What are Opportunity Zones? What is at stake?

Season 1, Episode 1

In Episode 1: What are Opportunity Zones? What is at stake? Allie Yee, MBA (SOM) and Professor Kate Cooney introduce the opportunity zone policy passed as part of the Jobs and Tax Cuts Act of 2017, the problems it is trying to solve and the incentives it creates to solve them.  Dramatic explication of the mechanisms of the OZ incentives performed by guest hosts Sarah Harrari, graduate of Yale School of Forestry and Environmental Studies and SOM and Dan Bitner, MBA (SOM).  To explore what is at stake for the OZ program, podcast hosts Allie Yee and Professor Kate Cooney present audio snippets from a selection of the guests interviewed for the eight episodes of CitySCOPE podcast, Season 1.


1. To learn more about opportunity zones: Economic Innovation Group, click here

2. To hear more about the investor perspective on opportunity zones: The Opportunity Zone podcast, click here

3. For an in depth examination of how opportunity zones can be shaped by developer interests and some more general background on the policy in historic context: Trump, Inc: An Opportunity for the Rich, click here

*Photo of geography of 8,700 Opportunity Zones, courtesy of EIG

Episode Transcript: 

Kate Cooney (00:00):

This is CitySCOPE.

Camilo Monge (00:01):

A new podcast from the Inclusive Economic Development Lab at the Yale School of Management.

Lauren Harper (00:05):

Where we learn about what might be possible in our city by talking with others about what is happening in theirs.

Liam Grace-Flood (00:11):

Are we ready?

Paul Bashir:

Let’s go.


Allie Yee (00:28):

Welcome to our first episode of season one of the CitySCOPE podcast, remaking the city, charting the opportunity and Opportunity Zones. I’m Allie Yee, an MBA candidate at Yale SOM.

Kate Cooney (00:38):

And I’m Kate Cooney, Senior Lecturer in Social Enterprise and Management at the Yale School of Management.

Allie Yee (00:43):

In America, neighborhoods are too often a self-fulfilling prophecy. If you live in a “good” neighborhood, your chances of leading a comfortable and lucrative life are high. Your schools are probably good. People have jobs. There are new businesses. The houses are nice and probably expensive. You are likely to be living in a neighborhood of concentrated affluence. If you live in a “bad” neighborhood, things are tougher. Your school is probably underfunded and perhaps racially segregated. There might be boarded up houses or factories from a manufacturing past. Good jobs are hard to come by. The concentration of poverty and low income neighborhoods has persisted and even deepened, even as many cities in the United States enjoy a Renaissance of new investment and growth.

Kate Cooney (01:25):

This last point about investments and the opportunities they can create in a place is what we want to talk about today and throughout season one of the podcast. We’ll be exploring Opportunity Zones, which is a new program to incentivize investments in the poorest neighborhoods across America. It’s seen as a tool that could bring in capital, money and investments into places that have seen very little of it. These places have been under invested in because financially the returns on those investments don’t look great compared to other places, but also because historically they’ve been excluded from investments through policies like red lining where the federal government designated certain areas as places where people shouldn’t invest and those policies have had an effect that reverberates to today.

Allie Yee (02:09):

The policy was actually created in 2017 without much notice or fanfare as part of the Trump administration’s tax cut legislation. It was championed by Senator Tim Scott, a Republican from South Carolina, and based on a bipartisan bill introduced early in the year, supported by Senator Scott and New Jersey Democratic Senator Cory Booker. The policy is basically a tax incentive program. It gives people with capital gains a tax break if they choose to put their investment dollars in places that are designated Opportunity Zones. Here’s Sara and Dan to break it down for us.

Sara Harari (02:44):

Hi, I’m Sara Harari. I am a recent graduate of both the School of Forestry, Environmental Studies at Yale and the Yale School of Management.

Dan Bitner (02:52):

And I’m Dan Bitner, also a recent graduate of the Yale School of Management. So Sara, tell us about Opportunity Zones. What kind of opportunities are we talking about here? What really constitutes a zone?

Sara Harari (03:02):

Well, you’re really cutting to the chase. Okay, first, opportunities. There are opportunities for both investors and for people that live in the zones.

Dan Bitner (03:11):

Okay, let’s start with the investors.

Sara Harari (03:13):

So let’s say that you just sold $10 million worth of stock.

Dan Bitner (03:15):

Oh, I’m rich in this fantasy. I like it. Keep going.

Sara Harari (03:19):

Usually when you sell that stock, you have to pay a capital gains tax. That means that you’re immediately paying about $1.5 to $2 million in taxes, depending on your tax bracket.

Dan Bitner (03:28):

All right, so I’m a little less rich now.

Sara Harari (03:30):

What if I told you that there was a way that you could keep a little bit more of that $10 million or at least way to pay off that $2 million in tax? Welcome to the Tax Cuts and Jobs Act of 2017. If you decide to take that $10 million and move it into an Opportunity Zone Fund, you can avoid some of that capital gains tax.

Dan Bitner (03:48):

How much is some?

Sara Harari (03:49):

That depends on how long you leave the money in the fund. If you keep the money in the fund for five years, you receive a step up in basis of 10%. Meaning that you only have to pay tax on $9 million, not 10. If you wait seven years, that tax basis is reduced by another 5%.

Dan Bitner (04:03):

All right, so just to recap, I went in initially paying $2 million in taxes today to now paying $1.7 million in taxes in seven years?

Sara Harari (04:13):

Yep. And it gets better. This money is in a fund, right? And funds are designed to make money. So your $10 million is making money while you’re waiting to pay less in taxes.

Dan Bitner (04:23):

Well, that sounds good, but I’ll have to pay taxes on those gains, right?

Sara Harari (04:26):

Yes. Unless you leave your investment in the fund for at least 10 years. Then, not only do you get the $300,000 deduction in your capital gains tax, but you also get any gains from being invested in the fund tax-free.

Dan Bitner (04:42):

I’m liking this more and more. How do I sign up?

Sara Harari (04:42):

Yeah, well, it’s certainly a great deal for investors looking to minimize their tax burden. If you want in, the investment window ends in 2028. But this policy also has the added benefit of shifting investments into these zones. The hope is that with more money flowing into these communities, we’ll start to see a higher standard of living for residents.

Dan Bitner (05:00):

So who picked these zones? Can I nominate my town?

Sara Harari (05:03):

Nope. All the zones have already been selected. They’re going to remain the same zones for the duration of the program. There’s been some heated debate over the selection process actually. The program was originally intended to target “distressed neighborhoods”, but 57% of the American neighborhoods qualified under the eligibility standards. States had brought authority to select which neighborhoods would be part of the program. A recent Brookings report found that overall the States selected pretty well. The national poverty rate is 15% and the average poverty rate across Opportunity Zones is 29%.

Dan Bitner (05:34):

Well it sounds like a well-designed policy, right?

Sara Harari (05:37):

Well, yes and no. Almost a quarter of the zones selected have a poverty rate below 20%. There were areas like downtown Portland, Oregon, and college towns across the country that also got selected. These were areas that probably already had interested investors and now we’re giving them a tax break to do projects they were already going to do.

Dan Bitner (05:54):

Okay, well that’s less good, but at the same time, there’s still a chance that this law could provide new much-needed cash infusions for low income communities.

Sara Harari (06:02):

Yeah, well, that’s certainly the hope. We need to start thinking about how to do inclusive development. How do we ensure that the new capital flowing into these communities benefits the existing residents? Whenever we talk about low income community development, one of the biggest fears is gentrification or the idea that as we improve these communities, we force out long-term residents in favor of those better able to pay for the new cost of living.

Dan Bitner (06:26):

That’s certainly an increasing problem across the country. Seems like there’s not a great answer for it yet. But how are people fighting gentrification?

Sara Harari (06:32):

Isn’t that what we’re here to find out?

Dan Bitner (06:34):

You’re so right. I guess that means I finally need to tell our listeners more about what they’re going to be listening to.

Sara Harari (06:39):

Yeah, I think that’d be best. I honestly can’t believe you haven’t told them yet.

Dan Bitner (06:42):

Okay, okay, so this is a project designed to talk about what Opportunity Zones mean for America and what they might mean for New Haven, Connecticut, where we’re based. The city has several designated zones and we’ll be working in four neighborhoods encompassing six zones throughout the next few months to build some consensus around what types of investments might be well suited to New Haven.

Sara Harari (07:00):

We’ll also have a variety of experts to talk to us, not just about New Haven, but also about inclusive community development in cities like Los Angeles, Philadelphia, Boston, New York, Washington DC, and New Orleans.

Allie Yee (07:18):

Thanks, Sara and Dan. Again, the basic idea of the Opportunity Zones is that investors get a tax incentive to invest in these zones and the longer they keep that investment in the zone, the bigger the benefit to them. This year, 2019, is an important year for the program because the policy is written so that investors must make their investment by the end of the year to be eligible for the full seven-year step up in basis benefit. The range of things investors can invest in is fairly broad, although the specific rules and regulations are still being finalized by the Treasury Department. Investments could go to commercial developments to building residential housing or to small business development. There are some proposed requirements to try to make sure these investments actually go to revitalizing assets in the local community, including rules that require real estate investments to substantially improve properties or requiring 50% of a business’s trade to come from within the Opportunity Zones.

Allie Yee (08:11):

Clearly these rules have implications for the economic and social impact of the investments and are still being debated. So far, the rules for real estate investments have been clearer and better understood, so more investment activity has been focused on that side than business investments. But this is all unfolding in real time so by the time you’re listening to this show, more will have been decided. You might be starting to see how this policy would garner both enthusiasm and skepticism. Ad over the next several episodes we’ll dive into the perspectives of different stakeholders, including community organizers, foundation leaders, real estate developers, impact investors and others, to get their take on what this could mean for Opportunity Zone neighborhoods. Here’s a sneak peek of some of our conversations. Eric Letsinger, Founder and CEO of Quantified Ventures.

Eric Letsinger (08:58):

The way we think about Opportunity Zones, we’re thrilled. We think it’s great. There’s a lot of enthusiasm for this new tool. There’s a lot of skepticism about whether this tool will be the thing that saves America. The way we think about it - we think about it as just another arrow in the quiver.

Allie Yee (09:19):

Joe Evans, Portfolio Manager at The Kresge Foundation.

Joe Evans (09:22):

We’re excited and sort of fearful and motivated from the moment we started to hear about the Opportunity Zone tax credits. It’s potentially huge amount of capital to be invested in these state-by-state identified Opportunity Zones. We also see a lot of risks for the community, certainly, in a number of ways, primarily because there isn’t much in the way of requirements under the regulations about how the money is invested, what kind of benefits, if any, might accrue to the residents of those areas.

Allie Yee (09:56):

James Johnson-Piett, Principal and CEO of Urbane Development.

James Johnson-Piett (10:00):

The other big thing is anytime you come up with a new product, there is a period where the product makes no sense and that’s the period where smart investors and smart users make the most money because the rules haven’t been quite figured out yet, the loopholes haven’t quite been worked out yet, and so you get a lot of arbitrage from the inefficiency of the first version of the plan. Because the Opportunity Zones are time-pressured, you’re going to get more of this energy as well.

James Johnson-Piett (10:29):

When I think about what we do, it’s a tool. So you’re starting to see this proliferation of how the opportunities on money can be used and it’s going to be a race to figure out, well what’s the model? Is it like the movie theater mixed with the grocery store? Or is it the power center mall with the housing on top? Everybody’s going to have to figure out what’s the thing that the Opportunity Zone fund gets used for and which one works. We’re in this really interesting wild, wild west phase where everyone’s kind of throwing all kinds of stuff at it to see what’s going to stick.

Allie Yee (10:58):

Jason Price, Founder and Chief Business Adviser of NXTHVN.

Jason Price (11:02):

How do I feel about Opportunity Zones? From a high level, I’m excited about them. The idea that change in tax policy will unlock access to, people are saying, trillions of dollars in capital is really, really exciting. And so anytime neighborhoods like our neighborhood have this opportunity, I think it’s a good thing.

Jason Price (11:28):

On the other side of that, this is new; and when you start to talk about numbers at that level, you know it can invite in some bad actors. We already have sort of speculative real estate investors in our neighborhood. If it’s not regulated in the proper way, this could accelerate those activities as they raise money from investors seeking to take advantage of these tax avoidance or tax savings plans. So that’s one negative.

Jason Price (11:54):

The other is, my background is private equity. What I really want to see in that neighborhood are folks and investors who are really interested in being stakeholders in that neighborhood. But what I’m nervous about is that they invest in the neighborhood, but they actually don’t have a stake in the neighborhood. One of my philosophies in private equity is, I think you get better results when you have an ownership mentality and if you’re too removed from the investment because you just look at it as an opportunity or math, there could be some unintended consequences.

Allie Yee (12:21):

Joel Cutcher-Gershenfeld, Professor in the Heller School for Social Policy and Management at Brandeis University.

Joel Cutcher-Gershenfeld (12:27):

The whole Opportunity Zone concept is a fascinating one in relation to digital fabrication. On the one hand, too many Opportunity Zones are limited to just being real estate initiatives that do help with housing, but that fall short of the full potential of creating distributed economic opportunity. If you have digital fabrication in the mix, it does allow for the kind of rapid prototyping that entrepreneurs will value. It does add skills and abilities in design and fabrication that are useful.

Joel Cutcher-Gershenfeld (13:14):

And the piece that I think is most interesting of all, is that an important part of opportunity is the dignity and self-worth of controlling your own destiny. And so you add in the notion of some self-sufficient production capability different than, for example, just doing a safety net of some kind of income that goes with replacement of people displaced by technology. Much better to have the dignity and meaning of making things rather than just some kind of safety net, important as that might be. Deeply embedded in the conversation is the question of who controls the technology? How much voice or choice is there with respect to the technology? And so if you’re setting up an opportunity zone, but the decision making is still in the hands of a small number of wealthy individuals, that’s very different from people making choices about the technology in their neighborhoods and in the process building, sort of self-governing capability.

Kate Cooney (14:28):

Greg Reaves, Mosaic Development Partners.

Greg Reaves (14:31):

I think Opportunity Zones are going to have a big effect on marginalized neighborhoods. And I’m not sure what that means. I think some of it will be positive. I think some of it will exacerbate gentrification as many people view gentrification today. The reason why is because it’s driven by capital gains and to have capital gains that means you have to have income and it can’t be from ordinary income. It’s typically… this is a wealth-driven model, so people who have excess cash where they don’t want to pay taxes that they’ve made from investments, could invest in communities that have been marginalized, provided that they hold it for a period of time.

Greg Reaves (15:15):

And now you have wealthy people looking in neighborhoods that otherwise they wouldn’t look. And now they’re thinking about what the appropriate investment strategy is and if they don’t have a mindset that’s driven around how does the community benefit, I think we’re going to see two sides of what could work with Opportunity Zones. One will be very wealthy people coming in neighborhoods and just changing them fundamentally. The other can be: How do we help small businesses or entrepreneurs or young people who have been struggling, use this new investment tool to build something together? And I’d like to be a part of this second story, but the first story is also being written.

Allie Yee (15:53):

Nancy Halpern Ibrahim, Executive Director of Esperanza Community Housing.

Nancy Halpern Ibrahim (15:59):

Opportunity Zones make me very nervous. I’m very concerned about entrusting the development to entities other than the community. If a project is not going to be community led, it is not going to be protective of the community. It could be paternalistically interested, but I am not entirely convinced that an opportunity zone, which is an opportunity for those with capital to attain more capital gains is actually going to translate into developmental equity for the community. And so I know we’ve all been to places that look as if they’d been cleaned up, where the bricks and mortar and the streets have been polished, and things look neater and spiffier and more upscale. That is something that I approach with a great deal of apprehension because it’s the families of a community that are really the critical resource for making a community just and safe and progressive. So Opportunity Zones… I would love to see some models where that’s actually rolling out in a truly progressive way, but I remain very deeply apprehensive.

Allie Yee (17:23):

These questions are so important because there’s a lot of money at stake. The economic innovation group which helped develop and push the Opportunity Zone policy estimated that there are $2 trillion in unrealized capital gains sitting on individuals’ and companies’ balance sheets. According to the National Council on State Housing Agencies, which is tracking all of the opportunity funds being created across the country, there were about 130 funds raising as much as $28 billion to invest in zones as of early May, 2019.

Allie Yee (17:52):

A few philanthropic organizations have also entered the mix. The Kresge Foundation has put in $22 million in investment guarantees to two funds to encourage investments that prioritize sustainability, living wage jobs, and community accountability. It’s unchartered territory and we and others are starting to find our way through it.

Kate Cooney (18:11):

In the following podcast episodes, we’ll be thinking about how community led and owned projects can fit into the picture; how innovative businesses in spaces like food halls, fab labs, community land trusts, and other models can be incorporated or complimentary to the OZ program; and how creative financing and blended capital stacks can make new opportunities possible.

Kate Cooney (18:34):

On episode two, we look at models for affordable housing and how the OZ program might fit in with other efforts to address the affordable housing crisis in the United States.

Allie Yee (18:43):

We hope you stick around for the ride.


Lauren Harper (18:49):

This podcast was recorded in studios at the Yale School of Management, the Yale Broadcast Studio and the Poorvu Center for Teaching and Learning.

Liam Grace-Flood (18:56):

Created by Kate Cooney and the students of the Spring 2019 Inclusive Economic Development Lab class.

Kate Cooney (19:03):

Special thanks to everyone at the Yale SOM studio and Media Control Center: Froilan Cruz, Abraham Texidor, Donny Bristol, Enoc Reyes, and Jessica Rogers.

Kate Cooney (19:12):

And at the Poorvu Center for Teaching and Learning: Brian Pauze and John Harford.

Paul Bashir (19:18):

Audio engineering and production by Ryan McEvoy and Kate Cooney.

Kate Cooney (19:22):

Music from the album, Elm City Trees, composed and performed by the artist, K. Dub. For more information and show notes, visit our website at IEDL.yale.edu.

Camilo Monge (19:36):

Thank you for listening.