(This piece originally appeared in the Jan/Feb 2020 issue of The Review magazine.)

Created by the federal Tax Cut and Jobs Act at the end of 2017, Opportunity Zones have all the features of a gold rush: things are moving very quickly, everybody is excited, and nobody actually knows if there really is gold in them there hills.

The best-case scenario that Opportunity Zones have promised is a mechanism to bring investment into neglected low-income neighborhoods, supporting local services and business development. Because the incentive has no approval step, oversight, or even transparency for local or state governments, though, there’s high potential for abuse: it could end up being yet another way that predatory capital investors extract value from communities already suffering from deindustrialization, racial discrimination, or both. Somewhere in between is the possibility that OZs have no significant impact, that there’s very little fire under all this smoke.

The challenge facing communities is how to steer Opportunity Fund investors towards projects with true local benefit and put guardrails in place to prevent the worst—all without being able to see what, if anything, is happening with the incentive.

First, where are these zones?

The Snyder administration had to designate a certain number of census tracts as OZs within the first three months after federal establishing legislation was passed, with very little information about the incentive or opportunity for on-the-ground input. A map of Michigan’s zones is at https://miopportunityzones.com/ and there is currently no way to add, delete, or edit zones from that map.

This means some municipalities and neighborhoods could see OZ investment (and have no way to opt out), and others never will. Many of the strategies emerging for communities to benefit from OZs do have application in other places—just without the incentive’s boost to investor return.

Map of southwest Michigan showing designated opportunity zones

OZs were designated in both urban and rural areas around the state; check https://miopportunityzones.com/ for specific locations.

If you’ve got a zone—what does that mean?

Opportunity Zones are a federal tax shelter that allows investors to avoid taxes on capital gains by investing those profits in business or real estate development in designated low- and moderate-income communities for multiple years. The greatest benefit for investors comes after 7 to 10 years of investment, and the incentive was only authorized through the end of 2026, creating pressure for investors to move quickly and secure long-term investments. As a federal tax incentive, the only reporting required is between the Opportunity Fund investor and the IRS—local government and states do not have any formal role in the process, and may never even know which projects the incentive is being used for.

Chart showing compounding increase in tax benefit of OZ investment over time.

OZs incentivize holding investments for longer-terms over rapid flipping. Longer-term investing can help host communities, but also has led to a surge of up-front interest in this time-limited incentive. (Image from Governance Project, at 2019 Convention)

While most OZ investment activity so far appears to be in real estate development, the incentive targets capital investors, not developers directly. This is a point of difference from financing that targets particular development priorities, like MEDC’s Community Revitalization Program (CRP) or MSHDA’s Low Income Housing Tax Credit (LIHTC) allocations.

The newness of the incentive (and the suddenness with which it was created), the shotclock for investments, and the very large amount of capital that could theoretically be invested have created a lot of buzz and attention.  There are several challenges this poses for municipalities, though each challenge can be addressed.

Who is going to be investing?

The OZ incentive does not apply to all investment, only to investments of capital gains within a short period of time after these gains are realized. An investor in an Opportunity Fund has to not just have a large enough capital gain to make the marginal tax benefit significant, but must be able to afford tying up those funds for as much as a decade. Most OZ investment is therefore expected to come from large-scale investors such as private equity funds, institutional pension or endowment funds, or extremely high net worth individuals—investors who tend to be looking into a community from the outside, to have little connection or familiarity with the local context, and to be concerned only with financial return.

Some local investors will have capital gains to use, however, and the OZ incentive could bring impact investing within reach for these investors. By moving a Main Street investment from negative return to merely below-market return, a combination of OZs and the emotional appeal of investing where they live may get some locals to bring some money home from distant and anonymous investments.  Providing local attorneys and accountants, or the local community foundation, information on the OZ incentive and potential local investments is one way to reach these stakeholders.

Make the best projects easiest

While municipalities have no direct role in approving Opportunity Fund investments, they can use the tools they have available for directing any investment: local incentive policies, zoning ordinances, and capital improvements plans should provide clear and easy paths for developers and investors to do the projects the community wants to happen. A combination of guardrails against harmful projects and incentives or promises of quick approval for beneficial ones can do a lot to steer investment.

This applies whether the project is financed through an Opportunity Fund or not—developers prefer easy projects over hard projects, so communities can use their tools to make the good projects easy. (At our September Convention session on OZs, Jill Ferrari from development firm Renovare put it bluntly: “If you’re not in the Redevelopment Ready program, we’re not even going to look at a project in your community.”)

…and make them easy to find

Another emerging best practice for Opportunity Zones is that communities should proactively market the projects they want to happen. This has multiple purposes. Any municipality engaged in the Redevelopment Ready program will recognize the first: putting your community on the map for investors who probably aren’t going to find their way to you on their own. The second is to keep those investors’ attention on the projects that will provide the most benefit to the host neighborhood, rather than waiting to react to potentially detrimental projects. Finally, holding the local conversations necessary to identify, prioritize, and communicate those beneficial investment opportunities may trigger the interest of local investors who had previously overlooked opportunities right in their backyard.

One model for this marketing is the OZ Investment Prospectus popularized by Accelerator for America (https://www.acceleratorforamerica.com/tools). These documents combine community-wide economic and quality of life data, usually sourced from county or regional economic development organizations; walkthroughs of the district- or neighborhood-scale character and goals for each local Opportunity Zone; and descriptions of individual property or business investment opportunities within those zones.

In short, Opportunity Zones could be a beneficial catalyst to designated neighborhoods, but could also be an example of what Jane Jacobs called “cataclysmic money,” a large outside force that acts despite communities’ interests rather than for them. The best defense may be a good offense in this case: getting out in front of the investors and leading them to the projects that will actually add to our distressed neighborhoods and municipalities.

You may already know about the Public Spaces, Community Places program, and can probably recognize a project in your city or nearby. From historic building rehab and splash pads to public art and recreation fields, this program has dramatically improved public spaces across Michigan. To date, more than 230 projects have been successfully funded through the program run by Patronicity, with nearly $8 million in public investment and $42 million in private donation match. These projects even have an impressive 96% success rate! This format takes many small pots of money and combines them to make a big impact in community projects. It’s succeeded far beyond our expectations.

The cover for the new crowdfunding report.

Now we’re diving even further into what this kind of direct capital infusion can do for making private investments in local Michigan businesses, too.

The counterpoint to Donation-Based Crowdfunding is called Community Capital Investment. This model takes small amounts of private investments from everyday people or larger chunks of cash investment from individual investors or equity groups and leverages them to get small businesses off the ground. It comes with the expectation of return on that investment. Individuals interested in supporting their local businesses can invest anywhere from $100 to $10,000 per company, per year. Investment crowdfunding is structured to provide a return on investment, either through an ownership stake or through a debt position. Investors with a debt position are provided a pre-determined rate of return that can be structured in a variety of ways within the investment offering.

Michigan-based Revalue Investments has a great fact sheet on local community capital investing. They offer one-of-a-kind resources, services, and training workshops for Michigan residents interested in becoming local investors. Learn more at www.revalueinvesting.com

To document Michigan’s work on both donation-based Crowdfunding and Community Capital Investments, the League released a new report this summer, co-written with several partners. We unveiled it in June 2019 at a national conference of investors and community leaders in Detroit, ComCap19, hosted by the National Community Capital Coalition (NC3). The conference drew hundreds of community leaders, ecosystem builders, entrepreneurs, investors, citizens, and practitioners from across the country.

Milton-Pung, Barbash, and Czarnecki presenting at NC3 in Detroit

Milton-Pung, Barbash, and Czarnecki representing Michigan on the national stage

Three key women in this effort – Angela Barbash of Revalue Investing, Melissa Milton-Pung of the Michigan Municipal League, and Katharine Czarnecki of the MEDC – participated in a panel discussion at ComCap entitled “The Evolution of Community Capital in Michigan.” They explored the reasons why Michigan is at the forefront of the community crowdfunding movement.

The biggest takeaway from this national dialogue? When you’ve got the position to champion a good idea, take the calculated risk to boost the message and build confidence by transforming nebulous ideas into pilot programs.

The report, Community Investment, Community Growth: A Retrospective in Michigan Crowdfunding, tells this story of risk and championing. It chronicles the evolution of crowdfunding, including the false starts, the hard work, and the triumphs. This publication, available at www.crowdfundingmi.com, is now being used at the national level as a learning tool that every state can emulate to activate a previously dormant network of community investors. By sharing case studies, it lays out the origins of the movement in Adrian, Michigan, the passage of the Michigan Invests Locally Exemption (MILE) Act in 2013, and specific projects in Detroit, Traverse City, Lansing, Tecumseh, Calumet Township, and Portland.

“This report does an exceptional job of telling the story of one of our state’s best-kept secrets: how Michigan and our supporters are leaders in the nation when it comes to crowdfunding projects making a real impact in our communities,” said Dan Gilmartin, CEO and Executive Director of the Michigan Municipal League. “With community capital, we all can play a part in making our communities better – whether it’s with our ideas, our time, our money or our networks. It all contributes to the inclusivity and opportunity we ultimately seek, and it gives us a voice and a stake in the process.”

“With community buy-in, both figurative and literal, donation-based and investment-based crowdfunding can fill critical gaps in access to capital for businesses and projects in all our communities,” said MEDC Senior Vice President of Community Development Katharine Czarnecki. And Michigan is at the forefront of this community capital strategy. The return on the state’s investment has been incredible. “It’s an amazing return on the state’s investment,” Czarnecki said. “Now, we’re very excited to see other states following in Michigan’s innovative footsteps.”

As for the emergence of direct investment in local startups and business expansions, it’s becoming more normalized every day.
Learn more about community capital investment at http://whatisgrubstake.com

“We’re just now starting to see the market ripen for local community capital investment,” said Angela Barbash, CEO of Revalue. “Building upon what we’ve seen occur with donation-based crowdfunding, we’re now establishing legitimacy in this alternative to traditional market investments.”

Barbash’s firm is dedicated to not only raising the profile of this kind of next-level local economy as well as educating would-be investors to make wise decisions. “Investing in your own backyard seems like a no-brainer to most [of us] but knowing if it’s right for you is another story,” said Barbash. “We are holding workshops all across Michigan to help people dive in to the nuances of community investments. People are excited about these options, and we’re teaching people how to evaluate investments in a new way.”

MSHDA has recently issued a call for proposals to their Neighborhood Enhancement Program, with local applications due December 1.  Municipalities and 501(c)3 non-profits can apply for up to $30,000 or $50,000 (depending on size) in funding for local exterior home improvements or public space improvements.

In mentioning that funding opportunity, I want to point to the Oswego Renaissance Association in upstate New York as a great precedent for how these relatively small grants can be used for substantial impacts. The ORA has one of the neatest programs I’ve found via Strong Towns. As they explain,

Among other activities, the Oswego Renaissance Association makes small matching grants to clusters of homeowners who want to collaboratively improve the exterior of their neighborhood. This results in a huge return on investment, not to mention the value of neighbors working together…often for the first time.

This is a simple but profound process that unlocks neighbors’ confidence in their neighborhood.

The ORA’s mini-grant program supports small, visible investments and repairs on clusters of properties, helping spin up collective action and belief on blocks where residents may be suffering from despair about their neighborhood’s prospects. Where the hurdle to residents’ reinvestment is as much about their belief that it’s “worth it” as it is the dollar cost, a program like this can get everyone moving together and supporting each others’ efforts.  (Often, of course, these neighborhoods also suffer from larger economic shifts or histories of discrimination, challenges that require larger interventions and shouldn’t be overlooked in a search for quick fixes.)

MSHDA’s program can be used in exactly this way — to offer every home on a block some funding for exterior rehab, providing a visual and emotional impact that’s greater than what might happen from just one home being fixed up: the whole is greater than the sum of the parts. As an example, Battle Creek’s past grantees Neighborhood Inc. note that their use of NEP funds for home repairs not only got those household engaged in additional projects, but generated a lot of attention from surrounding neighborhood residents.

The MSHDA funds are limited to owner-occupied single family homes, so unfortunately can only be used for a subset of neighborhood residences. A non-profit applicant, community foundation, or private sponsor could add funds to cover these gaps in eligibility; note that the municipality generally cannot use its funds for activities like private home repair.

Detroit Roosevelt MMP

Detroit is midstride in its great comeback, emerging like a phoenix in full burn. In a city which has suffered so much loss, not only are community leaders and private investors acting to salvage what remains, but they are making the city whole again by knitting together gaps with new infill. Big impacts have been directed to the downtown core, yet there’s still much to be done at the neighborhood level.

One of the instruments of Detroit’s success was established during the economic recovery, with an unorthodox approach to building preservation and reuse. In 2013, City of Detroit and the Detroit Landbank Authority (DLBA) received an allocation from the Hardest Hit Fund. Working with an army of volunteers from the Michigan Historic Preservation Network and Preservation Detroit, along with homegrown tech experts from Data Driven Detroit (D3) and Loveland Technologies, they created the Detroit Blight Task Force. Out of this creative partnership, Blexting—short for blight texting—was born.

Blexting created a survey of the condition of nearly every property in the city of Detroit. The results were informed recommendations for the demolition of thousands of properties by DLBA. Instead of blindly pushing through blight elimination dollars, Detroit’s leaders used a more sophisticated approach supported by photos and existing conditions data directly uploaded to the survey. By documenting and evaluating a substantial portion of the city’s building stock, the taskforce effectively put assets into a building savings account for when the market ripened for rebirth.

Less than a decade later, Detroit is now activating those saved assets. Neighborhood-level community plans and new developments contain a mixture of building rehab, adaptive reuse, and new infill construction. Sections of the city which had not seen new work in decades are now receiving reinvestment. And it’s far from done.
Detroit is in many ways unique. Yet in other ways, such as scarcity of resources, lost taxable value, and declined population, it mirrors the disinvestment felt by many Michigan towns. Here are lessons learned for Michigan’s aging building stock.

Strategize & Combine Tactics

The decisions cities make today will shape the reality of their future. Cities need to articulate a consensus vision of who they are and who they want to be. Immediate tactics are site inventory, zoning reform, and the choice of target sites for catalytic reinvestment. Doubling down on existing buildings – both historic gems and simply older sites – and development of vacant lots in core city centers can also help cities respond to increasing interest in lessening environmental impact and improving infrastructure resiliency.

Michigan residents are choosing increasingly to live, work, and be in places of authentic texture. And because energy use is an increasingly important issue, they often want it connected to transit. The Q Line on Woodward is one way that Detroit is concentrating effort along an existing corridor, building in walkable transit-oriented development amid the streetcar suburbs of the last century.

Explicitly Advocate for Diversity

Only 8 percent of National Register sites and 3 percent of our National Historic Landmarks represent people of color, women, or members of the LGBTQ community. As stated by National Main Street CEO Patrice Frey in a recent City Lab article, “The preservation movement is also struggling to tell the full American story.”

Cities must build an authentic local vision by asking their residents to help with asset inventory. Get on the ground and engage in conversations with those who live there. Record what defines the place to avoid sacrificing cultural identity.

Detroit is owning the gaps in its recorded history and they’re doing something about it. Through neighborhood planning efforts, the city is backfilling a broad range of under-told histories which are more reflective of all residents. They’re doing this through a pilot event that brings together several departments to engage with local preservation stakeholders. Tiffany Rakotz, a Preservation Specialist at the City of Detroit, says this dialogue will “focus on thematic topics that impact local preservation efforts during this period of recovery and growth.”

Broaden the Concept of “Preservation” to Plan for Attainable Housing

According to recent discussions at the Urban Land Institute’s spring meeting in Detroit, households are now choosing smaller homes in favor of proximity to parks, walkability to shops, and employment. The magical formula here also includes the key calculation of what people can actually afford.

In considering how to rehab Michigan’s aging housing stock and accommodate gaps with new construction infills, communities must choose a diversity of options instead of one single family housing solution. Prior to standardized zoning, historic neighborhoods had small scale commercial next to single-family homes mixed with multi-unit splits, carriage houses turned into apartments, row houses, and duplexes intentionally built next to single units.

By easing zoning restrictions and allowing these natural adaptations to take place by-right in the code, we can not only legalize what has happened in neighborhoods for decades, we can also encourage reinvestment in those same neighborhoods in new and creative ways.

In choosing to allow for a mixture of building types for rebuilding neighborhoods, cities can also communicate that attainable quality for many income bands does not equal luxury housing. Cities also need to develop alternative financing options so people who want to fix up their aging building stock – either in incremental multi-unit development or single-family rehab – can access the funds to accomplish the work.

Tempering community engagement with realistic expectations is key. In Detroit, members of the community are being actively engaged in “preserving … local history, and in creating a vision for the future,” says Rakotz. “I think it is important for the citizens of Detroit to recognize what resources the City is able to provide and for us as public servants to understand what those citizens want.”