May 14, 2018

Amid skeptics, CT bets ‘Opportunity Zones’ spur economic development

Photo | Contributed
Photo | Contributed
The United Technology Research Center in East Hartford sits in one of the myriad “Enterprise Zones’’ in Connecticut, which are decades-old, state-funded cousins to newly created federal “Opportunity Zones.”
Map | Contributed
The blue highlighted areas on the map depict Connecticut communities the state Department of Economic and Community Development has pitched to the U.S. Treasury for eligibility as “Opportunity Zones.’’

Connecticut rarely misses a chance to avail itself of state and federal initiatives aimed at benefiting the most economically distressed communities and neighborhoods among its 169 cities and towns.

In 1982, it was the first to embrace state-generated "Enterprise Zones,'' or EZs, that offered local, five-year property-tax breaks and other benefits to investors/developers to spur housing and jobs, among other private investment. According to the state Department of Economic and Community Development, there are 10 types of EZs in 43 participating communities, up from six initially.

A decade later, "Empowerment Zones'' were spawned also to encourage urban and rural development using tax incentives and grants to reward investors otherwise unwilling to risk pumping capital into redeveloping struggling neighborhoods or regions.

Now, a third, federally sponsored private-investment subsidy, known as "Opportunity Zones'' (OZs), has arrived, offering to trim federal capital-gains taxes for up to a decade to qualified "opportunity fund'' investors who potentially could unleash an estimated $6 trillion of private investment into needy U.S. communities, experts say. Opportunity funds are private investment vehicles subject to federal capital-gains tax benefits.

Connecticut has applied to the U.S. Treasury to qualify 72 low-income neighborhoods in 27 municipalities as OZs, according to the state Department of Economic and Community Development (DECD). Nominees include areas in Hartford, East Hartford, Meriden, Middletown, West Hartford and Manchester, among others. Treasury is not expected to formally issue its OZ rules and guidelines until fall.

But amid limited noteworthy examples locally and nationally of the positive economic contributions from EZs and Empowerment Zones, some question whether OZs will have much impact.

Brett Theodos, senior researcher for the nonpartisan Urban Institute in Washington D.C., describes OZs as "a very flexible tool meant to extend investment into communities of need.'' OZs, Theodos said, are intended to spur a wide menu of community and neighborhood investment, such as opening a supermarket, a gas station, or a bank.

Based on the collective checkered performance of Enterprise and Empowerment zones to date, Theodos says it's an open question whether OZs and their investors can deliver.

"I'm not sure,'' he said, noting the Urban Institute neither endorses nor refutes OZs. "It remains to be seen. It's so new and open-ended, none of us knows how this will play out.''

Timothy J. Bartik, senior economist at W.E. Upjohn Institute for Employment Research in Kalamazoo, Mich., says most of the analyses of EZs across the U.S. discovered they "don't necessarily do any more in luring private investment than non-Enterprise Zones.''

"There's very little impact," Bartik said.

The reason is, he said, that tax-incentivized private capital, coupled with government low-interest loans and grants cannot overcome more systemic issues — lack of education and job skills, weak housing and infrastructure, and high crime rates — plaguing many American communities and neighborhoods.

Moreover, U.S. communities that have drawn past EZ investment, and more likely to appeal right away to OZ investors, are typically attractive, low-risk environments that likely would have drawn private investment without public incentives.

The key to Connecticut making the most of OZs, Bartik said, is how and where the state chooses neighborhoods for OZ inclusion. Also, the state must commit to tracking and analyzing whether or not OZ investment funds and their investors are delivering on their obligations.

Connecticut’s hopeful

As expected, chiefs of local and state economic-development and housing agencies are high on OZs' potential to augment Connecticut's aggressive use of low-interest, forgivable "First Five" and Small Business Express loans and grants to encourage existing businesses to stay and grow jobs, while luring out-of-state and foreign employers to open or relocate here.

DECD Commissioner Catherine Smith says OZs could widen the spigot for more regional and national capital to flow into Connecticut residential-commercial development projects.

"We have talked to a few [opportunity] funds that are trying to figure out how to play in this new sandbox,'' Smith said, declining to identify them.

The U.S. Treasury will manage the OZ program and is working to put in place a program infrastructure, authorities say. Meantime, officials say Connecticut's housing agency, along with the state's Green Bank energy-ecology arm and its Connecticut Innovations technology-promotions arm, too, are exploring how to leverage any eventual OZ capital.

"I definitely see opportunity,'' said state Department of Housing Commissioner Evonne Klein. "By participating in this, this is certainly a piece of Connecticut's economic recovery.''

Klein said OZs offer potential to supplement Connecticut's huge, $1 billion public investment under Gov. Dannel P. Malloy to renovate or create 20,000 more units of affordable-living units statewide.

Michael Freimuth is executive director of the Capital Region Development Authority in Hartford and an economic-development veteran with experience overseeing two EZs in Stamford and Bridgeport.

"The beauty of enterprise zones was that … tax discounts are there as long as you are eligible,'' Freimuth said. "The problem with enterprise zones is that it's much more complicated in order to make a business succeed than just taxes. The condition of the properties, the greater costs of urban enterprise (higher insurance costs for instance) and the general obsolescence of the facilities creates diseconomies."

"Opportunity Zones on the other hand, go to the return on investment, increasing the ability/willingness for risk-taking," he said. "Whether the edge is taken off to a better degree with this mechanism than that available in an Enterprise Zone will have to be seen.''

While CRDA is not linked to any in-state EZs, Freimuth says OZs' tax-deferral structure could assist it and investors in handling the toughest part of any redevelopment deal — assembling the "capital stack.'' That is, packaging loans, tax credits, equity and other capital to cover projects' development and operating costs.

With OZs, CRDA could expect increased equity for projects in OZ areas that should make CRDA neighborhood projects more profitable and less debt dependent, Freimuth said. That, in turn, could lower the CRDA subsidy and spread the program to more deals. CRDA's OZ opportunities are likely to be housing-related neighborhood investments, he said.

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