As many of us involved in cities know, the indirect effects of large policy changes are often more important than the direct ones. The development of cities in the latter half of the 20th century was driven more by the Interstate Highway Act (negative) and the Immigration Reform Act of 1965 (positive) than by any law with “Urban” or “City” in the title. The Opportunity Zones tax incentive is shaping up as another federal intervention with multiple, indirect effects. Here are 5 that I am following closely:

Remapping the Geography of Capital

As Ross Baird and I recently wrote, the discussion of Wealth in America can lead one to believe that most capital sits, with a few exceptions, on the coasts and that the most important challenge is to move capital from the coasts to the heartland. Yet Opportunity Zones has revealed that wealth, in many respects, is hidden in plain sight. It often sits in local entities — family offices, local philanthropies, well-endowed universities, pension funds — that have chosen to export their investable capital outside their communities via large institutional investors. It also sits in public or private sector entities with large but fragmented asset holdings that are rarely deployed for maximum impact and public benefit. The conventional discussion of the geography of wealth makes us believe that cities writ large are poor and distracts us from focusing on another, more solvable problem, the misallocation of capital. Designing scorecards that can unveil the breadth and depth of local capital as well as institutions and mechanisms that can keep local capital local could be an intriguing byproduct of Opportunity Zones.

Rethinking Community Reinvestment

The census tracts designated as Opportunity Zones have been the focus of two seminal laws enacted in the mid-1970s, namely the Community Reinvestment Act and the Home Mortgage Disclosure Act. These laws were enacted to counter the insidious practice of redlining, which grew out of discriminatory federal practices dating from the 1930s. In my visits to dozens of Opportunity Zones, it is clear that discriminatory financial practices are not some vestige of the distant past. I routinely hear about financial institutions that have one set of practices around “safe” areas of the city and another set of practices around “risky” communities. These anecdotes, which track the invisible but real color lines in cities, are supported by independent research by the Federal Reserve Bank and others. With their relentless focus on making deals in places that have been bereft of deals, Opportunity Zones could shine a much-needed light on the continuation of discriminatory financial practices and make “community reinvestment” a social norm rather than a bureaucratic box to be checked by institutions under federal regulation.

Inventing Market Tools

Much of urban discussion focuses on policy and practice. As Opportunity Zones evolve, they are placing an intense focus on routinized market tools and instruments that can be invented by one or several cities (or Opportunity Funds for that matter) and then scaled. The Investment Prospectus tool commissioned by Accelerator for America and created by Jeremy Nowak, Ken Gross and myself to enable cities to communicate and market their distinctive assets via a common template is one such tool. We now have 5 cities with published Investment Prospectuses; by March, we should have 25 or more; by June, another 25 or 50.

But there are other tools in the making. I fully expect many Opportunity Funds to adopt ESG (Environment Social Governance) goals and guidelines. And I also expect the search for socially impactful deals will require us to rethink and simplify the blend of public, private and civic capital as well as the mix of debt, subsidy and equity that are needed to move the deals we want (e.g., workforce housing, energy efficiency). Opportunity Zones have come along when data analytics and geographic mapping enable new tools to emerge quickly and spread like wildfire and bring order out of what would otherwise be the chaos of 8700+ Zones.

Aggregating market power across cities 

With a few exceptions (e.g., LISC and Enterprise), most city efforts focus on cities as individual, separate entities. Countless city competitions and awards single out individual cities for their innovative practices and smart ideas. Opportunity Zones, by contrast, enable cities to aggregate their collective market power and increase the likelihood of multiple rather than exceptional winners. Creating dozens of Investment Prospectuses will unveil hundreds (if not thousands) of investable projects that adhere to similar characteristics, enable routinized financial structures and enable cities to engage as a collective with financial institutions and other investors. Similarly, unveiling common Zone typologies (e.g., downtowns, anchor districts, historic minority neighborhoods) will enable the creation of Opportunity (or other) Funds that reflect and align with sub-geographies across multiple cities.

Building wealth

Stopping gentrification seems to have become the dominant urban narrative today. Yet most Opportunity Zones I visit are characterized by high poverty, low business demand, long term disinvestment and severe, structural gaps across racial and ethnic lines around education, skills and wealth. For many Zones, we are having the wrong discussion and solving for the wrong problem. What many cities and Opportunity Zones need is an intensified, bottom-up focus on wealth building through home-ownership, entrepreneurship and skills building, perhaps through new local institutions, cooperative structures and self-generating financial mechanisms.

In short, the indirect effects of Opportunity Zones could be substantial and more transformative than a narrow, literal application of the Opportunity Zone tax incentive would have us believe.