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Missed Opportunity: Federal initiative meant to help poor neighborhoods benefits the rich

A neighborhood’s average income is nearly six-figures. The government calls it distressed.

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WOODBRIDGE, Va. (InvestigateTV) – A 4,100-square-foot home, recently on the market for $535,000, advertised its “highly sought-after” neighborhood. It boasted its proximity to award-winning schools and shopping malls, all located in what the listing describes as “Woodbridge’s best location.”

Despite the surrounding evidence of well-manicured lawns with luxury cars in the driveways, the house is in what the federal government has designated a distressed, low-income area in need of investment through the help of tax breaks.

That’s news to residents.

There’s a lot of development and “houses going up,” said Arly Aguirre, who has lived in the neighborhood for seven years.

Arly Aguirre has lived in this Woodbridge, Virginia neighborhood for seven years. Officials deemed this area —30 miles south of Washington, D.C.— as distressed. Aguirre disagrees adding that home prices have risen to $500,000. (Jennifer Warnick, InvestigateTV)

But the Woodbridge community — 30 miles south of Washington, D.C.— is one of 8,700 U.S. neighborhoods chosen as an Opportunity Zone, a new government initiative that allows investors interested in developing to pay little to no capital gains taxes on projects.

Opportunity Zones, approved by Congress in 2017, were billed as an economic booster to help low-income communities in every state attract investments and to spur development in depressed areas. But an InvestigateTV analysis of economic data found Opportunity Zones in thriving communities in some of the wealthiest areas in the nation.

The federal government estimates the initiative will cost taxpayers $1.6 billion in lost tax revenue.

Critics worry the program has created a windfall for the rich.

There’s little oversight. Developers don’t have to report any metrics such as how many jobs the project created or how many affordable housing units were built. And, there is a loophole that allows investors to bypass distressed areas.

The proposal’s biggest supporters — authors of the initiative, regulators, investors and the four congressmen who sponsored the bill — aren’t talking. In all, 18 declined or didn’t respond to InvestigateTV’s interview requests.

POOREST OVERLOOKED

The bipartisan Opportunity Zones legislation was tucked into President Donald Trump’s 2017 tax reform law. At the time, the effort was championed by Sens. Tim Scott (R-SC) and Cory Booker (D-NJ) and Reps. Ron Kind (D-WI) and Pat Tiberi (R-OH). President Trump claimed it as a personal success.

“We’re providing massive tax incentives for private investment in these areas to create jobs and opportunities where they are needed the most,” the president said in an April press release.
An Opportunity Zone must have a poverty rate of at least 20% or a median income that is 80% or lower of the state or metropolitan area.

The federal government created a list of eligible areas and allowed governors in each state to choose which ones would be declared Opportunity Zones, using census tracts – divisions of land within each county – to set the borders.

Is your neighborhood an Opportunity Zone? Opportunity Zones are in every state. This interactive map allows you to explore your area. Red zones are low income. Blue areas are wealthier zones that border low-income ones.

The vast majority of the zones met the disadvantaged criteria, but some of the poorest areas in the nation were left behind. In fact, only two out of every five of the neighborhoods with a more than 50% poverty rate were selected, according to an analysis by InvestigateTV.

Instead, governors chose Opportunity Zones in one of the wealthiest counties in the nation, oceanfront tourist hot spots and in areas bordering the Grand Canyon.

Greg LeRoy, executive director of Good Jobs First, a think tank based in Washington, D.C., has been tracking Opportunity Zones. “The big challenge here is whether or not any new investment will happen that wouldn’t have happened otherwise,” he said. (Owen Hornstein, InvestigateTV)

“It flies in the face of the rhetoric surrounding this program,” said Greg LeRoy, executive director of Good Jobs First, a think tank based in Washington, D.C. that tracks tax subsidies. “If you say a big chunk of this money could be going to these areas that aren’t really behind, that really kind of defrocks the whole program.”

States could nominate up to one-fourth of their low-income areas for the program, triggering lobbying by local officials and companies to have their areas chosen.

The “highly sought-after” Woodbridge, Virginia neighborhood met none of the original requirements.

Only 7% of its residents live in poverty in 2015, and families had an average income of $93,000. It shouldn’t have qualified.

But weeks into the selection process, the U.S. Department of the Treasury decided to allow states to use new 2016 data, which dropped the neighborhood’s median income to a qualifying level. The department didn’t return requests for comment. The data is based on Census estimates, which can cause numbers to fluctuate.

Virginia Gov. Ralph Northam did not respond to interview requests.

Congress also gave governors the option to choose wealthier areas that border poor Opportunity Zones. There are nearly 200 of these zones, labeled non-low-income communities, in 40 states.

Maryland Gov. Larry Hogan chose four non-low-income tracts, including two in Prince George’s County. One zone is next door to FedEx Field where the NFL’s Washington Redskins play. Just 4% of the residents there are poor, and the median income is more than $100,000.

Hogan’s office didn’t respond to requests for comment.

Residents living there were surprised to learn it was an Opportunity Zone. “It’s not a poor, distressed area,” said resident Joy White. “I feel like the area is fine. You shouldn’t touch something that’s not broken.”

Resident Joy White talks with a friend in her Maryland neighborhood. The area, named an Opportunity Zone, has it all: close to FedEx Field and the Washington, D.C. Metro train, she said.

Sen. Scott, one of the co-sponsors of the Opportunity Zones legislation, declined InvestigateTV’s interview request. But in an October opinion piece for the Washington Examiner, Scott wrote that only 6% of all Opportunity Zones have a median income above the national average, while 71% of zones meet the U.S. Treasury Department’s definition of severely distressed.

“These numbers help demonstrate that, as a whole, our state and local leadership accurately selected census tracts that are severely distressed and long overdue for investment,” he wrote.

NO PUBLIC REPORTING REQUIRED

Unlike past federal economic development programs, Opportunity Zones have few requirements for investors. There’s no mandate that jobs must be created or affordable housing must be built. But Congress did prohibit Opportunity Zone projects from being part of businesses like massage parlors, tanning salons and liquor stores.

In exchange, the program allows investors to postpone paying capital gains taxes until 2026. A capital gain is a profit from the sale of property or investment. Under the initiative, the IRS allows investors to take that profit, and defer paying taxes by investing in an Opportunity Zone. The longer they keep their investment, the more they save in capital gains tax, possibly paying none at all.

One of the initiative’s biggest lobbyists and home to the creator of the Opportunity Zones, the Economic Innovation Group or EIG, declined to comment. The public policy organization, based in Washington, D.C., focuses on economic challenges.

On its website, it states that the use of Opportunity Zones “has the potential to put significant amounts of private capital to work in distressed communities and serve as a catalyst for long-term, inclusive economic development.”

Those decisions are left up to the private market since Opportunity Zones were designed for the government to be hands-off. Some experts question even calling it a “program,” which could falsely imply that the government is overseeing investments.

“What we don’t know is … if that marketplace is going to effectively choose to bring products into low-income communities that actually meet their needs. The jury’s out,” said Aaron Seybert, a managing director at The Kresge Foundation, a community-development group that has backed socially-conscious investors.

The Kresge Foundation, a community-development group is backing Opportunity Zone investors and requiring impact reporting, such as jobs created, beyond federal law requirements. But Aaron Seybert, a managing director at the foundation, doubts the federal government will follow. “I’m not optimistic that we are going to see a strong mandate around impact reporting,” he said.

Without required metrics or accountability, it may be hard to tell if the Opportunity Zones will be successful. There’s no public reporting requirement of impact, such as how many jobs were created. The IRS recently released a draft tax form where developers would list which zone they invested in. It’s unclear how much information would be public. This has left some local government officials frustrated.

“If the intent is to create benefits for the community, then the regulations need to tie the outcomes of the investments into either the number of jobs created for low-income persons living in the census tract, or to the number of affordable housing units created for low-income persons living in the census tract,” wrote Sharon Ebert, deputy chief of planning and economic development in Richmond, Virginia.

She was one of more than 100 people who filed public comments with the U.S. Department of Housing and Urban Development. The agency requested input in April on how to change policies to maximize the impact of the Opportunity Zone initiative on affordable housing.

Several who wrote comments asked for the federal government to require projects to report the investment’s social effect.

A public-reporting clause was included in the original legislation but didn’t make it through Congress’ final vote. Subsequent attempts to require reporting have failed. It leaves local governments, who want to track progress, empty-handed.

“Since the city doesn’t have anything to do with the approval of use of the opportunity zone tool, it makes requiring collection, etc., at the local level very challenging,” said Diane Stoddard, assistant city manager in Lawrence, Kansas. “And even if we did require it, there is a practical challenge of not being in a good position to enforce compliance because we don’t have access to the records.”

LUXURY HOTEL IN AN OPPORTUNITY ZONE

Experts question whether Opportunity Zones are being used to spur new development or to benefit the bottom lines of projects, that were already underway before the initiative started.

In May, billionaire Richard Branson, founder of the Virgin Group, stood in a downtown New Orleans parking lot with a golden shovel and a Virgin red hard hat.

With blues music playing, Branson shoveled dirt and celebrated the groundbreaking on the new $80 million Virgin Hotels site. The 14-story project in the city’s trendy Warehouse District has been in the works since at least 2015, when the city gave approval. It’s also in an Opportunity Zone allowing hotel investors to get the bonus of paying little to no capital gains taxes.

The “experiential lifestyle hotel,” as described to investors, is a six-minute walk from luxury condos with amenities such as a saltwater pool surrounded by cabanas. Nearby, a $6 million penthouse with sweeping views of the Mississippi River, is for sale.

It’s not a distressed area, according to national real estate analyst Arthur Sterbcow.

“It’s one of the fastest growing areas of the state. Obviously, you can just look around and see the development that’s going on,” he said.

Louisiana Gov. John Bel Edwards declined to explain his selection process for Opportunity Zones.

Sterbcow speculates that the governors are trying to compete with other states for investment dollars by selecting attractive areas such as the New Orleans Warehouse District.

More than 90% of Louisiana’s neighborhoods were poorer than the Warehouse District when the state selected its Opportunity Zones. The average income in the neighborhood was $97,000 — higher than the rest of New Orleans and above the state average of $57,000. But the Warehouse District qualified because the poverty rate was 29% in 2015, according to the data used by the federal government.

The four-year-old data failed to capture the growth in the district. It’s not an anomaly. Since 2015, more than half of the 8,700 Opportunity Zones improved before being selected, according to the InvestigateTV analysis of the most recent 2017 data. Nearly two-thirds recorded fewer people living in poverty.

The Warehouse District was one of them.

In addition, its average family income jumped to six figures in 2017. The neighborhood has also been ranked among the top Opportunity Zones in the nation for economic attractiveness, according to two separate research studies.

That is great news for investors, who are going to put their money in the lowest risk, highest return areas, according to Sterbcow. “That’s just common sense. If you can invest your dollars into this area as opposed to an area that truly is low income with distressed housing, distressed businesses, where would you put your money?”

Zillow senior policy advisor Alex Casey analyzed home sale prices and found a more than 20% price surge in areas selected as Opportunity Zones. (InvestigateTV)

But some officials question if it fuels the stated purpose of helping distressed areas.

“Creating an investment vehicle for tax shelters for the rich will not help low-income households build wealth,” Ebert, the Richmond administrator wrote.

There also is concern about pushing long-term residents out of neighborhoods. An initial analysis by the online real estate business Zillow found a more than 20% surge in home sale prices in areas selected as Opportunity Zones. The company is still analyzing sales data over time to see if this was a flash sale or a more permanent increase, said Zillow senior policy advisor Alex Casey.

“IT’S A STRUGGLE BEING FROM JEFFERSON COUNTY”

The Opportunity Zones, as touted by supporters, seem to have been made for places like Jefferson County, Mississippi, the poorest county in the nation’s poorest state.

In 2015, Jefferson County had the second-highest poverty rate in the nation with nearly half of the residents making less than $25,000 for a family of four. The poorest county in the entire country, Oglala Lakota County in South Dakota, was however chosen as an Opportunity Zone.

But again, Jefferson County did not make the list. Mississippi Gov. Phil Bryant scheduled an interview with InvestigateTV to explain his selection process but canceled just hours before the meeting.

Percy Turner and his aunt, Brenda Buck have felt the impact of the lack of employers in Jefferson County, Mississippi. As county administrator, Buck is hoping to attract developers. (Submitted by Percy Turner)

Mississippi was identified as one of a handful of states that prioritized places that were less distressed than tracts that were not chosen, according to analysis by Brookings Institution, a nonprofit policy research group and think tank in Washington, D.C.

Part of rural Mississippi, the population of Jefferson County has slowly declined to around 7,400 residents, more than 85% of them black. The job options are either minimum wage, highly sought-after positions with the school district—the county’s largest employer— or travel union jobs, according to county administrator Brenda Buck.

The county can’t afford to hire an economic development director, so Buck, who has lived here all her life, runs the county along with recruiting developers and even taking care of the office’s janitorial work.

The county has an available workforce, according to Buck. More than 15% of the workers in the county are unemployed — highest in the state and nearly five times higher than the nation — according to September records.

“You have people here who are genuine and want a better life and greater sustainability for their families,” she said.

Percy Turner coaches youth baseball in Jefferson County, Mississippi. (Submitted by Percy Turner)

With few job options, Buck’s nephew Percy Turner, 29, took a traveling union job doing carpentry for the nuclear energy industry. The pay is good, but he’s away from home three to four months at a time.

“I’m blessed to be able to have a job. I might be away from home. I might not get to see them, but I know this: The lights are on,” he said.

After his dad died, Turner became financially responsible for his mother and sisters. In order to help his 6-year-old nephew get ready for the school year, Turner had to take vacation time to be at home.

Percy Turner, a youth baseball coach in Jefferson County, turns this grass area into a baseball field. He brings his own bases and paints the lines each time. “The struggle is real,” he said. (Submitted by Percy Turner)

Turner said he would love to have better employment options so he can stay in the area. New developments in Jefferson County would give him that chance. Even though he holds a master’s degree in sports administration, Turner said he’s open to good-paying construction jobs.

It would mean more time with family and the nonprofit youth baseball league he started. There’s no baseball field, so his team uses a grassy area and Turner brings the bases.

“It’s a struggle being from Jefferson County. I don’t know why we are so passionate about staying there,” he said. “We are trying our best.”

InvestigateTV analyzed data compiled by the U.S. Census Bureau and used the government’s standards for eligible Opportunity Zones. The margin of error was not factored in because it is not used in the selection process.

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