As Opportunity Zones continue to come into focus, the National Trust Community Investment Corporation (NTCIC) is collaborating with investors, real estate developers, and community development leaders to explore how Opportunity Zone capital can best be used in underserved communities and complement successful incentives such as the New Markets Tax Credit (NMTC) and historic tax credits (HTCs).

Since 2000 NTCIC has invested more than $1 billion in 175 transformative community development projects nationwide through tax credit investments that enable direct community benefits. These projects have created 6.7 million square feet of commercial space—including more than 650,000 square feet of nonprofit office and community space for direct community service providers such as health care services, school and daycare facilities, and organizations that support small businesses through incubation or workforce development training. These investments have created more than 13,500 jobs nationwide.

In the last two years, 16 of the 30 NTCIC investments have been located within newly designated Opportunity Zones. NTCIC is exploring how the new incentive might allow us to scale the impact of our investments in distressed communities even further. Our early analysis suggests that, for Opportunity Zones to achieve both investment returns and community impacts, other sources of community-focused financing—as well as the inclusion of experienced impact investors—will be key. To achieve this, updates to the Opportunity Zone regulations, like those NTCIC previously submitted to the Department of the Treasury, will need to be implemented.

Community Development Potential in Opportunity Zones

Launched with the Tax Cuts and Jobs Act in 2017, the Opportunity Zone incentive allows investors to defer and reduce their capital gains tax bills by investing in properties and businesses in economically distressed areas. State governors identified these areas using definitions similar to NMTC-eligible census tracts: high poverty rates and low median family incomes.

The potential scale of impact is huge; economists estimate that Opportunity Zones could provide access to nearly $6 trillion in unrealized capital gains. This new incentive has the potential to be the largest accelerator for community development and revitalization the nation has ever seen.

Currently, the NMTC incentive generates a substantial amount of subsidy for projects, but since the program is statutorily capped, the number of projects that need investment is far greater than the annual allocation available. As a result, hundreds of qualified and highly impactful projects cannot secure the necessary capital and must seek alternative sources or remain unfinanced and unrealized.

Additionally, while the federal HTC incentive—which provides a 20 percent credit for the substantial rehabilitation of historic properties in any community—has no such cap, we have found that the HTC alone is sometimes insufficient to close the financing gap in distressed communities. The cost of rehabilitation is often quite high, especially in an environment of high construction costs and rising interest rates, while the rents that can be achieved in these communities are often quite low. This creates an imbalanced development equation, stymieing otherwise desired investment and redevelopment.

Opportunity Zones impose no such limits to the investable amount of capital in a Qualified Opportunity Fund (QOF). Investments are only limited by supply of viable investment opportunities and demand of capital traced to capital gains activity. And with trillions of dollars hypothetically available through the Opportunity Zone incentive, many more projects could receive financing. Additionally, as the incentive’s regulations and provisions are finetuned, new investors will continue to enter the program seeking qualified projects and investments. However, to meet the financial return expectations of Opportunity Zone investors, projects may need the support of other incentives, like NMTCs and HTCs, in their capital stack. Unfortunately, current regulations make pairing Opportunity Zone equity with either HTCs or NMTCs difficult, if not impossible.

To remove these barriers, NTCIC and other industry groups are working to encourage the Treasury Department to clarify the proposed regulations and provide additional guidelines that will allow Opportunity Zone investments to be “twinned” with the NMTC and the HTC.

There is such a need for investments in these communities, but they lack resources; Opportunity Zone investments can be another tool for completing these projects, especially when paired with more established tools.

Ensuring Community Benefits

Since NTCIC’s inception, our mission has been to support vital and impactful historic preservation and real estate initiatives in distressed areas nationwide, and a key element of programs like the NMTC is their encouragement of mission-oriented impact investing. Community Development Entities (CDEs) like NTCIC track a variety of measurable benefits created by their investments, such as the number of people served, participants in specific programs, jobs created, and job quality. We are hopeful that the Opportunity Zone incentive can be successfully realized, both for bringing untapped (and uncapped) capital sources to bear in communities and for achieving high-quality community outcomes. At its highest and best use, the incentive could create impacts like those we’ve seen across our HTC and NMTC portfolio.

For example, our recent NMTC and HTC investment in the Pythian building in downtown New Orleans is providing a wealth of benefits to the surrounding community. Constructed in 1908, the Pythian building was originally built for a Civil War–era fraternal order of African Americans known as the Colored Knights of Pythias. It served as the cultural and economic center of the local African American community for decades and figured prominently in the early Civil Rights movement. The building’s cultural heritage was literally hidden behind a midcentury facade that many considered an eyesore, and it became vacant following Hurricane Katrina. Thanks to a significant infusion of tax credit capital—$7.9 million in federal HTC equity and more than $14 million in NMTC allocation, including $6 million provided by NTCIC—the Pythian has recently been transformed into a cultural hub that provides 69 units of mixed-income housing, a primary health care facility estimated to see more than 10,000 patients per year, and an innovative marketspace supporting 13 local food entrepreneurs.

As it currently stands, the Opportunity Zone incentive alone does not provide sufficient guidance to ensure that funds are invested with maximum community benefit. The legislation has no requirement that QOFs seek or track community benefits, nor that they consider a project’s impact on broader measures of success such as poverty reduction. These funds are self-certified and privately overseen, which could lead to a wide range of potential outcomes. Adding mission-oriented stakeholders, especially ones who provide capital and can insist on the creation (and tracking) of additional measures, will enable more robust results.

If programmatic changes to the Opportunity Zones incentive are made through statutory or regulatory channels, adopting impact requirements for the incentive would ensure that investments meet community needs, create much-needed assets, and encourage the inclusion of existing communities. For example, including mission-oriented intermediaries like CDEs in the review and deployment process would increase the likelihood of Opportunity Zone funding being used beneficially. NTCIC has endorsed these types of modifications.

Absent statutory changes, pairing the incentive with other sources of financing that are subject to such requirements could still achieve community outcomes. If successful, NTCIC’s efforts to shape regulations that would allow for “twinning” Opportunity Zones with initiatives like the NMTC or HTC would ensure the involvement of at least one mission-oriented organization with experience measuring community outcomes.

The Opportunity Zone incentive is only a year old and the regulations governing it are still being refined, so there are as many questions as answers. With only preliminary regulations in place, the emerging industry has had to focus on the technical mechanics of the program—the “what?” and “how?” questions. As the mechanics are resolved and community development investors continue to advocate for changes to the regulations, the analysis should begin to consider “who?” and “why?” Including local stakeholders and mission-oriented organizations will help ensure that communities in need are part of the answer.

Merrill Hoopengardner is the president of the National Trust Community Investment Corporation.