Opportunity zones were designed to spur development in poor areas. Are they doing the job?

Future development—namely a $306 million boulevard linking Interstate 490 with the Cleveland Clinic on East 105th Street—through the Fairfax, Kinsman and Central neighborhoods was dubbed the Opportunity Corridor.


The idea for investors to profit off poor neighborhoods began, of all people, with the guy from Napster.

Located on four pages of President Donald Trump’s Tax Cuts and Jobs Act of 2017, opportunity zones, the brainchild of tech billionaire Sean Parker—and other Silicon Valley honchos—were supposedly intended to create a win-win: 8,700 census tracts (64 total in Cuyahoga County), notably distressed and underdeveloped, were re-envisioned as hotbeds of prime real estate potential with shiny tax benefits. Intrigued investors could reduce capital gains taxes over the years, then eliminate them in full by Year 10. In theory, according to a recent analysis by Novogradac & Co., a national tax consulting company, such incentives could increase an investor’s return by as much as 70 percent.

“That $100,000 building that you’ve built? It’s now suddenly worth $125,000,” says Bradford Davy, director of regional engagement at The Fund for Our Economic Future, a Cleveland nonprofit designed to cull capital together for worthwhile infrastructure projects. “This is a strong private-capital tax incentive we’re talking about here.”

In Cleveland, which contains 48 census tracts deemed eligible for opportunity zone readiness, the benefits for all city residents alike are still in dispute two years after their debut.

In 2017, a newly formed network of public and private partners called Opportunity CLE grouped these tracts into 11 districts, including already prospering parts of the city, like Downtown and the West 25th-MetroHealth Corridor. Future development—namely a $306 million boulevard linking Interstate 490 with the Cleveland Clinic on East 105th Street—through the Fairfax, Kinsman and Central neighborhoods was dubbed the Opportunity Corridor, a 4.9-square-mile project site where, in some tracts, the poverty rate is as high as 87 percent and the median household income is as low as $4,600.





The Opportunity Corridor, a five-year project that will benefit from thousands of dollars in opportunity zone tax deferrals, probably best illustrates this big-picture zoning dilemma: Can wealthy investors eyeing dirt-cheap land build in line with what residents in the community actually need?

“This is the biggest challenge that exists,” says Peter Truog, founder of the Opportunity Exchange, a cataloguer of opportunity zone projects. “It’s still super unclear. There’s no grassroots panels asking, ‘How do you structure [projects] so that there will be community benefits and appeal for investors?”

Although the pendulum on opportunity zone benefits swings from hints of gentrification to stable progress in commercial deserts (“The Forgotten Triangle” of Central, Fairfax and Kinsman being one), projects have been sprouting, albeit gradually. The 13 made public through Opportunity Exchange include everything from luxury apartments in Little Italy and a rock climbing gym in Ohio City to a $1.3 million demolition of a former FX Fitness in Maple Heights. According to Davy, most of these projects benefited from opportunity zone tax abatements while they were already in progress rather than before.

Timothy Weaver, professor of urban policy at the Rockefeller College of Public Affairs in Albany, New York.As for whether these projects would exist, first of all, or not is up in the air. Timothy Weaver, professor of urban policy at the Rockefeller College of Public Affairs in Albany, New York, says programs like those in the 2017 Tax Act—he alludes to President Bill Clinton’s “empowerment zones” in 1994—have historically allowed for higher-end construction in burgeoning areas rather than “risky” projects in low-income ones.

“There’s a lot of investment happening anyway,” Weaver says. “And do we really think the [investor class] has been really held back by taxes in the past? I don’t really think so.” When asked about whether the Opportunity Corridor could reach its potential, Weaver is cautious to avoid any false optimism.

“What is possible is that people will get the highest return on their investment,” he said. “The people who aren’t guaranteed to benefit? Those who can’t afford to pay rent.”

The ‘little boost’ to break ground

For Josh Rosen, opportunity zone profits weren’t mere perks along the way in his latest project. They were the reason, essentially, his company built where they built.

Fifteen years before deciding to build The Tappan, a 95-unit apartment complex on the southern border of Tremont and Clark-Fulton, Rosen formed Sustainable Community Associates in 2004 with his partners Naomi Sabel and Ben Ezinga. Founded in Oberlin, where Rosen and company went to college, the company made its first endeavor into socially aware housing development when it renovated a blighted brownfield site formerly host to an auto dealership. Since then, the team has longed to find the sweet spot where, as their website says, “Real estate development can have a positive impact on a neighborhood.”

Opportunity Corridor on East 93rd Street.In 2018, after rehabbing the vacant Ohio Awning & Manufacturing Co. building on Scranton Road in Tremont, Sustainable Community Associates turned its sights on land across the street. Wanting to build a multi-use structure for workforce housing—almost half of The Tappan is reserved for those making less than $46,000 per year—Rosen and Sustainable Community Associates secured a $12 million opportunity zone equity (half of the Tappan’s full build cost) that will aid it to its grand opening come June 2020.

A “boost” that, Rosen says, was absolutely requisite.

“Without it, we wouldn’t have been able to pull all this off,” he says.

Cognizant of Sustainable Community Associates’ adding to a crowded market of market-rate housing in an economically complex neighborhood (median incomes surrounding it range wildly, from $17,000 to $77,000), Rosen still maintains a forward-thinking mentality considering The Tappan’s usefulness. He’s fostered complaints already about more middle-income apartments and about the plausibility of skyrocketing neighborhood property taxes. Considering the $21 million price tag, Rosen asserts that building 100 percent of The Tappan with lower-income tenants in mind wouldn’t have been just implausible. It would’ve been, he says, financially impossible.

“The three of us aren’t sitting in a room saying, ‘Let’s not build low-income housing! Let’s not do it!’” Rosen says. “I mean, you can pay the bank back with $1,200 in rent, or you can pay them back with $1,800 in rent.” The former, he says, “is just unrealistic.”

Construction on the Opportunity Corridor at East 55th Street and I-490.With hopes of hooking in more “socially committed” investor types attracted by opportunity zone funds, Davy reached out to Washington, D.C.-based think tank the Urban Institute this spring after catching wind of a possible solution to prevent cheap land abuse.

They shot back with a partnership and helped create a “social impact assessment tool,” a net-feasibility study which Davy says rates deals’ benefit to poorer areas on a wide variety of parameters: What kinds of jobs will Project X create? How has Project X’s lead supervisor sourced the underrepresented locales?

“This allows us to go to project sponsors, have them show up and spit an aggregate number which literally rates how their project will be beneficial,” Davy said.

Though the so-called scorecard is still in its beta stage, Davy is sure that if Opportunity CLE can make its usage necessary, it can curtail the building of projects clearly aiming to put more bucks in the investor’s pocket. In fact, Davy says one of the heads of the Cleveland Rocks Climbing Gym, Kevin Wojton, was involved in interviews to shape the tool in the first place.

As for the Tappan, which Davy says was “not around” for the scorecard beta testing, he is certain Rosen and crew’s buildout will show future opportunity fund holders how to properly make use of tax benefits.

It’s better for Tremont, he says, to have than to have not.

“I mean, at least they’re pretty upfront about it,” Davy says. “Without opportunity zones, they would never have made the numbers work in the first place.”

Brenda Parks says she's open to seeing what the Opportunity Corridor brings once it's finished in 2023.‘What we’re doing together’

On a recent clear-sky day near the border of Fairfax and Central, about a dozen or so locals set up tents and tables outside of University Hospitals Otis Moss Jr. Health Center on Quincy Avenue. Among the reverends, urban farm owners and reps from the city’s Department of Minority Outreach is an aura of neighbor positivity, one piggybacking off a recent UH renovation announcement and upgrades to the nearby Karamu House.

Talk is positive, despite the fact that this is in the so-called Forgotten Triangle, an area pockmarked with grass lots, quiet public parks and wide stretches of grated-window public housing. And that, in a year or so, several dozen homes will be razed to make way for a $306 million roadway.

“Sure, we’ve got a lot of vacant lots here,” says Brenda Parks, 63, who works in the Fairfax neighborhood and grew up in Glenville 15 minutes up the way. “But what about [building] some homes here? A lot of the old houses are troubled by lead poisoning.”

Glad about the general improvement of the Fairfax neighborhood—especially the state of the Otis Moss Jr. Health Center in recent years—Parks says she’s open to seeing what the Opportunity Corridor brings once it’s finished in 2023, especially in the sector of jobs for the area’s young, African-American population. Those, she says, “who’ve for a long time been ignored” by the city.

Jay Hope maintains a kind of smile-worthy skepticism on the Opportunity Corridor.Down the way from Parks is Jay Hope, a resident of Central who lives 13 blocks west of the Otis Moss Jr. Health Center with his wife and three kids. After graduating from Miami University in Hamilton, Ohio, in creative economic development, Hope moved back to Cleveland to operate a small art-based nonprofit out of a renovated International school bus.

As for thoughts on the Opportunity Corridor, Hope maintains a kind of smile-worthy skepticism; on one hand, he wants to see a big arts festival in Fairfax or Central, akin to the now-defunct Hessler Street Fair. On the other hand, he’s weary of who exactly controls the reins of developing.

“I always think of it like this: What you do for me without me is what you do to me,” Hope says. “What you do for me with me, then we’re doing it together.”

Walking east on Quincy Avenue, Hope, wearing a T-shirt that reads “Neighbor Up” on it, picks up littered beer cans with his trash grabber. He spots a group of middle-school age boys nearby and says hello to them, as if he’s seen them before. They look over, confused by Hope’s spontaneous clean-up duty.

“If I can go around picking up trash, how do you think this looks to outsiders? To kids?” he speculates. He continues, filling a small black bag of trash. “To me, it looks like we’ve begun to care.”

CLE Means We: Calls to Action

What can you do to learn more about how leaders are ensuring opportunity zone projects are equitable?

1) Follow opportunity zone development news on the Opportunity Exchange.

2) Follow Ward 6 updates to hear about projects in The Forgotten Triangle.

3) Contact Opportunity CLE to hear more about how their social assessment tool is working in your neighborhood.

This article is part of our "CLE Means We: Advancing Equity & Inclusion in Cleveland" dedicated series, presented in partnership with Jumpstart, Inc., Greater Cleveland Partnership/The Commission on Economic Inclusion, YWCA of Greater Cleveland, and the Fund for Our Economic Future.

To see other stories in our CLE Means We series, click here.
The Commission on Economic Inclusion has launched a year-long storytelling project called Racial Equity Sketches. They demonstrate how racial equity is interconnected with issues affecting both the business community and our larger community.

These fictional stories are meant to imagine what making an "equitable decision" could look like. Through them, they hope to reveal that equity is not always a major comprehensive strategy, but rather the compilation of many small, informed, and thoughtful decisions.

Read "A Letter of Interest" below:


Before Reading: Keep in mind that although Opportunity Zones are a real federal incentive, the below correspondence is fictional. The investor and mentioned neighborhood businesses are fictional, and any resemblances to living people are purely coincidental. Though many of the strategies mentioned in the response email are based on real initiatives, either in Cleveland or other cities, the story below should not be taken as a reflection of reality or standard procedure. Rather, it is an exercise that imagines what types of interactions could yield the best results, if Opportunity Zones were to work in the favor of equitable economic development. In other words, the sketch imagines what could be possible.

To: Cleveland
 
 From: Webb, Melanie B.
 
 Date: July 25, 2019 14:03:22, PST
 
 Subject: Potential Opportunity Zone Investment

 Hi there,

I recognize that my note may not be standard protocol. However, I was interested in gaining your insights for an investment I am considering in Cleveland using the new Opportunity Zone incentive.

First, a bit about me. I am an investment banker turned equity investor based in the Bay Area, with a portfolio of over 15 successful company investments (mostly in California). Admittedly, most of my interest in the past has been captured by scalable, high-tech businesses. In recent years, though, I have been having a slow change of heart. I think back to my life as a young adult, paying my way through college working a variety of odd jobs … and I wonder, would any of the companies I invest in have hired that younger version of me? Probably not.

What excites me about Opportunity Zones is that they encourage me, and people like me, to think differently about what we consider “valuable” investments. But frankly, I’m also nervous about it. I’ve noticed some of my friends putting dollars toward luxury high-rises in communities where there’s no way most residents could afford it—unless, of course, those residents change. Perhaps worse still, I’ve seen people invest in things like storage facilities that create minimal jobs and opportunities for anyone but the investors themselves. I am committed to going about this differently and have expressed the same to my tax adviser.

So, why Cleveland? Well, because, once upon a time, Cleveland was home. My parents moved the family when I was just 5, but they lived their whole lives in the city, as did their parents. I have scattered memories—picking out apples at the West Side Market, watching the sunset by Lake Erie. What I have more of are the family stories. Of my grandpop losing his job at the same time as 150 other employees, of shopping malls shutting down, of a landscape of empty factories whose signs were never taken down. The loss that Cleveland experienced decades ago was felt in my family's bones.

I am thrilled to see that economic realities are changing in Cleveland, and I would love to be a part of that transformation in whatever small way I can.

My ask from you is to provide your input on a half-baked investment idea. I have read through your comprehensive prospectus, as has my tax adviser. We have a few strategies in mind, but the one I am most excited about is a business incubator space in the Opportunity Corridor district. My family grew up in the Slavic Village neighborhood where part of the corridor will be located, so this project would be extremely close to home. I would love to bring a more vibrant retail landscape to the area after the decades of business closures and disinvestment. Moreover, I have some ideas for businesses that can go in the space based on what I’ve seen succeed in the Bay Area. These include a doughnut shop, a fitness studio, and perhaps a coffeeshop. I have great connections with local shops here that are looking to expand to other cities and probably can get them on board to be the incubating businesses.

That said, I would like to hear your initial input before moving forward with concrete plans. I believe your boots-on-the-ground perspective might better inform our direction with the business incubator space. Together, I’m sure we can make something great happen in this district.

I look forward to hearing from you.

Best, Mel
 
Melanie B. Webb
President
Grava Capital


 —

To: Webb, Melanie B.
 
From: Cleveland
 
Date: August 29, 2019 09:35:18, EST
 
Subject: RE: Potential Opportunity Zone Investment

Dear Melanie,

Many thanks for your inquiry. We are delighted to hear of your interest and look forward to partnering with you in bringing a successful, meaningful investment (or two!) to fruition.

The OpportunityCLE prospectus is a great starting step—glad to hear you’ve already reviewed it. Have you also seen our online platform, the Opportunity Exchange, which lists and evaluates neighborhood projects seeking investment with a social impact score? You may find some good leads there, and it also lists the appropriate contacts for next steps. Investing in a project that already has neighborhood anchors, supporters, and even other investors backing it could be an easier route.

Since you mentioned Opportunity Corridor and the idea of a retail space, we wanted to bring a specific possibility to your attention.

Some context first: A few months ago, we launched an educational campaign around the city to inform residents about the influx of capital that may be coming to Cleveland because of the federal Opportunity Zone incentive. The purpose of these sessions was to increase engagement and source ideas from residents on what changes they wanted to see in their neighborhoods. This led to the creation of special task forces in some neighborhoods—comprised of local stakeholders including nonprofits, residents, activists, politicians, students, and entrepreneurs. These task forces have mobilized quickly, producing an astounding amount of recommendations. We are committed to actualizing many of these wish list projects with additional local incentives to complement the Opportunity Zone incentive. Ultimately, we believe that investments emerging from these recommendations will be the most rewarding and successful, since there is already local demand for the identified needs.

The task force in the Opportunity Corridor district has been especially active and has already identified an empty plaza space that they’d like to fill with some locally owned businesses. This closely reflects your idea for a business incubator. Your investment in the building’s improvement can directly influence the establishment of the space, which can surely become an anchor retail space for the neighborhood.

You did mention some possible businesses for the space, which sound like good ideas! Nevertheless, they may not have the requisite local demand to succeed, based on an analysis of the neighborhood CDC’s most recent survey on resident needs and wants. Luckily, though, the task force has already identified local entrepreneurs that are on a growth trajectory and looking for retail space. These could be perfect fits for your incubator. Moreover, they already have traction in their neighborhoods, and investing in them could see impressive returns!

We’ll mention some of those businesses below, to give you an idea.

    1. EZ-Clean, a laundromat (65% of the residents within a 1-mile radius are renters, many of the homes do not have washing and drying machines, and there are no other functioning laundromats in the neighborhood. The business owners are committed to providing employment specifically to formerly incarcerated individuals).

    2. We-hicles, a local rideshare service for the elderly (the entrepreneur is also looking to expand her fleet, so if you’d be interested in a capital expenditure investment, let us know).

    3. Nick-o’-Time, a retailer for watch straps (started by a young enterprising teenager named Nicholas, these wristband straps have been a major hit locally. The young man is committed to hiring other local teens that choose not to go to college and mentor them on how to become entrepreneurs themselves).

    4. FRESH, a cooperative grocery store (the neighborhood has a few community gardens and urban farms that have traditionally sold their products online or through subscriptions, but they are interested in operating a storefront grocery store to provide their produce directly to their neighbors under an employee-owned model).

and a handful of others, which we can discuss in detail further. All these businesses are supported by a robust technical assistance and entrepreneurial support ecosystem. Moreover, they have participated in a specially designed two-day curriculum that educates them on financial milestone planning, Opportunity Zones, and how they can maximize potential investments in their business. In short, they are sure to be promising ventures.

As mentioned, we are committed to supporting the projects with greatest potential social impact by adding further incentives. Through a combination of other legislative tax credit programs (e.g., New Markets Tax Credits, Low-Income Housing Tax Credits), added funding from partner philanthropic foundations, and other financial de-risking mechanisms such as municipal bonds, we will give preferential treatment to investments that include any (or all) of the following:

    1. Economic Impact (high number of jobs created)

    2. Local Hiring (high percentage of employees are city of Cleveland residents)

    3. Diverse Hiring (high percentage of employees are women and/or people of color)

   4. Local Procurement (high percentage of suppliers are city of Cleveland companies)*

    5. Diverse Procurement (high percentage of suppliers are women or minority-owned companies)*

    6. Wage Quality (lowest-paying job still above hourly living wage of $23.61 for Ohio family of 4)

    7. Signed Community Benefit Agreement with local community development entity

    8. Public Reporting of investment information including amount, jobs created, wages paid, etc.

*Note, we are happy to make recommendations for local & diverse suppliers.


Given the nature of the proposed plaza project, we think it would be relatively simple for you to meet the above conditions for added incentives.

Moreover, this project could be eligible for our Opportunity CLE Development Fund, a recently announced $50 million fund that will further strengthen the feasibility of select projects by offering below-market interest rate loans. This loan was created specifically to target investments that have high potential for social impact.

Finally, we want to convey that we are being mindful of potential displacement, with a focused eye on the impact on racial equity. We like to share data around racial demographics in the census tract(s) of your designated investment. The Opportunity Corridor census tracts, and the population percentage that is nonwhite in each tract, are given below.

    Census Tract 1135.00 - 95.5%

    Census Tract 1136.00 - 92.4%

    Census Tract 1138.01 - 97.5%

    Census Tract 1141.00 - 99.2%

    Census Tract 1143.00 - 100%

    Census Tract 1145.01 - 96.3%

    Census Tract 1146.00 - 59.1%

    Census Tract 1147.00 - 100%

    Census Tract 1192.02 - 69.6%

    Census Tract 1193.00 - 99.2%

    Census Tract 1196.00 - 97.2%

In abiding by some of the practices outlined earlier in our email, your project would help close, rather than further divide, some of the racial inequities in our region.

Again, thank you for your interest. We are encouraged by your apparent thoughtfulness and intentionality and of course share the same vision for a prospering, vibrant Cleveland teeming with opportunities for all that call our city home.

Our best,
Cleveland



1. The prospectus & the online database are both real efforts. Read more about them in the Afterword and by visiting the hyperlinks.

2. All small businesses mentioned are fictional.

3. See MIT Living Wage Calculator.

4. The Opportunity CLE Development Fund is a real effort, announced in June 2019 by the Greater Cleveland Partnership and managed by Cleveland Development Advisors. Read more about it in the hyperlink.

5. This table is not fictional and is based on 2017 U.S. Census data (American Consumer Survey) for the tracts in the Opportunity Corridor district.

 —

To read the afterword for "A Letter of Interest" and to see more information and recommended reading suggestions please click here.
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