Call me a skeptic when it comes to government-hatched plans to spur private investment in the most distressed “zones” in U.S. cities, including Baltimore. We had Enterprise Zones and Empowerment Zones, and now Opportunity Zones, the latest program of tax incentives for potential investors.
Will this one be a truly transformative, sustainable anti-poverty program? Will it create new jobs, new homes and small businesses in neglected neighborhoods? Will it help reverse the city’s population decline?
The answer to all that, at this point, is a big maybe.
Intuitively, Opportunity Zones seem to have more potential for success than previous “zone” programs because the incentives are so much better. The idea, hatched in the Obama years and approved with the Trump tax cuts of 2017, is to spur private investment in the many communities that never see much of it. In return, investors get generous tax breaks. For instance, anyone who puts capital gains in an “opportunity fund” can defer paying taxes on those profits until as late as 2026. And anyone who sticks with the program for at least 10 years would pay no taxes on any gains from their Opportunity Zone investments.
Hundreds of OZs have been identified across the country. Maryland has 149 of them. Of those, 42 are in Baltimore. One of them is Port Covington, and last week The Sun published a ProPublica story about how an area that at first did not qualify became an Opportunity Zone. While the developer of Port Covington lobbied for and celebrated the designation, other wealthy investors — banks, real estate trusts, rich cats with business gains to invest — will be the beneficiaries, assuming they can be enticed to invest in the area.
Still, the designation raises a question about how the Opportunity Zone program will work: Did Port Covington, already the recipient of huge public subsidies, need another sprinkling of tax magic to spur investment? If individuals and institutions are going to get huge breaks to direct capital to places that have not seen much, is Port Covington among such places?
The answer to that seems to be yes, based on my conversation with an “impact investor” in the middle of, and bullish about, the Opportunity Zone rollout. Patrick McKenna, a co-founder of an OZ fund and an investor in Baltimore companies, says money from opportunity funds will likely go to communities where at least some redevelopment is already underway.
McKenna has been investing in tech companies based outside of Silicon Valley for eight years now, and he thinks he’s developed a good eye for overlooked places where some outside capital would accelerate growth.
“Baltimore or Columbus or Pittsburgh, Tacoma — these are places where there is some underlying organic growth,” he says. “This [OZ] incentive isn’t going to create growth, but it can catalyze the organic growth into a sustainable ecosystem. You don’t win at three-year, or five-year [investment]. You need the ecosystem to be sustainable and to get enough critical mass so that what you’re investing in will be successful on its own and attract other [investment].”
McKenna is a co-founder of Catalyst Opportunity Fund, a private equity firm that intends to raise $150 million for OZ real estate investments and, later, additional capital for investment in OZ businesses.
Impact investors like McKenna want to generate both profits and enduring social benefits to communities that need a lift — a relocated company with jobs to offer, maybe a new supermarket or health clinic, and housing that local workers can afford.
The managing partner of Catalyst is Jim Sorenson, a wealthy Utah entrepreneur and philanthropist who is considered a leading voice of impact investing.
“We’re a bit unique,” McKenna says of Catalyst. “We believe in superior returns with measurable impact, and we’re putting the impact right alongside the returns, and being very disciplined about finding markets that have the growth capacity and that have been historically underinvested in.
“We’re also being disciplined about approaching investors who are attracted to that combination. It’s still early, but we’re getting a very good reception from a new group who ... now see that [they] can have some certainty about getting a reasonably good return and have some impact.”
But the rules of the OZ program do not require a community benefit — jobs created, houses rehabilitated, and so on. There’s no metric for that in the law. Catalyst, McKenna says, will have its own scorecard. “We’ve been clear that we are going to be measuring impact throughout the process,” he says.
“We don’t think there’s a tradeoff. We really believe that superior returns are to be had by focusing on having an impact over 10 years. If you make the whole [OZ] better, then 10 years from now your investment is going to be worth a lot more than if you’re just very transactional about it.”
McKenna has invested in several companies, including Facet Wealth, Emocha, FixT and Factory Four in Baltimore. He calls Baltimore “an incredibly high-potential city” that benefits from strong universities that produce plenty of talent for emerging tech companies. The city has a great location and a housing market that’s more affordable than Washington or Philadelphia.
All that makes Baltimore prime for Opportunity Zone investment, though McKenna, who makes frequent trips here and has met the city’s OZ coordinator, Ben Seigel, is restricted in what he can say about Catalyst’s anticipated investments. “We can’t wait to talk about them publicly,” he says. “They’re going to be good examples of what’s possible.”