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The Opportunity Zone tax incentive–passed in amended form as part of the Tax Cuts and Jobs Act of 2017–is a potentially powerful new tool for helping low-income communities. By providing breaks for certain investments in distressed areas, it has already led to the creation of nearly $1 billion in new funds. Officials from the Treasury Department expect $100 billion in private capital will be deployed through the incentive.

But the policy may fail to achieve its goals unless foundations guide investments in the right direction. Their deep experience in struggling local communities around the nation prepares them for the challenge.

Lawmakers passed this policy with the belief that investors don't pay enough attention to the breadth of good financial opportunities available across the United States. But investors may still worry that low-income neighborhoods present more risk than other areas. And they may only use the Opportunity Zone tax break to enhance investments they would have undertaken anyway, rather than pursue potentially lower-return projects that truly help local communities.

Failure to address the challenges the Opportunity Zone policy seeks to solve has ramifications for a critical factor in communities' health around the nation: the distribution of jobs. The majority of new employment in the United States over the past 10 years has come from the formation of new businesses, yet between 2010 and 2014 half of America’s new firms were concentrated in just 20 counties. Entrepreneurs and small business leaders in undercapitalized areas around the country need help, or their communities will fall further and further behind.

Fortunately, foundations already know how to serve as the connective tissue that channels investment to marginalized regions and nascent economic ecosystems. Here are their four proven approaches:

1. Support Independent Transaction Advisors

Since Opportunity Zone areas are now indirectly competing with each other for tax-advantaged capital, local public officials, association heads, business leaders, and other community constituents need expert advice to develop investable deals and recognize alignments of interest with new investors.

Transaction advisors—private and independent experts who work with local government officials to prepare a pipeline of potential private sector investments—can provide it. They helped Power Africa, launched under President Obama in 2013, deliver more than $5 billion in private investment for energy projects on the historically undercapitalized continent in the program's first five years. Their efforts contributed toward lining up at least $10 in private funding for each $1 in public funding, demonstrating that well-placed funds can drive high multiples of market-rate capital towards beneficial investments.

Foundations who wish to support local champions in Opportunity Zones can use their limited funding to directly embed independent transaction advisors in city governments, local associations, or community nonprofits. There they can help prioritize projects, provide financial expertise, and become the focal point for Opportunity Zone investments. If enough experts are deployed nationally, they can form a powerful knowledge-sharing network, help develop appropriate metrics of success, and replicate approaches that work from one area to another.

The California Opportunity Zone Partnership from Accelerator for America, for example, will use experts from metropolises in California to advise leaders in smaller cities on attracting productive investment. Foundations could encourage similar programs across the country.

2. Support Policy-Aligned Fund Managers

By supporting fund managers who align their efforts with the intent of the Opportunity Zone policy, foundations can signal the best investment options among many, and in the process reduce financial risk for other investors and channel money to where it's most needed. They can do this by:

  • Providing guarantees that would reduce the risk of investing in a fund by compensating investors for a pre-specified amount of losses.

  • Taking on first-loss positions in a fund’s investments.

  • Supporting new innovative fund structures.

  • Seeding new fund managers.

The federal government has a long track record of funding innovative businesses and investing structures through programs such as Defense Advanced Research Projects Agency (DARPA), In-Q-Tel (IQT), and Advanced Research Projects Agency-Energy (ARPA-E). By taking early stage risks that the private investing market wouldn’t bear, these institutions have used relatively small amounts of dollars to achieve massive impact. Foundations can occupy a similar space.

Access Ventures, an investment fund in Louisville, Kentucky, for example, has been rebuilding the low-income neighborhood of Shelby Park. Over the last five years, through a combination of investments, loans, and grants, the organization has supported local businesses and created more than 200 jobs. It is partnering with Village Capital, a small business investment fund based in Washington, DC, to replicate this experience nationally in places such as Atlanta, San Antonio, and Kansas City. Both Access Ventures and Village Capital were seeded and developed with public and foundation support.

3. Be Hyper-Local

When the Kresge Foundation and the Rockefeller Foundation issued a request for letters of inquiry from aspiring Opportunity Fund managers, 113 of the 141 respondents were raising funds with an explicit state or local focus. This embrace of geographic specificity indicates that foundations will likely have many chances to support Opportunity Funds that share a focus on the same communities, while also giving them a position from which to ensure new capital goes toward inclusive growth.

Fund managers would benefit from such partnerships at all stages of the investment process. Before investment, they would enjoy access to community expertise that foundations have built around across the country, including recommendations for mission-aligned local investors. With foundations' help, fund managers could also identify promising local projects that aren't quite off the ground and help move them toward investment readiness.

Foundations could use program-related investments to support development of local entrepreneurs or the re-skilling of local workers. And once investments are ready, foundations can provide first-loss guarantees or other forms of support. Finally, they can help investors broker successful exits to other local investors years down the road.

In Wisconsin Rapids, Wisconsin, the Incourage Community Foundation partnered with the local chamber of commerce to launch more than 20 programs. One of them, an entrepreneurial boot camp, helped launch more than 40 local businesses. The collaboration also led venture funds to support the programs and created workforce training that benefitted a dozen local companies. By combining its philanthropic efforts with local community investment, Incourage drove inclusive and sustainable economic growth.

Foundations that replicate approaches like Incourage's would have the chance to direct a whole new pool of capital towards inclusive investments in the local communities they already serve. They would also define what a beneficial project looks like for a local area, drawing in further investment from others who want to see their dollars go to work in a policy-aligned manner.

4. Develop and Track Success Metrics

Investing alongside the private sector will help foundations exert influence over the goals and success metrics of new Opportunity Funds—an especially important undertaking because the policy currently lacks impact reporting requirements. And by directly supporting new funds, foundations have the chance to shape fund managers' definitions of equitable growth and ensure periodic reporting on those measures. It shouldn't be too far of a reach—investors increasingly want partnerships with socially driven institutions to help them embed sustainable development measures into their financial goals.

There are already efforts in the foundation community to develop and publish standards for Opportunity Zone investments. Existing frameworks, such as the Social Progress Index, can also be used to develop best practices.

Harm or Help?

As the Opportunity Zone tax incentive enters the mainstream of the investment world, foundations have a choice. They can allow the policy to fall prey to the view that it is just another tax cut for the wealthy and an accelerator of gentrification. Or they can drive the policy closer to its intended outcomes by forming the much-needed connective tissue between private investors, community leaders, and the public sector.

Our most distressed communities are counting on their answer.