"Opportunity zones," a cornerstone of the White House plan to combat racial inequality, have mainly helped large real estate projects while many low-income communities have yet to benefit, according to a new study.
The plan, which was part of the 2017 tax cuts and have attracted over $10 billion in investments, has taken center stage in the Washington debate over racial injustice and inequality.
President Donald Trump, Treasury Secretary Steven Mnuchin and many Republican members of Congress have touted opportunity zones as a way to create jobs and lift up underserved communities and minority-owned businesses. Critics say the program, which offers tax breaks to the wealthy to invest in designated projects, lacks transparency and has largely helped investors and big developers.
A comprehensive study of the program by the Urban Institute with a grant from JPMorgan Chase found that while opportunity zones have helped some low-income community projects and created new networks of investors and social activists, they have fallen short on their larger promise.
"The incentives were intended to foster equitable development outcomes — such as by creating quality jobs, affordable housing, community-oriented amenities like grocery stores, and improved quality of life for low-income people," the report said. "Our evidence suggests they need to be redesigned so government dollars are allocated effectively and help project sponsors achieve those outcomes."
The program's main flaw, according to the report, is investment returns. Wealthy investors tend to seek high returns on their money, and projects in low-income areas have low returns. So opportunity zone money is flowing to retail, condo and commercial projects in already developed areas rather than minority-owned businesses and communities that need capital, the study said.
"Luxury housing in appreciating neighborhoods therefore may receive much larger public support than, say, affordable housing projects," the report said. It added that wealthy investors in the program were looking for returns of around 10% or more, while social-impact investments typically yield in the low single-digits.
The program, which allows investors to defer or reduce capital gains taxes if they roll the money into an opportunity zone, has also been held back by its timelines. To get the largest tax benefit, investors have to keep their money in the projects for at least 10 years — too long for many wealthy investors but too short for many community-development projects.
"The 10-year time horizon of most (opportunity zone) equity investments is not long enough for long-term community ownership of such assets as affordable housing, health care centers, or schools, causing equitable development project sponsors to scramble to put together [a] refinancing plan that may not work in a future interest rate or real estate market environment," the report said. "Conversely, the 10-year time horizon is too long, too illiquid, and too fixed to make the incentive useable for non–real estate business investments."
Opportunity zones also suffer from the cultural and economic disconnect between the wealthy investors and the low-income communities they're supposed to be helping. The chief incentive for investing in an opportunity zone is a capital-gains tax break -- up to 15% for investments held at least seven years and a full tax break on the gain in the opportunity fund if it's held 10 years. But the study said that because the investors who benefit are mainly wealthy — nearly three quarters of capital gains are in the top 1% of earners — "people from outside zones will largely be making investment decisions that affect Zone residents," the report said.
Black organizers of opportunity-zone projects have also felt "patterns of discrimination have made it hard to connect with investors," the report said. One developer of color said that among the rich family-offices and millionaire and billionaire investors, "their doors have not been open to women and minority developers. Doors are closed to us, and that's been the case for other folks too," according to the report.
The report said that to fix the program, opportunity zones need to be better targeted to low-income areas and small, minority-owned businesses rather to than real-estate projects that were already underway in more affluent areas. The tax incentives, the report said, should be tied to their social impact rather than their investment returns. And the zones should be paired with other government programs to boost the returns and make more affordable-housing projects, food banks and grocery stores in disadvantaged neighborhoods more viable.
"As we grapple with the twin public health and economic threats the current moment poses, and longstanding issues with police violence, the very place-based iniquities that compelled the creation of (opportunity zones), are at risk of widening further," the report said.
The Treasury Department and Sen. Tim Scott, R-S.C., a leading proponent of the zones, did not immediately reply to a CNBC request for comment.