ask because setting aside the outcomes, just conceptually, it seemed self-evident to me that it was an innovative policy idea that, as we’ve discussed, was mostly decentralized but also sought to nudge investors in the direction of investing in communities who need support and for whom typical economic development programs had produced underwhelming results. It seems like a model that should have had a lot of interest in the policy community. My question for you is: why not?

JOHN LETTIERI: Well, that’s a big, loaded question, Sean. So, I am going to be very diplomatic in answering it. I think there are three reasons I’d point to, two of which are good faith reasons, one of which is a bad faith reason. The good faith reasons are, and again, I would associate myself with number one, we should be skeptical of any new experiment that attempts to do something that previous policies have failed to do.

There should be a baseline level of skepticism, not cynicism but just skepticism that we’re not going to accept at face value that this is going to work exactly how it’s being marketed. I think given the literature on place-based policies and incentives over time and how most of them have at the very least fallen short of expectations or had ambiguous economic effects, if not negligible economic effects, that should colour the average observer’s view of this new thing.

For a lot of them, they saw no distinction. They didn’t know the distinction between how OZs were designed versus how those previous attempts were designed. That leads to the second good faith reason why I think there’s some pushback, is that there’s a real misunderstanding—you can see this very clearly in a lot of the early commentary, just a fundamental misunderstanding about how the policy actually works, how it’s actually designed.

If you mix the, well, I know that place-based policy doesn’t work, according to the empirical literature plus this new thing, which I don’t really understand very well, you mix those two together, you get a lot of people are just resistant to the idea that this is going to be a success just at face value but not necessarily entrenched in that. Just that it sets a high bar for them to be convinced. I’m okay with that. Both of those are fine for there to be a better understanding of how the policy works because you can account for a lot of the criticism right there.

If there’s a belief that basically any investment in an Opportunity Zone would qualify and that is just fundamentally not the case. There are a lot of rules you have to comply with compared to other tax policies, it’s relatively simple. By design, it’s meant to create clear lanes, but once you’re inside the lane, you can maneuver however, is necessary, as long as you’re not running afoul of the rules.

I think that’s intuitive. If we want people to do more of something, we don’t want to make it hard for them to do that thing to the point where they’re turned off and put their capital to use elsewhere. There still have to be rules and with Opportunity Zones there are, but there are a lot of misconceptions like that, that led people to attach themselves to criticisms that were never going to prove correct. This was not just a wait-and-see thing, this is, “I just don’t understand the policy.”

The third reason I think is the more cynical, politically motivated one, which is you got this policy that emerges from two years of being a standalone proposal. It’s folded into the Tax Cuts and Jobs Act—

SEAN SPEER: Supported, by the way, by Cory Brooker, a Democrat from New Jersey, and Tim Scott, a Republican from South Carolina, right?

JOHN LETTIERI: Supported by close to 100 Republicans and Democrats across the entire political spectrum. This was, I would argue, at least as bipartisan, a portion of the tax bill as any policy they got folded into the 2017 Tax Bill. Just as a standalone proposal, by the time that happened between the House and Senate, you had nearly 100 co-sponsors. You had a representative division of Republicans and Democrats at that time in Congress, you had the voting majority of the Committee of Jurisdiction, and the Ways and Means Committee of the House were co-sponsors of this bill.

I can tell you, for a tax policy, that does not happen often for any material, really of any consequence, which this was, at a time when tax reform was the issue of the day. You had a lot of contentious debates happening about tax policy that were very partisan. This bill did not look like that. This looked like a big bipartisan thing, so you start there. I think that reflects the reality on the ground, which is communities in question here are Republican and Democrat and purple, everything in between.

These are places that don’t follow any clean red versus blue mapping. Some of the biggest proponents of Opportunity Zones on the ground are Democratic mayors and Democratic governors. Outside of DC, this is really not, even today, this is not controversial in the least in the vast majority of places. It’s a tool to be put to use for a need that everyone acknowledges is a big need that we don’t have enough resources to meet. So from a non-DC standpoint, it’s very straightforward.

I think it’s hard to overstate how much the era of Trump, the Tax Reform Bill being a partisan exercise in terms of the vote, all of that really coloured what would come next. You had some, I’d say, bad faith observers and commentators who were never going to let the evidence lead their opinion on this. Their opinion was going to lead the evidence and that’s very much how it played out. Thankfully, now we have more evidence to work with to say, “Let’s revisit those early critiques and see do they hold up under scrutiny now that we have evidence in hand.” The spoiler here is that most of them don’t.

SEAN SPEER: Yes, that’s a great segue to my remaining questions in today’s conversation. EIG has produced, as I mentioned, a crucial study that at this stage of implementation is in a position to make some judgments about Opportunity Zones’ performance thus far.

As you say, John, many of the results challenged the early skepticism of the policy’s critics. One key finding from the research is the breadth and scope of investment, which you’ve talked about a little bit already, is that nearly half of Opportunity Zones have received private capital as a result of being part of the program. Why is this important and what does it tell us?

JOHN LETTIERI: It tells us a few things. One, you can’t take for granted that this new model of incenting private behaviour and pulling capital from one set of activities into more on the ground productive investment. There’s nothing to say ex-ante that that was going to work or that it was going to work at scale. The fact that you see so many investors across so many different geographies investing at such a large scale and reaching so many communities through the second full year of the policy—nly one year of full implementation is accounted for that—and that’s the COVID year.

I think it’s also, remember the context here, 2019 is when the regs come out and early Q1 2020 is when a global pandemic hits. It had a little effect on the economy, you might remember. The idea that this was a pain-free exercise at every step, there’s been real challenges to overcome. To achieve that scale and scope in spite of those challenges is remarkable and you don’t have to like the policy to acknowledge that.

No observer has to say, “I sign off completely on how that capital’s been put to use.” Just as a threshold question, does this model move behaviour and get capital moving at a certain scale and just distribution? We can say yes to that now. We know that it did that. In fact, at the very time, the very moment that critiques, people were writing books and going on book tours talking about how Opportunity Zones has failed to reach a meaningful number of communities based on the data they had at the time, which was partial one-year data from before the regs were in.

The very moment that they were making those claims, Opportunity Zones had surpassed my expectations for where it would end up in 2026, the end of the rainbow. I thought if we ever got to 50 percent, that would be phenomenal given how large the scope is. 4,000 communities is not a small share. The types of communities that the IRS data shows that it’s going to are in the highest quintile of need across unemployment, poverty, and income.

SEAN SPEER: Let me take up that finding, John, that indeed, Opportunity Zones are some of the most distressed parts of the United States. Do you want to unpack a bit why this is so important, especially in the face of what has proven to be a wrong-headed criticism that these zones that were being selected or designated by governments were going to exclude some of America’s most vulnerable communities and citizens?

JOHN LETTIERI: Exactly as you said, a lot of the early critiques did a very clever job of what you might call nut picking. They would find the worst outlier and say, “Well, this is representative of the case for Opportunity Zones. Look at this community that shouldn’t be an OZ.” The flip side, the trade-off and providing that federalism in terms of the selection processes, we had some governors who allowed some places to make it into their selections that don’t pass the eyeball test for what an Opportunity Zone should be.

One example of that would be a tract in Long Island City in New York. That got a lot of attention. That’s in literally the 99.9th percentile of those used by income. It could not be a more extreme outlier to tell you anything about the normal, what is an Opportunity Zone on average. That was held up as, “Well see, this is what they’re like.” Rather than this is an extreme outlier, and by the way, EIG and a lot of other organizations say, “Let’s deal with that. Let’s sunset those types of zones early.” That doesn’t tell us anything about the typical Opportunity Zone.

In a lot of people’s minds, and again, it’s based on how this is presented in press coverage and some of those motivated bad faith commentators, they treated it like it was on the one hand you have these, and then you have some legitimately needing tracts as if they’re in the balance, rather than extreme outlier and then the broader national story. The IRS data just makes it unambiguous clear, not just for the selections, not poorly targeted in general, where the capital is actually going is representative of congressional intent and far exceeds the congressional statutory threshold.

It’s not just the selection process, it’s where dollars are actually going. That’s really important because it allows us, again, to put to rest this idea that capital is just going to go to the very best-off Opportunity Zones and everybody else is going to miss out. Actually, we find in 2020, the worst off OZs, the bottom decile of OZs, which are extremely distressed, see a proportional share of investment. They see more than 10 percent of the investment in that year. That’s a remarkable finding and one that should give a lot of people hope that this is going to turn out much better than what they were told to expect.

SEAN SPEER: We talked earlier about the Qualified Opportunity Funds. One thing that your research finds is that they’re drawing on an increasingly diverse mix of investors. Why does a broad and diverse investor base matter for realizing the policy goals of Opportunity Zones?

JOHN LETTIERI: As I mentioned earlier, I think one is geographic distribution. You want it to reach a lot of places. You need to pull investors off the sidelines, not just in the conventional centres of capital, but in the places that have not been big participants in policies like this in years past. When you look at New Market’s Tax Credit, that’s the legacy program, it’s been on the books for more than 20 years, 90 percent of their investment comes from corporate investors.

You see that almost perfectly inverted with Opportunity Zones where 85 percent, 90 percent are individual investors. We’re getting a meaningful participation from both ends, the corporate and the individual. What that tells us is that OZs are pulling, not just poaching from people who are already in the game, it’s pulling new participants into the game, which is desperately necessary. If you want to see large-scale change in these communities over time, you need a large-scale change of behaviour among investors.

That really fundamentally means individual investors as well as corporate investors. If you can effectuate a norms change for how investors think about, “What are my options?” This is return-seeking capital, it’s not philanthropy. Philanthropy has always been there and should be doing more for these communities. That’s a podcast for a different day. If we want to build on what philanthropy can do and what federal investment can do, you need private investors to be in that game as well. That norms change is desperately needed, has not showed up in previous policies. We’re seeing some evidence that it’s showing up here.

SEAN SPEER: A penultimate question: Probably the most promising finding in the paper is that those communities that are benefiting from opportunities seem to be experiencing what you call “large and immediate effects.” Can you elaborate a bit? What’s the research showing, John?

JOHN LETTIERI: Yes. That’s taken from the paper by a researcher named Harrison Wheeler, who looked at building permits data four years before OZ designation and four years after. A very large sample of 12,000 census tracts across 47 large cities. I want to just pause and say this is unlike other research we’ve seen in the quality and scope of the research. Big time to work with, lots of tracts to work with, and something very tangible, building permits which is the right thing to be looking at early on.

If you know that most of the investments going in are associated with real estate in some way, the first thing you want to look for is the permitting data because if that’s happening, that’s the upstream signal that there’s going to be downstream activity. Every building starts with a permit, right? He looks at building permit data, he finds that per designation, eligible tracts that were chosen and eligible tracts that were not chosen tracked very similarly. There are no systematic differences between the two.

At the point of designation, you see this very large gap emerge very quickly. So OZ tracts start separating from the other similar but non-chosen tracts to the tune of a 20 percent jump in the likelihood of development, commercial and residential, after designation. In terms of place-based policy that is a very, very large and promising effect. That then follows through to other findings that are equally promising, finds a positive spillover from OZ tracks into their neighbouring communities. It’s not just poaching activity from next door, it’s actually pushing activity next door as a result of being an Opportunity Zone.

It shows on a city-wide scale a boost in development and housing prices. It shows a jump in housing prices of over 3.5 percent from 2017 to 2020 within Opportunity Zones but no change in rents. Meaning the market is revaluing their community but it’s not driving up rents in a way that pushes out local residents, and that’s because of the supply angle. OZs is a fundamentally supply-oriented policy so to comply in a real estate context you have to be adding supply. That is what’s restraining growth and rents. We know this from the broader housing literature. Housing supply is very key to reducing displacement pressure. That’s exactly what we find with Opportunity Zones. That study is incredibly important.

It’s not telling us the long-term story because we’re not in the long-term yet. We don’t know the long-term effects on poverty and on income and on employment. Those are really important. I would say the most important questions. For where we are right now it’s telling us the incentive is having a behavioural change effect. It changes the trajectory of the communities and it changes the activity of investors. It’s not just a windfall, it’s for activity that would have happened anyway. That’s the most important question to answer right now.

Having that coupled with the IRS data provides a really powerful one-two punch to say, “Let’s revisit those early questions and assumptions and see how they hold up now we have multi-year evidence to work with.” That’s why we did our analysis. We think those two together shed more insight than every other piece of commentary that’s happened so far combined and really puts to rest a lot of those really good questions.

SEAN SPEER: Final question, John. I’ve spent a lot of time in the world of Canadian think tanks and of course, we’re always in search of the elusive causality. It’s common for think tanks to argue that their ideas or their analysis is associated with some kind of policy outcome but in this case, the Economic Innovation Group can claim true causality. It has influenced and shaped this policy and, as you say, the early results that it’s producing. Can you talk a bit about what it feels like to see this early progress since your initial support put you in the middle of some policy controversy?

JOHN LETTIERI: Thanks. It’s great. It feels good. We have a kind of nervous energy to ourselves here in EIG where we are not satisfied. I’m not surprised that the results are positive. I’m also keenly interested in having my hands on more data to be able to tell a bigger, richer, deeper story about what’s going on. That’s why you see us spending so much of our time and energy fighting for more transparency, more reliable data, and more improvements to the policy itself.

We don’t actually have to wait for more data to make changes on the margins of the policy that will make it better targeted and stronger especially in this post-COVID era where a lot of the communities in question need even more help than when the law was originally passed. We feel like the work is not done but to have this kind of tranche of multi-year evidence at hand is both rewarding because I was the kid who always liked to get my report card.

I liked to see what the grade was on the paper because I want to know how to course correct. I want to know how to adjust. I think as an organization we’re interested in the long term here for OZs to be the first of a new generation of policies that are aimed at doing the same thing. No one program or policy is going to get that job done. A constellation of efforts is required, and OZs should be the experiment that informs the other tools.

So, ultimately that’s the prize for us, is we want to—now we have a chance to measure a very different model over time and see did it achieve things that were elusive in other programs? If so, why? If so, where did they have the biggest effect? This emerging evidence is helping us answer those questions. We think this is as urgent a challenge as it was when we first started working on it, so let’s not waste time.

Let’s get to work on the next iterations and the next ideas informed by solid evidence about this first experiment. That’s what’s exciting. That’s what’s satisfying, is having more of that evidence in hand to say, now we can confidently go forward and inform new ideas that policymakers are very hungry for. We’re now living in the era of place-based policy again, and that was not true when we started. Given that that’s the case, let’s make it the best-informed policy that we’ve ever seen. Opportunity Zones can help in that regard as well. Not just delivering capital, but delivering evidence for how to structure ideas and incentives. It can be even more effective in the future.

SEAN SPEER: Well, John Lettieri, the co-founder, president, and CEO of the Economic Innovation Group, thank you so much for sharing that excitement and experimentation with us at Hub Dialogues.

JOHN LETTIERI: Thanks, Sean. It’s great to be on.

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