The Opportunity Zone (OZ) provisions of the Tax Cuts and Jobs Act spawned a new marketplace and active national discussion around what it means to invest in under-resourced communities across the country. The tax incentive included is accelerating conversations and solutions to the challenge that the community and economic development finance industries have been working to solve for decades – how to best address the massive inequity in economic activity, economic growth and private investment across U.S. communities.

We see promise that the OZ incentive can be a powerful tool, among others, to address this. The incentive alone will not make a bad investment good. It is not an incentive meant to replace public or philanthropic grant dollars. What the incentive does is draw much-needed attention to the inherent value – the quality of the businesses, the character of the assets and the tenacity of the people – in these zones.

We know through our work in these communities during the last 25 years that they are worthy of investment and capable of providing value to investors. We also know that to effect lasting change and overcome structural barriers, we and others must think creatively, in partnership with governments, community leaders and investors, with a common purpose – to create economic opportunity and shared prosperity for all people, no matter their ZIP code.

The Opportunity Zone Incubator was built to stimulate this work. The Incubator, funded by The Kresge Foundation, provides support and technical advisory services to mission-driven managers seeking to build and launch Qualified Opportunity Funds, the vehicles that are designated to make Qualified Opportunity Zone investments. This may sound wonky, but it is a function and role that is critical to ensuring that community-based managers have the resources and ability to get to market efficiently.

The national media coverage of this incentive to date has been largely skeptical. Stories point to large, commercial asset managers who are taking advantage of the incentive by making investments that they would have made anyway in a few zones that may not have the highest need. The basic reason that many of these funds are in the market first is not necessarily because they have the best strategies, but because they had the resources – money to pay lawyers, tax advisers, accountants and experts – to devote to new product development as soon as the legislation was passed.

Kresge recognized this gap – the need for immediately available funds for new product development – when it started and funded the Opportunity Zone Incubator.

What does the incubator provide?  We at Calvert Impact Capital are supporting five selected managers through their fund-development process in coordination with legal and tax advisers from Holland & Knight and Plante Moran. Together, we are helping the managers:

• Identify and build their investment strategy based on the demand they see in their communities;
• Determine the feasibility of a mission-driven, marketable Qualified Opportunity Fund;
• Develop the appropriate fund structure that is responsive to the market demand and fits the requirements of the Opportunity Zone legislation and regulations;
• Draft the fund’s main documents, including a term sheet and offering memorandum;
• Model the economics of the strategy at the project and fund level to understand the terms and investment profile; and
• Develop an investor outreach strategy and gather initial feedback from the relevant investor community. 

To be clear, we are in a support role. The managers are doing the hard and important work to engage with their local communities, build a pipeline of investable and qualified deals, develop partnerships needed for the development or eventual investment, and pull it all together in a cohesive package that will be attractive to investors and feasible to execute. They will ultimately manage the Qualified Opportunity Funds but– like many others in these communities – do not have slack capacity or excess resources to pay for the strategic and technical support they need to get started.

While we are excited about the progress made by many of the selected managers, we – like many others – are anxiously awaiting the release of further guidance from the IRS and Treasury so that we understand and operate within the stated rules. Once released, we will be able to more concretely determine the right structure of these vehicles, so the managers can get to market, raise capital and start investing in the critical community projects and businesses that they have identified.

We are thrilled to work with Kresge to play this market-making role so that community-based Opportunity Zone strategies can form, launch and compete for tax-incented capital. We know that investors with unrealized capital gains are actively seeking ways to deploy their money, but they can only respond to products that are offered to them. We want to make sure that the strategies that are being built in, from and by these communities have a seat at the table.

Beth Bafford is Vice President of Syndications and Strategy at Calvert Impact Capital. Follow her on Twitter @bethbaff.