A top official of the largest community foundation in the US, the $13 billion Silicon Valley Community Foundation, said his organization and others institutional investors may be able to play a role under the federal government’s opportunity zone program in providing loans for fund investments designed to help spur housing and business creation or expansion in economically depressed areas.
The comments of Bert Feuss, the Mountain View, Calif. foundation’s senior vice president of investments, came during a conference on responsible investing in San Francisco on Tuesday. Panelists, including Feuss, discussed the potential implications of the US Treasury Department’s certification late last month of more than 8,000 communities or portions of communities nationwide as opportunity zones.
Under rules proposed by the Treasury Department, investors may defer and reduce capital gains taxes from investments by plowing the money into funds to create housing and other development projects in the economically depressed opportunity zones. The proceeds from the new fund investments are not taxable if the investments are held for at least 10 years.
Feuss said institutional investors like foundations can play a role because they can help the equity backers of the opportunity zone funds make an adequate market return by providing, for example, leveraged loans that help the overall financing of the project.
The Treasury says the program is designed to spur economic development and job creation by encouraging long-term investments in economically distressed communities nationwide.
Feuss said that a problem with equity investments into the opportunity zone funds alone might be limited returns, which could create a problem finding investors.
“Foundations could play a major role with debt financing,” he said.
Another panelist, Ron Homer, president of access capital strategies at RBC Global Asset Management, said the opportunity zone program could be a major boon to economically depressed areas, but cautioned it could also be used by developers in the wrong way.
“People can buy a whole block and throw everyone out and build a high-rise luxury apartment,” he said.
Homer, whose organization sponsored the environmental. social and governance (ESG) investment conference, said at least two major foundations, the Kresge and Rockefeller foundations, have identified 20 potential opportunity fund managers to drive positive outcomes in low-income communities.
He said the foundations have committed up to $25 million in grants and guarantees in an effort to make the opportunity zone funds financially viable for investors.
Both foundations have said that combined they received more than 140 responses to their summer 2018 letter of inquiry, looking for “mission-aligned” fund managers that can deliver returns to investors while improving the lives of people in low-income communities.
Feuss agreed that it was essential to ensure that foundation money put into the opportunity zone program went for the right purpose, to build affordable housing and projects that created jobs for community residents, as opposed to creating gentrification and displacing poor people.
Another panelist, Kat Taylor, co-founder and CEO of Beneficial State Bank, said it was essential that the economic development opportunity created by the opportunity funds benefit residents of the opportunity zones. If not, she said, “this is just one more trajectory of pretty strong misery for those populations.”
The community development bank, based in Oakland, Calif., was founded by Taylor and her husband, billionaire Democratic party fundraiser Tom Steyer, back in 2007.
The opportunity zones stem from legislation sponsored by congressional Republicans that created the federal Tax Cuts and Job Action Act in 2017. The legislation signed by President Trump creates 8,700 opportunity zones in depressed communities across the US.
To be eligible for the tax benefits, investors must roll profits from the sale of stocks, bonds, real estate, or other assets into a qualified opportunity fund.
Formal investments into funds are not expected until at least early next year when the Treasury Department rules are expected to be finalized.
Homer said investors want to see the final rules, which are now under a 90-day comment period, before making commitments.