New report: Are Opportunity Zones boosting the prospects of small businesses?

The massive new Opportunity Zone tax incentive was conceived as a tool to promote economic development, job creation, poverty reduction, and support for new businesses in areas of concentrated poverty. A couple years in, is it having the desired effects? Are the investments supporting small business stability and growth, especially for minority-owned legacy businesses? Our new report takes a closer look.

We held an online discussion of the findings in Unrealized Gains on October 29. If you missed the discussion or want to revisit it, you can watch the full recording here.

Small businesses are essential to creating stable communities where everyone gets a chance to prosper. They create sustainable competitive advantages, give people jobs and create long-term wealth, which is especially vital in disadvantaged communities or for people who have been systematically isolated from the process of building wealth.

As a refresher, the Opportunity Zones tax incentive allows anyone expecting financial returns (capital gains) from selling things like real estate, stocks, or bonds to minimize their taxes if they invest those returns into areas that have been in need of more investment than the market has been providing. It was designed to close economic gaps with a win-win: investors win (by avoiding hefty capital gains taxes) and cities and communities win (by having more money invested into areas that need it.) But this new influx of capital also has the potential to also threaten the economic security and stability of local residents and businesses—particularly those who were already vulnerable. 

Download Unrealized Gains 

We went to four cities (Miami, Atlanta, Louisville, and Washington, DC) to collect data and interview business owners, municipal staff, and Opportunity Zone fund managers to see what was happening on the ground.  

One of the clearest findings in Unrealized Gains is that most investments are not being made into business enterprises, but into real estate. There are some structural reasons for this—including how investors pursue equity in companies (rather than offering debt) and the long required timeline for investing (ten years) that just doesn’t lend itself to investing in businesses.

After talking to business owners and then investors on the other side, we discovered that there is also often a mismatch between what investors are seeking and the needs of minority-owned and legacy businesses. There’s also a spatial mismatch—those investing are rarely if ever actually located or living in the areas where their investments play out. Our research also found that, while Opportunity Zone investments may have admirable goals, it is hard to measure the impacts carefully and track progress due to a lack of standard reporting requirements. And most investors don’t see social impact as a motivating goal and view the tax incentive as merely an added tax benefit rather than a reason to seek lower returns.

We are hopeful about the potential to reshape and tweak the incentive to help improve its ability to accomplish the stated goals of reducing economic disparities, and Unrealized Gains offers a number of recommendations to address the limitations we found. There are some relatively simple but powerful changes that could help steer more money into small, minority-owned and legacy businesses, like allowing investments to be made in the form of debt, and guaranteeing a known level of tax benefit to those investing in existing small businesses. The spatial mismatch of investors investing in places that they aren’t familiar with could be addressed by allowing people who live in or work for a business in a zone to be able to invest directly, and allowing them to do it without using capital gains, which most people don’t ever have.

There is excitement and potential for the OZ incentive, and we know money is being mobilized, but it’s still neglecting the small, minority-owned legacy businesses that should be at the forefront of receiving the benefits. Key changes are needed to guarantee that the benefits are reaching communities in tangible ways, to improve reporting guidelines, maximize state and local oversight, center community benefit, and prepare businesses with the tools they need. 

Download Unrealized Gains 

Smart Growth America and the Democracy at Work Institute thank our partners at Citi for their support in this research and continued collaboration to help ensure that Opportunity Zones help support equitable development.

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