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HUD and Opportunity Zones

Below is the Nowak Metro Finance Lab Newsletter shared biweekly by Bruce Katz.

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Today, the Department of Housing and Urban Development issued a Request for Information, seeking public guidance on how HUD can leverage the economic and social impact of Opportunity Zones. As part of the Request, HUD crunched the numbers and revealed the remarkable way in which Opportunity Zones overlap with public and assisted housing, home to millions of low-income Americans.

Consider the following:

About 27 percent of the residents of public and assisted housing, almost 2.4 million people, live in developments located within Opportunity Zones;

371,000 public housing units are located within Opportunity Zones, representing about 38 percent of the total number of public housing units in the country; and
337,000 project-based rental assistance units are located within Opportunity Zones, or 27 percent of the national total.

These numbers should not come as a surprise. Decades ago, many cities located public and assisted housing in neighborhoods where there would likely be little opposition. Some of those neighborhoods were located close to central business districts. With downtowns now reviving, cities have the potential to spur innovative re-development plans that could simultaneously leverage the market re-valuing of the urban core (e.g., a new corporate/university campus, a new node for neighborhood serving businesses) while providing, in the exact same area, quality affordable housing and new commercial nodes for current residents and others. In other words, enable neighborhood revitalization while dramatically improving educational and employment opportunities and living conditions for current residents.

This potential for market-led transformation forces us to think outside the box of traditional HUD programs like HOPE VI and Choice Neighborhoods. The City of Norfolk, Virginia, is doing just that. Over the past several years, it has engaged both public housing residents and a network of private and civic leaders on the transformation of the St. Paul’s area, a 230 acre community located literally across the street from the city’s downtown. The result: the genesis of a plan to transform a neighborhood currently populated by three 1950’s public housing developments into a mixed-income, mixed-use community of the future (see https://www.stpaulsdistrict.org/).

This community-led vision, of course, is not cheap and is unlikely to be financed exclusively with conventional federal government subsidies, a scarce resource. It is thus critical that public housing authorities and owners of assisted housing development begin to rethink the blend of public, private and civic capital that is necessary to move transformational projects forward.

On February 19th, the City of Norfolk hosted a financing charrette with 70 representatives from public, private, state, philanthropic and private-wealth investment firms in addition to representatives from state and federal partners to think creatively about new financing models to make the St. Paul’s Area vision a reality. The charrette included a tour of the St. Paul’s Area, a review of Opportunity Zones, and discussion on how to sharpen the vision for St. Paul’s and specify resources needs for the initial planned phase of redevelopment.

Charrettes — intensive design and planning sessions where citizens, designers and others collaborate on a vision for development — are not new to the urban field. For decades they have been used extensively in the place making arena, by respected intermediaries like the Urban Land Institute.  Opportunity Zones are tailor made for the charrette process, giving cities a tried-and-true method for working through different financing scenarios for concrete deals that have the potential for transformative social impact.

HUD’s Request for Information, in short, is not just an academic exercise. It forces us to imagine a future state for current public and assisted housing that both preserves and enhances our affordable housing inventory as well as builds wealth for current residents through the upgrading of skills, the promotion of neighborhood serving businesses and new ownership structures. It then compels us to rethink and simplify the mix of debt, subsidy and equity that is needed to move the deals, and build the communities, we want. Opportunity Zones are thus catalyzing a radically different discussion about the ends and means of community renewal.

There is a special bonus this week. Yesterday, the Financial Times posted my latest oped. Here it is, pasted below in full (complete with King’s English spelling):

How to funnel capital to the American heartland 

Over the past year, economically distressed communities across the US have been engaged in an intense discussion about mobilising private capital. Why? As mayors, governors, real estate developers, entrepreneurs and investors have learnt, buried in the 2017 Tax Cuts and Jobs Act was a provision that created a significant tax incentive to invest in low-income “opportunity zones” across the country.

The law was promoted by its sponsors as a way to move market capital from wealthy coastal cities to the lagging heartland. And for good reason: more than three-quarters of venture capital currently flows to companies in just three states — California, Massachusetts and New York.

Yet the law’s greatest effect, ironically, has been to unveil a treasure trove of wealth in communities throughout the nation. Some of the country’s largest investors are high-net-worth families in Kansas City, Missouri, and Philadelphia; insurance companies in Erie, Pennsylvania, and Milwaukee; universities in Birmingham, Alabama, and South Bend, Indiana; philanthropists in Cleveland and Detroit; and community foundations and pension funds in every state.

These pillars of wealth mostly invest their market-oriented equity capital outside their own communities, even though their own locales often possess globally significant research institutions, advanced industry companies, grand historic city centres and distinctive ecosystems of entrepreneurs. The wealth-export industry is not a natural phenomenon; it has been led and facilitated by a sophisticated network of wealth management companies, private equity firms, family offices and financial institutions that have narrow definitions of where and in what to invest.

The US, in other words, doesn’t have a capital problem; it has an organisational problem. So how can capital flows be rewired to reverse the export of wealth?

Three things stand out. First, information matters. The opportunity zones incentive has encouraged US cities to create investment prospectuses to promote the competitive assets of their low-income communities and highlight projects that are investor-ready and promise competitive returns. Dozens of cities with diverse market conditions have already published their own prospectuses, following a common template promoted by Accelerator for America, a new intermediary led by Los Angeles mayor, Eric Garcetti. With further refinement, investment prospectuses could become a ubiquitous market tool to match eager investors with worthy investments.

Second, norms and networks matter. The opportunity zone market will be enhanced by the creation of “capital stacks” that enable the financing of community products such as workforce housing, commercial real estate, small businesses (and minority-owned businesses in particular) and clean energy, to name just a few. Initial opportunity zone projects are already showing creative blends of public, private and civic capital that mix debt, subsidy and equity. As innovative financial packages in one city are codified, they can then be adapted to others.

Finally, institutions matter. Opportunity zones require cities to create and capitalise new institutions that can deploy capital at scale in sustained ways. Some models already exist. The Cincinnati Center City Development Corporation, backed by patient capital from Procter & Gamble, has driven the regeneration of the Over-the-Rhine neighbourhood during the past 15 years. Washington University in St Louis deployed a small portion of its vast endowment to help create the Cortex innovation district, now a thriving hub for start-ups and scale-ups that commercialise university research. These models can easily be adapted to cities across America, unlocking local capital and stimulating business demand in areas long devoid of investment.

More institutional innovation, however, is needed. As Ross Baird, author of The Innovation Blind Spot, has argued, the US must create a new generation of community quarterbacks to provide budding entrepreneurs with business planning and mentoring, matching them with risk-tolerant equity. These efforts will succeed if they unleash the synergies that flow naturally from urban density. New institutions will not have to work alone, but hand-in-glove with the trusted financial firms that manage this locally-generated wealth.

The irony is rich. A federal tax incentive intended to entice coastal capital into the heartland may end up helping to keep local capital local.