New Developments: Beyond the OZone Incentive

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The enactment of the 2017 Tax Cuts and Jobs Act and the creation of the Qualified Opportunity Zone Incentive (QOZI) has generated a great deal of activity by investors deploying capital in disinvested neighborhoods.

To the disappointment of many affordable housing professionals, for a variety of regulatory, market and tax reasons, the QOZI does not align especially well as a source of Low Income Housing Tax Credit equity. An additional incentive to support LIHTC equity pricing would have been very helpful given the ever-increasing demand for affordable housing, as well as the challenges LIHTC developers face with rising construction costs. (See The Guru Is In) But even though the QOZI may not be a perfect fit for generating more LIHTC equity proceeds, there is a lot this incentive can do to support affordable housing and other community development projects. For example, QOZI could be a great source of patient “conventional” equity for the non-affordable component of a mixed-income and/or mixed-use transaction. QOZI investments could also raise capital for operating businesses that may locate in a mixed-use project but may not be of the scale to access New Markets Tax Credit capital.

I suggest we broaden our discussion around Opportunity Zones beyond the incentive itself and think about both the impact that QOZI capital will have on the OZones and how we can encourage community development activity that benefits from or complements QOZI investments.

Let’s assume the following premises are generally true:

  1. Economic investment in OZones (and other disinvested neighborhoods) is generally a good thing for the local community;
  2. Many qualified OZone investments will be “conventional” in nature and not specifically “mission-oriented” or “community development” projects;
  3. The economic activity generated by OZone investments will result in some degree of gentrification; and
  4. It is desirable that the people living and working in OZones pre-investment should benefit from the economic development generated by the incentive (i.e. no displacement, access to the jobs, services, etc.).

If these assumptions are valid, it stands to reason that federal, state and local government entities should give serious consideration to how neighborhoods may change as a result of QOZI investments and how they might prioritize other current (and future) resources to support activities within the OZones so that as broad a constituency as possible benefits.

There are many existing tools, resources and programs that the federal government can (and in my opinion should) deploy in OZones to facilitate more affordable and community development activity. This is a great opportunity for the federal government to pilot strategies and policy innovations that reduce regulatory barriers that drive up the cost of affordable housing (another major federal priority) within existing programs.

For example, what if HUD and the Department of Labor (DOL) issued a new Davis-Bacon Wage Scale for affordable housing in OZones? It could be as simple as ruling that any residential or mixed-use project (regardless of height) would qualify as residential for the purposes of Davis-Bacon. This would facilitate higher density projects (more affordable housing units), generate more leverage, give developers more predictability about what their costs will be and reduce some of the compliance burden of potentially having to monitor multiple wage scales, all while preserving the underlying principles of Davis-Bacon.

Also, what if HUD gave housing authorities more flexibility in leveraging their resources within OZones? Many Public Housing Authorities (PHAs) pursuing Rental Assistance Demonstration (RAD) own land in OZones and are interested in demolishing and replacing functionally obsolete buildings with modern, new construction properties; however, the application of Site and Neighborhood Standards (SANS), though an important fair housing and civil rights evaluation, may not allow the PHA to build replacement housing in these geographies because they are currently areas of concentrated poverty. Since the operating premise of OZones is that economic investment will transform the poverty characteristics of these neighborhoods, it seems reasonable to consider some of these future outcomes in the SANS review in order to facilitate new construction housing.

Project-based vouchers are another tool that PHAs can utilize to leverage affordable and mixed-income housing; however, non-Moving to Work PHAs are limited in the number of vouchers they can project-base. I suggest waiving or eliminating the cap on traditional PHAs on project-basing vouchers if they are being used in OZones. Similarly, RAD transactions are constrained by the number of units that can be converted to vouchers via HUD’s Section 18 Demolition Disposition authority; while I would not suggest a wholesale removal of this limit because there would be significant budget implications, an increase in the cap for RAD conversions in OZones may make more RAD deals viable and allow for deeper rehab and/or increased project amenities.

The Federal Housing Administration can also facilitate the flow of capital to OZones through some modest changes to its Multifamily Accelerated Processing lending programs. For example, it could apply the same low mortgage insurance premium that affordable housing and “green” projects benefit from to certified historic rehabilitation projects, mixed-income and/or other conventional rental properties located in OZones. An additional, and admittedly more aggressive step FHA could take, would be to provide more generous underwriting criteria for properties in OZones. Similarly, FHA’s Economic and Market Analysis Division (EMAD) could give additional consideration to OZones as they do their market reviews. HUD could also target its grant programs to support community development projects located in OZones including HOME, CDBG, Choice Neighborhoods Grants, etc.

State Housing Finance Agencies and the IRS can also take steps to support community development in OZones. For example, while many of the designated OZones are located in Qualified Census Tracts (QCTs), many (particularly the designated “adjacent tracts”) are not. HFAs could designate all OZones with their discretionary Difficult to Develop Area (DDA) authority so that nine percent LIHTC projects can take advantage of the 130 percent basis boost. Additionally, the IRS could revise its regulations that define QCTs to include all designated OZone census tracts. Since HFAs do not have the legislative authority to designate discretionary DDAs for projects financed with tax-exempt bonds, this strategy would benefit all LIHTC projects located in OZones. Where appropriate, HFAs could also incentivize development in OZones either through their competitive funding criteria or with other administrative maneuvers, such as special consideration in underwriting criteria or total development cost criteria.

By design, the scale of the OZone incentive is vast and there are few community benefit requirements beyond the deployment of capital in underserved areas. I think we have both a moral and public policy obligation to consider how we can extend benefits to the longstanding members of the impacted communities. We should consider a more holistic set of solutions for OZone communities beyond the QOZI investment. OZones could serve as a laboratory for the federal government to experiment with new and innovative approaches to modernize its current community development strategies and programs.

Thom joined National Housing & Rehabilitation Association (NH&RA) in 2004 and currently serves as its as Executive Vice-President and Executive Director. NH&RA is a national trade association and peer-network for affordable housing and tax credit developers and related professionals including: investors, lenders, public agencies and professional advisers. Thom directs the association’s day-to-day operations including legislative and regulatory advocacy, committee activities, conferences and events, publications, financial management and strategic planning. Thom also serves as the Executive Director of the Tennessee Developers Council, a state-wide trade association for affordable housing developers and professionals active in Tennessee. In 2013 he spearheaded the launch of NH&RA's Preservation through Energy Efficiency Project, a major educational initiative supported by the John D. and Catherine T. MacArthur Foundation. Thom also serves on the Board of Directors for International Center for Appropriate & Sustainable Technology (iCAST) as well as the Advisory Board for its ResourceSmart program, a turn-key, cost-effective, green rehab provider for multifamily affordable and market-rate housing communities and nonprofit facilities. Thom is a frequent speaker at affordable housing, sustainable development and tax credit industry events and has been published in a variety of industry journals including Tax Credit Advisor, Independent Banker, and the Novogradac Journal of Tax Credit Housing. Thom also serves as the Associate Publisher of Tax Credit Advisor, a monthly magazine for tax credit and affordable housing professionals and is an Executive Vice-President at Dworbell Inc., a boutique association management and communications firm in Washington, DC. Thom was previously employed at a national lobbying firm focusing on financial services and technology issues. Prior to moving to Washington, Thom worked in media relations in the New York State Assembly and as a research assistant for New Hampshire Governor Jeanne Shaheen. Thom graduated Magna Cum Laude from Tufts University with a double major in Political Science and History.