[Watch] Building Community Capacity to Harness Opportunity Zones 2.0 Investments

Opportunity Zones (OZs) open the door to billions of dollars in potential investment for community‑driven projects — but dollars don’t automatically find their way into neighborhoods. Communities need trusted, well-prepared local partners who can leverage, facilitate, and channel capital into projects that truly benefit existing residents.

With Opportunity Zones 2.0 on the horizon, many communities have been asking:

In this Connecting Communities session, participants explored the fundamentals of Opportunity Zones, including what they are, what’s changing, and why those shifts matter. Attendees also heard from practitioners across the country who are already doing this work in communities, ranging from small towns to major metropolitan areas. Speakers shared considerations for preparing project pipelines, forming partnerships, and building the local capacity needed to make the most of OZ 2.0.

The discussion also examined practical questions, including:

Whether representing a community development corporation, local government, nonprofit organization, or community foundation, participants gained concrete examples and actionable guidance for building the infrastructure needed to turn Opportunity Zone potential into tangible, equitable community impact.

Related resources:

• The Opportunity for Alignment: OZ Investments and the Community Reinvestment Act
• Opportunity Zones 2.0 will offer place-based investment to low-income communities

Speakers:

• Alex Flachsbart, president and CEO, Opportunity Alabama
• Mauri Ingram, president and CEO, Whatcom Community Foundation
• Dr. Daffney Moore, former chief opportunity zone officer
• Jason Vargo, senior researcher, Federal Reserve Bank of San Francisco
• Sergio Galeano, community and economic development advisor, Federal Reserve Bank of Atlanta, moderator

Transcript

Sergio Galeano

All right, it is 3:00 PM Eastern Time. Everyone, thanks again for joining us for this Opportunity Zones 2.0 Investments webinar. I’m Sergio Galeano, a community and economic development advisor with the Federal Reserve Bank of Atlanta, and I’m happy to serve as a moderator for today’s session. Opportunity Zones sit at a really interesting intersection of public policy, private investment, and economic development, offering a strong tool to help attract capital to places where it can make a difference. Since their launch in 2017, communities across the country have used Opportunity Zones as one way to attract investment to projects and places in need of capital and investment. Today, we’ve brought together four speakers who have worked in this area to help us reflect on what we’ve learned over the last several years. They’ll also give us a look ahead to what comes next. With a new phase of Opportunity Zones beginning next year, we’ll explore what this next iteration could mean for communities and how they can prepare to take advantage of it.

To help us unpack all of this, we’re fortunate to have with us today the following four speakers. Jason Vargo is a senior researcher in community engagement and analysis at the Federal Reserve Bank of San Francisco. In this role, he conducts research on the economic experiences of lower income communities and informs community development stakeholders on promising practices related to economic opportunity. Mauri Ingram is president and CEO of Whatcom Community Foundation. Since 2008, Mauri has been responsible for delivering on the Community Foundation’s mission, creating an environment for a great stellar team of people to excel, listen to their communities, maintain trust, build durable relationships, marshal key resources and capital, and implement strategy for impact. She has worked across public health, downtown revitalization, and real estate development with both private and public sector clients. Next, we have Alex Flachsbart, CEO and founder of Opportunity Alabama, a nationally recognized nonprofit organization focused on generating economic development in Alabama’s distressed communities.

Prior to Opportunity Alabama, Alex’s professional career spanned from practicing tax and economic development law to teaching high school geometry through Teach for America. Serving as a board member and fellow with multiple organizations, he was recently named one of the top 100 national influencers in commercial real estate by the Business Journals of America. And also today we have with us Dr. Daffney Moore. Daffney is an economic development strategist, public policy leader, international bestselling author, and speaker with extensive experience leading community revitalization and place-based investment strategies. She is principal of Innovative Consulting Group and previously served as the Chief Opportunity Zone Officer for the City of St. Louis through the St. Louis Development Corporation, where she led efforts to advance the city’s Opportunity Zone strategy, project pipeline, community and investment partnerships and investment readiness. To the four of you, thank you so much for being here today and sharing your experience and expertise.

For today’s webinar, we’re going to have Jason Vargo provide framing remarks followed by presentations and a panel discussion with our three speakers. Now everyone, before we get started, just a few housekeeping items. Views expressed during this session are those of the speakers and are intended for informational purposes only. They do not necessarily represent the views of Fed Communities or the Federal Reserve system. Now, microphones have been muted, but there are great ways to engage with us. Please make ample use of the Q&A feature. If you came in already with a question of interest, please feel free to drop it now and ask questions as you hear the presentations and reflect on them. We promise to get to as many questions as we can both in the chat and live during our Q&A. Now to keep the conversation going and engage with us wherever you get your social media, please use the hashtag, #connecting communities.

You can also visit fedcommunities.org for a great variety of community development articles, resources, and data from across the Federal Reserve system. And finally, this session will be recorded and all materials, including the presentation, video, and the podcast will be available on Fed Communities within about two weeks of this event and probably sooner. Everyone, before I turn to Jason who will kick us off, it’s just great to get to know you a little bit better. We’re going to launch a poll right now. It’d be great if you can answer. You should see that now. And the question is, what sector best defines your role? Everyone, thanks again for joining. Hey Jason, the floor is yours.

Jason Vargo              

Thank you, Sergio. It’s so great to be here with you today. I just want to provide some remarks and framing that will give us sort of a common base to work from for the rest of the conversation around Opportunity Zones. So if we can go to the next slide, I’ll start by just describing what the Opportunity Zones Tax Benefit is. To understand it, you really need to know what a capital gains is. It applies to capital gains, the sale of an asset that results in some more money for the investor. That tax incentive in Opportunity Zones can defer, reduce, or ultimately eliminate tax on capital gains, and we’ll go through exactly how that works. But the stated goal of the program is to spur economic growth and job creation in low income communities. So that should immediately tell you why community development and the Federal Reserve Bank is interested in knowing more and helping understand this tax benefit.

Next slide. Okay, so I’m going to walk through this quickly, but I want to walk through one example that goes through the investor math. So in this case, let’s assume an investor has a million dollar capital gain, and you can see in the two columns what will go from top to bottom and how that million dollars changes when it’s put through the Opportunity Zone benefit and when it goes through a traditional investment. So immediately when you experience the capital gain, the first thing that would happen is you had to pay the taxes on it, the capital gains tax. So in the traditional investment that’s due immediately, that’s about 24%, let’s assume. So $238,000 is gone. Under the Opportunity Zone, that tax is deferred. So when you realize the capital gain, you pay no taxes at the time of the gain. So that million dollars can then be invested.

In the traditional investment, you have a net of 762,000, which can then be invested. And if we assume a typical common return between these two scenarios of 12%, you can see that the value at the end of 10 years on that million dollars is about 3.1 million. And with the traditional investment, we start with a lower amount and the growth after 10 years is about up to 2.3 million. Now, if we exit that investment after 10 years, we experience another capital gain. And so immediately in the traditional investment, you would owe another round of capital gains tax on the profit that you made from the investment. So you can see that’s 384,000. But this is the really huge benefit potentially with Opportunity Zones is the gain that we experienced over those 10 years on the million dollar investment, the investor owes zero, and that’s the elimination part of the capital gains tax.

Now we do still owe taxes on that initial million-dollar capital gain, but you can see that it’s slightly different than the traditional investment second row of 238,000. On the Opportunity Zone capital gain, the original capital gain, it’s a reduced tax bill. So in this case, it’s a 10% reduction down to 214,000. And you can see the total value of the investments at the end of these 10 years is very different and 46% higher under the Opportunity Zone. So that’s real. You can see pretty clearly why investors might be interested in putting their money through this Opportunity Zone program. Next slide.

But of course, we are very interested in how that money reaches the communities. The investors are able to put that money into a fund and then that fund ultimately decides which projects will be invested in and those projects take place in Opportunity Zones on the ground. On the next slide, you can see a map of potential Opportunity Zones. So this is what Opportunity Zones look like on the ground and where the projects actually occur. So on this map of the Phoenix area, you can see purple tracks which meet the treasury’s criteria for low income and can be qualified for becoming Opportunity Zones. And then you can also see another distinction, which is low income and rural, which is additional benefits under the new law. States ultimately will have the decision about which of these eligible tracks become Opportunity Zones and they can nominate up to 25% of those census tracks for the official list.

Please go to the next slide. The money that goes into projects in those places can go into a couple different types of activities. Largely, we saw a lot of money in the pilot phase of Opportunity Zones go into real estate. That might be new or revitalizing existing buildings, but it can also go into operating businesses in those census tracks that are Opportunity Zones. Next slide. So I mentioned that we just finished the pilot period of Opportunity Zones or we’re really wrapping it up at the end of the year. We have seen from early research, it has shown us that over $100 billion has been invested through the pilot Opportunity Zone 1.0. At the end of this year, Opportunity Zones 2.0 will start and that begins in 2027 and involves a couple changes to the 1.0 pilot based on what we heard and learned from 1.0.

So we saw that in 1.0 is limited to a decade. It’s been made permanent in 2.0. Research showed that a lot of investments went to metro areas, largely to real estate. In 2.0, there’s this additional benefit for investments that go to Opportunity Zones that are also rural and that also use the stricter low income definition and some changes to adjacency of tracks that hopefully will direct money more in a targeted way. There’s also from our conversations with communities, we’ve heard about mixed results from Opportunity Zones 1.0. There is regular reporting that’s required in 2.0, which I hope and think the intent is to improve transparency and accountability of the investments for communities. On the next slide, I’ll walk you through a timeline quickly of where we are and where we’re going. Right now, the law passed in 2025 and right now we’re in the track designation process where governor’s offices are deciding which of the eligible tracks will become the Opportunity Zones for the next 10 years.

Then starting on January 1st of 2027, those changes of Opportunity Zones 2.0 will go into effect, and investments will begin to flow. You can go to the next slide and you can advance further please. So importantly, this is not an allocation. Although every state has Opportunity Zones, it’s not a guarantee that every state’s Opportunity Zone will get money. The investors direct the money and it flows along the path of least resistance. So the groundwork is really important, preparing that local ecosystem, getting sites ready for investment, perhaps even getting involved. Community-based organizations will hear from community funds about getting involved in projects and really trying to combine the investments and the projects with other practices like community benefits agreements that might multiply the impact for communities. And that’s what we’re going to hear more about in the rest of today’s session about how to do this groundwork to multiply impact.

Before we go to hear from someone from my own district, I just wanted to sort of cover the findings from polling question one. You can see about a third of the people are here from government and another 30% are from nonprofit and community organizations with spattering of CDFI and other financial institutions. So really good mix, 16% out there. I’m kind of curious about that. But we have one more polling question for you to get a little better sense of what kinds of areas you think OZ 2.0 might be best invested in or where you would like to see those investments land. You can think about property, which might be affordable housing or workforce housing, single family housing or infrastructure, especially energy infrastructure, small businesses like commercial real estate or the operating businesses that I mentioned and rural investments and what those might look like. So take a minute to think about that, answer the polling question, and with that, I will turn it over to Mauri.

Mauri Ingram           

Great. Thank you, Jason. Hi everybody. I am excited to be with you all today. Really appreciate the Fed Communities for highlighting Opportunity Zones and appreciate your time. So this first image that you’re going to see is the beautiful place that I get to live, and it is the traditional homelands of the Lummi Nation, the Nooksack Tribe, and other Coast Salish communities here in the Pacific Northwest. Next slide please. So as Sergio said, I’m with the Whatcom Community Foundation. We are based in Bellingham, Washington. We are just south of Vancouver, British Columbia and about 90 miles north of Seattle. And as a community foundation, our vision is that everyone who lives here thrives and we put all of our forms of capital, monetary and otherwise behind the mission to help make that happen. We have a population countywide of about 235,000 people. We are largely a rural community, although we don’t meet the federal designation to be qualified in that way.

The city of Bellingham where I’m based is a little bit under a hundred thousand people and our predominant employers are government, including pre-K through 12 through post-secondary education, healthcare, and heavy industry. And I want to share a little bit more about my community because I hope that it will help you all think about the places that you live, work, and invest because ultimately, as you heard from Jason, communities are the whole point of Opportunity Zones. And I see that the funder attendance as a percentage of attendees today is pretty light. So I just ask those of you in other sectors to please be thinking about the funders that you have contact with and encourage them to get curious about Opportunity Zones as well. In my community, we have a very limited history of utilizing tax tools that leverage private money beyond the federal low-income housing tax credit program.

We max that out every year and are well oversubscribed in that area and it’s been tremendously valuable, but most of our real estate development is either privately funded or publicly funded. We don’t do a lot of public-private partnership or P3 work and we hope to do more. And there are a couple of characteristics about our community that I think are important to share because they have a tremendous influence on our economic development efforts. First, we have significant economic disparities. About 40% of the people in our community are not able to meet basic needs and have what probably most of us would consider to be just a baseline standard of living. And despite that, for most of us, this is an extraordinarily wonderful, easy, comfortable place to live. The second is that Whatcom County has been fortunate in that we’ve been pretty insulated from a lot of the economic shocks that have occurred, whether it’s regional or national over many decades.

And as a result, it’s easier for us to ride those waves. And so those factors combined unfortunately lead to a certain amount of complacency at the community level. I’m not even pointing to any institutions in the community, but we as a community collectively don’t focus on economic opportunity, mobility and development. And as a result, we tend to be more reactive, opposing things we don’t like rather than being proactive in thinking about the kinds of investments that we want to make, the kinds of opportunities we want to see for ourselves and our families and our neighbors and for the community at large. And so we need to be more intentional about what we’re looking for. And this is especially important at a time when we are focusing so much in the way of public and private resources just on meeting basic needs because it’s such a challenging time for so many communities.

And that unfortunately means it’s easy to lose sight or to feel like we don’t have the time or the bandwidth to focus on being aspirational. And so we need to make sure that we keep that in mind. And that’s one of the reasons I’m excited about this reauthorization and the permanent nature now of the Opportunity Zone legislation. Next slide please.

So to achieve our vision that everybody thrives, we know that people need agency and in order to have agency, we believe that people need a certain level of financial security. It’s an essential ingredient. And because we know that the experience of living in a place is much more than employment opportunities or business opportunities, it’s in fact also the place itself. It’s what the built-in environment looks and feels like. It’s whether there’s open space and where it’s located, and it’s all of the messages that we send that are sometimes not so obvious in our land use planning and development and all the choices that we make in relationship to that because it’s those choices that communicate who we value and what we value. And that philosophy is really the underpinning of our Opportunity Zone work. Next slide please.

So, we have pretty familiar challenges, I’m sure, to all of you. We don’t have enough affordable and workforce housing and we don’t have enough access to affordable quality childcare. And we consider those things to be sort of soft infrastructure and again, essential ingredients for a healthy local economy. On the bright side, we have, as one example, an extraordinary opportunity to redevelop much of our central waterfront, which is also in an Opportunity Zone. Next slide. And as Jason noted, the purpose of Opportunity Zones, the stated purpose is economic growth and job opportunities, job creation. And in the spirit of everyone who lives here thrives, we interpret that to mean significant ongoing benefits for communities. And I want to emphasize that, significant and ongoing.

So when the enabling legislation passed back in 2017, we were already in the early planning stages for a project called The Millworks, and we’ll post the link to that project in the chat. We describe it as a mixed use community redevelopment project with community benefit at the center. And again, fortunately it’s in an Opportunity Zone. For us, community benefits means a project that’s designed to work for and benefit the broadest swath of community possible. And community benefits are in fact not just part of our investment return calculation, but they’re prioritized over financial return. And for the Millworks project and the overall waterfront redevelopment to be successful, both need readily available opportunities, as I described, all kinds of physical places that are there to serve everyone as well as opportunities for entrepreneurs and more job creation and visitors.

So, Millworks phase one is completed. It’s 80-plus units of permanently affordable rental housing and an early learning center, which is now fully occupied and thriving. And that was, again, funded primarily with low-income housing tax credit financing and a bit of philanthropy to cap off and make the project pencil. Phase two, I won’t talk about in detail. You can find lots more information on the website, but I’ll highlight that we have workforce housing that will start out as rental and convert over time into permanently affordable workforce home ownership. And then we also have a small business incubator that’s targeted for food-based businesses. So you’re going to hear more about what types of investments are more likely to be successful for Opportunity Zones. And because Millworks is designed explicitly with community benefits at the center, in order to take advantage of opportunities on financing and some other financing elements that are a little bit more traditional like conventional lending, it required that we really build in a significant amount of philanthropy and some catalytic capital, which in this case is either zero or low interest loan capital that will be raised within our community.

And we need that not only to get the building built, but also to ensure the long-term affordability for our commercial tenants that won’t be able to pay market rate, specifically in our case, nonprofit organizations, and to make sure that we can help those small businesses launch and to make sure we can meet that workforce housing goal as well for folks that are making 80 to 120% of area median income. And those ongoing community benefits are what make the Opportunity Zone investment worthwhile from our point of view, both as a funder, as an investor, and as an entity in the community that’s really working to promote more inclusive economic development countywide. So it’s about $130 million project. There’s lots of different layers and flavors of financing, and we’ve got about $18 million budgeted for Opportunity Zone funding, and that’s about 14% of the total project cost.

We’re currently working with an experienced Opportunity Zone investment firm, and it’s intended to help finance Millworks, but it’s also a broader place-based fund. We want to make sure that we use Millworks as a proof point and we’re able to catalyze a lot more Opportunity Zone investment as soon as people can see how that works. And in a community of our size where we’re a smaller market, you heard from Jason that a lot of the money went to metro areas. We really need to make sure that we’re demonstrating the proof in the pudding so that other folks want to get in because they know the water’s warm. So since there’s going to be a lot more details we’ll get into in the group discussion, I’ll stop there and turn it over to Alex.

Alex Flachsbart    

Hey gang. Alex Flachsbart, founder and CEO of OPAL, as you see on the slide. Thanks for having me. Next slide if you don’t mind. This is us. So OPAL is a, and I say OPAL, Opportunity Alabama, OPAL for short, is at this point, a national organization, which is weird to say eight years in, founded in 2018 as Alabama’s statewide response strategy to OZ 1.0. We exist because a coalition of our state’s largest bank, our state’s largest utility, our state’s largest insurer, and then a number of other private sector folks that cared about seeing this new incentive deployed in creative ways resourced the creation of a statewide nonprofit organization to be the intermediary between communities, projects, and capital to kick off an ecosystem that would hopefully drive investment on a statewide basis, leveraging this new tool. And really, and this is one of the points I want to underscore a lot today, OZ was the excuse for putting people with money in a room with people with projects.

And I’d like everyone on the webinar, I want that to be one of your takeaways that you don’t necessarily… The best result of an OZ local community development process does not necessarily need to be somebody with a big gain investing that gain through an OZ fund in your project. It might be leveraging this really powerful, really interesting tool that gets people who aren’t typically in a room talking to each other, in a room talking to each other. I want to underscore something Jason said in the very beginning, this is a tool that’s all about capital gains. Think about the number of ways you can have capital gains. You could cut timber, you could sell a boat, you could sell your business, and then of course you could sell stock, you could sell property, things like that.

But at the end of the day, it’s a really interesting tool because it allows for people who don’t necessarily think of themselves as big time investors, local folks in a lot of cases, someone who’s been a plumber, built their own business and has a one-time generational wealth event to become a local investor in this tax advantaged way. So that’s kind of how we built OPAL. We built OPAL as a combination over on the investor side of large corporates and then a whole smattering of individuals, all of whom had many of them life-changing gain events, many of them regular gain events, brought them in on the investor side, and then literally over the course of three years, got to every single county in the state of Alabama and built out a project ecosystem. Three years later, we looked up and realized that, holy heck, Alabama had become top 10 in the country in terms of the level of OZ investment that we saw, and it was kind of taken off from there.

So, from that starting point, we built an ecosystem that’s funded, as you can see, over $800 million worth of projects, both in Alabama and increasingly as we add more tools, outside of Alabama. The very funny little org chart you see over here is us, and what you’ll see is we grew from a nonprofit intermediary to our own capital provider. So we are at this point an aggregator of capital and a deployer of capital. So I’m the fund manager on the phone for this webinar. Over on our advisory side that you see over here on the left, we manage a series of private equity funds, OZ funds, non-OZ funds, because repeat investors liked the idea of the local investing ecosystem that we created, and increasingly funds even in other product areas that align with our OZ investment, like for example, historic tax credits, where that tool that we use typically in rural or smaller projects actually works not just here in Alabama, but increasingly outside of Alabama as well. Next slide.

And this is just to show you the scope and the volume. So we’ve deployed more capital to OZ deals as a fund manager than we have anything else. But again, just underscoring the point that once you can build using this tool, you can ultimately hopefully crowd in other sources of capital behind it. That’s part of the whole point. Next slide. And underscoring the point on our national reach. Keep going. We got limited time. I’m going to try to blaze through these if I can, get more time to talk to more. Okay. 1.0 versus 2.0. We talked a good bit about this. Jason covered this in the intro. One thing I want to underscore that Jason said for everyone is I think that it’s so funny when you talk about OZ benefits, you would think that not paying taxes 10 years from now, if you invest something really well, would be what motivates people to do this.

My gosh, I invest a dollar, I get three back, and I’m not paying tax on the two bucks I made. That’s great. And it is. But in our practical experience with capital raising, the immediate pain of dealing with a gain event, particularly when it’s someone who’s had one of those business sale events or something where it is a generational large thing, they’re looking for answers right now. The most common response I sometimes get to people when I’m telling them about that 10-year benefit is like, who knows? I might be dead in 10 years. We might all be dead in 10 years. Who knows? So it really is the deferral here. It matters. And I’d encourage everyone to think about the fact that in rural communities, not only will you be getting that five-year deferral, you’ll also be getting a 30% discount on the cap gains tax bill when it comes in, which I think is something that we’re going to build on significantly in 2.0 if you want to keep going. Next slide.

So where did we see capital flow in 1.0 versus 2.0? So for us, and this is obviously speaking from our Alabama experience, but also to some degree nationally, this is a housing tool. There’s some fabulous research from Economic Innovation Group out there that I’m happy to send around to anyone who asks who did a ton of work around the fact that OZ’s created more new housing units than any other federal place-based incentive tool that has ever existed. So it’s fascinating. And at a price point that is significantly more attractive for the taxpayer than some of the other federal policy tools that are designed that create housing in various capacities. And I won’t name names on this webinar, but point is you saw a lot of investment in housing, period, full stop. And a lot of it was market rate housing. A lot of it was workforce housing.

Very little of it was true capital A affordable housing because it’s kind of odd to make LIHTC and OZs work together effectively on a consistent basis. But again, on the theory that new housing kind of supply creates downward pressure on rents across the board, which we certainly saw in our experience in Huntsville in particular, it’s been a fabulous tool for that, and we think that will continue in 2.0. In general, real estate, what did we not see as much of as we certainly would’ve liked? Business-based investing. Tangible businesses where you’ve got a lot of assets that don’t leave the zone, we saw capital moving into. Other than that, it’s a challenge. It’s a challenge to invest in a startup when your assets are laptops that move all around. So next slide. We should keep moving.

And the one thing that I’ll say, and this kind of underscores this slide. So the biggest other takeaway around OZs from a community development perspective, and this is something Jason said too, but to underscore it, because you have an OZ does not mean a single dollar will be invested in your community. Like Jason said, OZs get designated, the capital will flow. At the end of the day, capital will only flow if you can identify projects that will make money for the people that are investing in them. So if you’ve got a great infrastructure project, but that infrastructure project doesn’t have a monetization strategy, I don’t know that I’d bother with OZs as a solution for that. If you’ve got, on the other hand, a great downtown revitalization project that’s generating rent, that actually has a revenue strategy around it, then that’s probably a better fit for thinking about how this tool works. You saw Jason’s initial slide, 12% IRR is not an easy thing to achieve. That means that it’s a good project that really is making money.

So, I want to underscore that because that is something that kind of underpins OZ investment is it’s got to be something that is going to significantly appreciate over a decade. That’s the whole point. So where are you most likely to see that? And where did candidly, a lot of the investment flows in 1.0 went to urban because that’s where you’ll most consistently see those type of investible assets. I’m hoping that we can flip the script in 2.0 and really focus on the rural opportunity set. And obviously there’ll be people that think that the best way to do that is with self-storage and data centers. That’s not us, but I’m sure others will. So that’s kind of on the one side of the spectrum.

The other side of the spectrum, and why I’m so excited about this webinar and all of you being here as a part of it is I think that 2.0 in rural gives us a unique opportunity because of that 30% basis step up to attract and crowd in more capital to quality rural projects that have been well vetted, locally sourced, locally underwritten, that can produce significant revenue stream over a 10-year period. And they’ll give hopefully with the right infrastructure behind it at the community level, all of you on the phone an excuse to go have conversations with those folks you might not otherwise be empowered to have a conversation with about local vesting in your backyard, using this 30% basis step up, using these tools as an excuse to do so. So we’ll talk more about that in the Q&A and about what our role in that could look like, but I’ve talked enough. So Dr. Daffney Moore, you’re up.

Dr. Daffney Moore  

Thank you, Alex. Next slide. So, I became a part of the Opportunity Zones from the standpoint of the Rockefeller Foundation chose the City of St. Louis to fund community capacity building initiative. And so my whole focus was on Opportunity Zones and marketing them so that we could promote the city and get more funding into the city of St. Louis. Next slide. With that being said, there was no blueprint for what to do. And so we got to work quickly trying to figure out what was the best way to move our story forward. And we decided to build a prospectus, create a website and make a project portal for anyone who had a project in St. Louis to display it on our portal so that investors across the country could actually see those projects. The other thing that we did, we spent a lot of time working in community, convening our regional and local partners, and also working with federal partners to really move the needle and really help some of the areas that were more disinvested in our city versus just helping the ones that we knew would already be successful.

And through that work, EPA, Office of Community Revitalization, helped us with technical assistance for five organizations that sat along the MLK corridor. And through that work, we were able to help get them site prepared, more ready for capital and help them with some organizational capacity. We also through our portal had over $359 million, which contributed to about 21 projects be on our portal, which made a big difference when investors were looking at our site. Next slide. Some of the biggest things that I think worked for St. Louis is that we had local ownership. Everyone knew to come to myself and my other colleague to really say, “Hey, we’re doing something in the Opportunity Zones. I’m having an issue with zoning or I’m having an issue trying to acquire a property.” So they knew who to go to. We also tried to get as much technical assistance and other resources to our Opportunity Zone areas.

So anything we could do to market and sell and tell our story, that’s what we did. We built trusted relationships in the community, which really helped when COVID-19 actually happened. We were able to help the city distribute over a thousand small business loans to help businesses recover. So not only did OZ1 help us with the prosperity of helping attract money, but we were able to create resources for individual and small businesses. Next slide. So with that, of course, there’s always some issues with how a program rolls out. And I think one of the biggest challenges is when people heard Opportunity Zone, they instantly thought that the city had money. We did not. The designation didn’t come with money. And it also showed a glaring issue that we had with the program is that a lot of our communities were not ready for OZ. There were a lot of issues with gap financing.

A lot of people didn’t have pre-development capital and didn’t know how to structure a deal. So we came in to really help with financial modeling and getting them the tools that they needed and to work with EPA to see how we could address some of the brownfields. Next slide. So one of the things that I really wanted to hone in on, what changed. The permanent 10-year designation cycle is a big thing, and I don’t think that a lot of people took that part seriously when thinking about the designation and getting their census track or their city to have as many Opportunity Zones as possible.

That 10-year designation means that you have 10 years to really work to build your community in that census tracks that are designated to be development ready, to help decide what type of infrastructure and other opportunities and assets that you have. And that’s really going to help those communities that get the designation have a competitive advantage for 10 years while other communities that don’t get the designation will probably still be waiting for other resources. And again, this is trillion dollars that is possible within these designations, so it can make a difference in rebuilding communities. So I’ll stop there and turn it back over to Sergio.

Sergio Galeano   

All right. Daffney, Alex, Mauri, and Jason, thank you so much for sharing your expertise. I heard so much there, so much value. There’s a lot of complexity to the investment side. Opportunity organizations like OPAL are really breaking that down. I love what Alex said about simplicity. We’re getting folks with money and investment in the same room as folks who want to have impact with projects that we can take from inception to end. From Mauri, the value of opportunity about how Opportunity Zones can be used as an economic development tool. And from Daffney, as a former Opportunity Zones officer, the experience of playing this role as we could call it kind of a facilitator, a gatekeeper, a convener to help connect the dots between these various organizations. I want to unpack that, but before we do, I’d love to see the results from the first polling question.

All right. So we asked folks earlier through Jason, thinking towards OZ 2.0, what kind of areas would you like to see investment in your community? And it should not be surprising that a lot of folks said all the above, but even in individual answers with a slight priority for property, a slight priority for property, that all in all folks see a lot of these investment vehicles and opportunities as the most impactful for their communities. All right, thank you for that. Let’s unpack some of the insights that we found today. Mauri, I wanted to start with you.

We learned a lot about Whatcom Foundation, a lot about the opportunity that in 2017 Opportunity Zones brought to you and the board to use it as a tool in your interactions with the community and all that. But when we think about it, we talk a lot about Opportunity Zones bringing, like the name suggests, opportunity, but like any investment vehicle, there’s risks also associated with that. How do you and the board balance and reflect on the opportunity and the risk associated with an investment, especially because it can take so many years and so much effort to bring it together that you want it to come to fruition? How do you think about that?

Mauri Ingram     

Yeah, we have been talking about risk and trying to redefine risk a little bit, not only from the community foundation point of view, but in our conversations in the community. So we’ve been doing impact investing work for 15 plus years, and it was really important that we have that conversation early. So when we think about grant making, there’s no risk that we’re going to get the money back because it isn’t coming back. But in traditional investments, we think mostly about the monetary return and the risk of not getting it back. So we think more about the opportunity cost as a risk, what if we do nothing? And helping people factor in, as I mentioned earlier, the benefits that we’re going to get as part of the return. So you can’t talk exclusively about the financial return. You have to think about the why behind the investment, the why behind Opportunity Zones to begin with.

Sergio Galeano   

Thanks, Mauri. And a follow-up on the long-term impact. So I know that one of the requirements is that Opportunity Zone investments tend to have a minimum duration, and so that’s something that investors have to understand, that your money is not going to be a quick profit. It’s for the long-term. It’s meant to really sit there that the money can be patient and generate economic benefit. But that’s also partly to ensure that the investment gains traction and actually comes to completion and benefits the community. But as a partner, as someone who convened the partners, who orchestrated it, worked with the funders and saw the investment part done, there’s still kind of the waiting it out to see that this physical project is built, whether it’s rural housing, property, small business development. So what else could a community foundation and partners like your colleagues in the field do to help facilitate that long-term stewardship of an Opportunity Zone investment?

Mauri Ingram            

I think any partner in this type of work, whether you’re a community foundation, you’re a local government, you’re a state government, regardless, asking the right questions early on. It’s easy to think about 10 years as a long time, and so making sure that you think about what the exit can look like. I’m not an expert on the OZ legislation, but you can’t predetermine who you’re going to sell your interest to as an Opportunity Zone investor, but you can be creative in figuring out, legally creative, of course, you can be creative about how you’re going to set parameters around what that exit might look like. And so for us, we are looking at a lot of the commercial property that’s a part of The Millworks development going into a community investment trust. So that gives us a 10-year window to raise capital so that the average person, not an accredited investor, but the average person could buy into a real estate investment with 10, 25, $50 a month and actually become a property owner in their place, whether they own their own home or not.

Sergio Galeano       

Oh, thank you for that. Alex, I’d love to turn to you. I’ve heard today and in other podcasts, for example, in Opportunity Zones, a lot on your background in law, you’ve nerded out on the tax law, the legislation, there’s a lot of complexity that you simplify for partners. A lot of that is making it accessible so that people can understand. And like Mauri said, in her county in Whatcom, investments like these weren’t common in a certain situation, for many maybe aren’t and Whatcom is helping bring that out. Opportunity Alabama in Alabama has brought so much investment and you’ve had far reach across the country. You’ve seen so many projects that you detailed from inception to completion and constantly have them ongoing.

Someone had asked in the chat earlier and I wanted to bring up on just if we could simplify this back and give us kind of a story and origin, what is it like the most common kind of approach where someone has an idea, you see funders, how do you take a project from inception, from an idea, from a partner perhaps who’s never worked with funders or never worked with this tool and actually get to papers that are signed and things that begin to get constructed and completed? And if I could also ask what that looks like for the investor side as well, that someone like Mauri can then go back to funders and explain that narrative, that impact.

Alex Flachsbart  

All right. So anyone wants to stick around for an extra 20 minutes? I’ll give you a full… No, I’m just kidding. So what I’d say is step one, build a model. Project has to work, your project has to pencil, right? So you’ve got to be able to understand what your cash flows are and you’ve got to be able to underwrite those cash flows. So you, project sponsor, person with idea, it’s got to be something that actually can create value for who you’re thinking to attract investment from. So that means, again, two pieces. There’s typically debt and there’s typically equity. Think of the OZ as your equity because that’s what it is. That’s literally what OZ investment is. It’s equity investment into an underlying project. So that’s another common misconception around OZs. This is not grant capital. This is not free money. This is actually quite expensive money.

It’s because equity is always the most expensive form of capital because equity, it’s the capital, it’s the most at risk in any project. Things go sideways. Who gets the keys? Is it the bank or is it the equity investors? It’s the bank. So equity demands a return for its investment. Now, the theory behind OZs is that because of all the tax benefits that there is a crowding in effect of capital into equity that maybe it reduces that cost capital a little bit. Maybe investors aren’t asking for quite as much because they’re able to raise tax benefits. In our practical experience, we find more that it’s investors are willing to do things they might not otherwise from a risk perspective because of the tax benefits, not that they’re reducing how much it costs. So that’s what I’d say is build a model, make sure it works, make sure it pencils.

And then again, start conversations locally. Most of the folks on here seem like they’re from nonprofits or from local governments. So it’s normally the mindset we get is, oh, I got to get a grant application done or I’ve got to write this thing to this person and I’ve got to explain my project and the job’s created. It’s like this is a totally different mentality. You need to find someone who actually sold something and made money, and then you can start having conversations. Until you do that, the cavalry isn’t necessarily coming in over the hill. There’s not necessarily some big national opportunity fund that’s going to find your project wherever you are and be able to capitalize it. So the best closest source of OZ capital is always going to be someone who sold something locally. So have projects, vet projects, make sure they pencil, and then have conversations with accountants, have conversations with financial advisors, have conversations with those locally that probably you wouldn’t otherwise, and start to build your Rolodex with people that might sell something. And if you can start putting those people in a room, then hopefully something magical can happen.

Sergio Galeano         

Question for you also as a fund manager. So let’s say you get a new partner in Alabama or in the Southeast and they’ve got CDFI financing, they’ve got philanthropic dollars over the next 10 to 15 years or any other source of public dollars and they’re trying to understand, well, how does OZ funding work? How does it interact with these other sources of funding? How does it do so in a way that I don’t lose out that other funding that I have? How do those all integrate? How do you combine those investment vehicles?

Alex Flachsbart          

Carefully and painstakingly. So yeah, I mean at the end of the day, think about OZ as your equity source. In some weird ways, OZs is actually your most flexible capital source relative to those other ones that you mentioned in most projects. Pairs well with new markets, pairs really well with historics. That’s probably the most common pairing that we see and that we’ve done. Part of why we now offer both products under one roof is because we see them used consistently so often together. H2C provides the subsidy because it’s a credit, and then OZ provides the equity so that you cannot have nearly as much debt and stuff pencils because you’re not having to carry as much debt load on the same rent. You can actually get to workforce. So, you’ve got to be thoughtful, you’v got to be careful, find someone smart locally who can give you all the legal and go from there.

Thank you. Someone in the audience had asked something about your slides, about resources that they could find out more. Reminder for everyone in the audience that our three speakers on behalf of their organizations are going to share resources that we’re going to share with Fed Communities on the material so you can dig in and find more info on everything that they’re talking about and get more resources. Now I’d love to go to Daffney. Daffney, as a former Opportunity Zones officer, that was a very special role that you filled in St. Louis, and it speaks a lot to the importance of coordination, of partnership, of someone who can have a 30,000-foot view of the landscape of what the city from its perspective, what it thinks that is the most important for distressed communities, but also can have a portal, can have a way to coordinate for funders to make that conversation easier.

So, you talked a lot about the importance of a role like that. And right now as the map is still being drawn out for Opportunity Zones 2.0, I know a lot of localities are thinking about who should be that one person or organization to fill those same shoes. So you’ve had so many lessons. So from your experience in St. Louis, what did that role require day-to-day that you would recommend if there were a new Opportunity Zones officer in St. Louis, Birmingham, Whatcom County, that they could do to even do better than 1.0 and really leverage it? And if it helps, what have you seen happens in communities that don’t have that kind of role available to coordinate and marshal those resources?

Dr. Daffney Moore   

Sure, that’s a loaded question. So first I would say the day-to-day was different every day. There will be one day where I’m really marketing one of our best projects like the Foundry, which was one of the most successful OZ projects, not only in St. Louis, but across the country. It created a food hall, a grocery store, entertainment venues. And so I got to market that. But some days I would be working with the mayor. Other days I would be working in the field with the CDCs trying to figure out how you can get investment into some of the hardest hit communities. Other days I would be creating working groups to get everybody to work together because in government, one of the biggest problems is that everyone works in silos. The zoning department’s over here, the community grant development money is in another office. So really making sure that everyone was on the same page and we knew who was going to be the point person for those people.

So, I would recommend that for cities, have a point person within your city that can help deal with the zoning. Or if there is a problem with trying to get a property acquired or if they want tax incentives to go along with the Opportunity Zone designation, how does that work? And so for me, it was easy because I had someone I was sitting next to that could do financial modeling, like Alex said, to make sure the project penciled and to see if the city was willing to use new market tax credits and other incentives to make a project pencil. So I would say yes, get you someone, but if you can’t afford to work with their chamber or your economic development partnership to really try to see how you pull together. I was very fortunate that everybody wanted to work together and that my mayor allowed me to do my job. And so I think it’s easier when you have someone that has the leadership and vision to know how important this could be to their community.

Sergio Galeano

Oh, thanks for that. And I appreciate you specifically mentioning certain kinds of organizations because I think there are partners that could be overlooked from what I’m hearing and that it’s really important to bring a lot of folks at the table. So as we look at 2.0, there are some great changes coming there to really provide improvements, to provide broader reach, for example, geographic diversity and rural opportunity, incentive behavior to make that more attractive. What are things that communities that’ll be placed on the map that have the opportunity could do you think to leverage that? And I leave that open if there’s something that really attracts you about 2.0, whether it’s that geographic opportunity for rural zones where typically bigger metros got the investments. If it’s on the funder side that perhaps now it’s even more attractive because it’s a permanent investment vehicle or even the transparency and accountability that would lead to better information on evaluation. What’s something that stands out to you most out of the 2.0 improvements that you think will be really impactful that you’ll enjoy implementing and working with?

Dr. Daffney Moore     

Yeah, I think the most important thing is the transparency side for cities because we had to guess what projects were actually in our communities, which made it harder to market that. And I think a city, if they know that there are projects going on, they may be able to put infrastructure dollars toward it. They may have a pot that can be used for extra pre-development costs. But if you don’t really know what the projects are, you can’t properly assist the developer and the investor in making the project successful.

Sergio Galeano

Thanks, Daffney. Alex?

Alex Flachsbart      

You already heard me say it, rural. I’m really excited about the 30% basis step up. I’m also excited about there’s a substantial improvement test. We didn’t get way in the weeds on OZs but basically to have a qualified project, it’s either got to be a new building or it’s got to be a gut rehab of something. You have to at least double what you paid for a building. And that can sometimes be hard, for example, on affordable housing preservation. It can be kind of hard to reinvest that much money back into a building to keep it. But in rural now, that’s only a 50% bar instead of 100% bar. So that’ll be another really interesting wrinkle on housing creation in rural places.

Sergio Galeano

I agree. Mauri, anything stand out for you?

Mauri Ingram

I would emphasize what Daffney and Alex shared, but I would also add that we have this, it’s not so much about the changes with 2.0, but we have this 10-year history from 1.0. And even though we don’t have great data around it, we do have a lot of examples and we have amazing resources like Daffney and Alex where it’s easy for people to reach out and say what worked, what didn’t work, point me to a project, tell me somebody that I can talk to. And there is a lot of information out there. It’s not aggregated necessarily as well as we might like, but there’s a lot of potential to leverage it.

Sergio Galeano

Yes, I totally agree. And Mauri, following up from one question from the audience, someone asked about two things happening with an Opportunity Zone. If you could elaborate just for another minute, is that you’ve got the economic potential from the project itself, but with something like the Millworks or a physical property that’s being built, it’s also providing direct employment for a lot of folks over time. Have the three of you seen that? How can that play out? The workforce development side of Opportunity Zones and what we could keep in mind on that for talent opportunity and jobs in regions that have these investments?

Mauri Ingram 

Well, in our case, it’s built into what we call “the kitchens,” which is the small business incubator for food-based businesses. So it’s inherent in that, and there’s a lot of entrepreneurship support. And I think we are a community benefits first project. That’s not going to be true for everybody, but you can still identify places and you can start the conversations, as Daffney mentioned, with potential project proponents to say, “These are the things we’re interested in as a community. How does your project measure up? What kinds of workforce development opportunities are you going to have?”

Dr. Daffney Moore    

And I would say that the foundries created a lot of entrepreneur opportunities, but it also created a lot of jobs. The city winery, the grocery store, the little commercial stores that are along the storefront, it really did take a space that had been vacant for decades and turn it into this vibrant place that now I think they’re on their third phase of building and created workforce opportunities that wouldn’t be possible without a type of OZ funding that came along with it.

Sergio Galeano

Thank you. Well, as we come to the end, I want to thank the three of you and also Jason Vargo, the San Francisco Fed. Thank you so much for the presentations, your research, your experience, and all the resources we’ll share with our audience. Opportunity Zones are such an impactful economic development tool, one that we’ll continue to track. And like you said, Mauri, we have 10 years of experience and counting, and it will only continue to be a more impactful for the communities that we serve. I want to thank you all so much on behalf of Fed Communities. But before we end the session, a few requests for everyone in our audience, please complete the post-event survey. We’ll send it to you immediately after today’s event so we can improve and continue to bring you timely and relevant topics and discussions. A reminder, materials from today’s event will be available on YouTube and the Connecting Communities website in about two weeks’ time, and the video will be available on YouTube.

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