PIDC is hoping to spur inclusive growth in Philly with those new Opportunity Zones - Generocity Philly

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Jan. 31, 2019 12:36 pm

PIDC is hoping to spur inclusive growth in Philly with those new Opportunity Zones

"With a strategic approach at the local level, Opportunity Zones can attract private investment to support and benefit — not displace — existing businesses, residents and neighborhoods."

The view of North Broad Street facing Temple University Hospital and Center City, which includes several Opportunity Zones.

(Photo by Flickr user tehshadowbat, used via a Creative Commons license)

In the last year, two unique opportunities brought the potential to drive significant new investment in cities across the country.

First, Amazon announced its search for a second corporate headquarters — HQ2 — which is projected to employ up to 50,000 employees over the next 15 years. More than 238 cities and regions submitted proposals, and 20 candidate cities (including Philadelphia) were ultimately selected by Amazon to compete in a next phase. Amazon eventually decided to split its second headquarters into two locations and chose New York and Northern Virginia for its next stages of growth.

Just a few months after announcing Amazon’s high-profile HQ2 search, the U.S. Congress added a new economic development tool called Opportunity Zones to the tax code through the Tax Cut and Jobs Act of 2017. Opportunity Zones provide federal tax benefits to investors who make equity investments from realized capital gains in qualifying development projects or businesses within certain low-income communities. Initially referred to by the New York Times as “a little-noticed section” in the tax bill, this new tool has the potential to tap into the more than $6 trillion in unrealized capital gains currently sitting on the balance sheets of investors across the country.

As with the Amazon HQ2 bid, Opportunity Zones bring increased visibility and a national platform to position a city as a destination of choice for business growth and investment. In the same way that many have pointed to housing affordability and other challenges in Seattle as a result of Amazon’s growth there, similar concerns have been raised about potential adverse side effects of a significant influx of capital into low-income communities through Opportunity Zones.

From our Partners

In Philadelphia, the Amazon HQ2 process gave us the opportunity to dig deep into data about our value proposition and to bring together organizations in an unprecedented level of collaboration to craft our proposal. We are now using a similar approach to Opportunity Zones: We at PIDC are collaborating with our partners in city government and the private sector on three core strategies to attract capital investment in our Opportunity Zones and to leverage as much private capital as possible to drive equitable growth and development in the communities and enterprises where it is needed most.

We must focus both on sustaining the city’s recent economic growth and making progress in addressing our high and persistent poverty rate.

Philadelphia is experiencing a sustained population and economic growth for the first time in many decades, driven by an influx of young people and immigrants. At 1.6 million people, Philadelphia is the second largest city on the East Coast and sixth largest in the United States. Center City Philadelphia has the densest downtown residential population outside of Manhattan, and our city and region attract more than 40 million visitors each year. There are more jobs in Philadelphia today than at any time for the last 30 years. In many ways, opportunity abounds here.

Philadelphia is also America’s poorest large city with a 25.7 percent poverty rate affecting 400,000 residents. For many decades, Philadelphia’s government, business and civic leaders operated in an environment of declining jobs, population and tax base. Thanks to a combination of economic diversification and strengths in our education and medical sectors, strategic investments in infrastructure and place-making, and current national and global trends favoring dense and dynamic urban environments, Philadelphia is experiencing growth.

We must focus both on sustaining the city’s recent economic growth and making progress in addressing our high and persistent poverty rate.

PIDC believes that Opportunity Zones and other economic and community development investments can play a role in a multi-pronged plan to growing Philadelphia’s economy and lowering the city’s poverty rate. With a strategic approach at the local level, Opportunity Zones can attract private investment to support and benefit — not displace — existing businesses, residents and neighborhoods.

There are 82 designated Opportunity Zones in Philadelphia, which are part of the 300 census tracts in Pennsylvania designated by Gov. Tom Wolf and approved by the U.S. Treasury this spring. Opportunity Zones, which qualify based on poverty rate and/or median family income criteria, are located across West Philadelphia, North Philadelphia, the Northeast, South and Southwest Philadelphia, and the River Wards.

The zones include areas adjacent to the city’s major transit infrastructure to the west and the north along the Market-Frankford and Broad Street subway lines, as well as proximity to anchor institutions such as universities and hospitals and other major employers. Philadelphia’s zones were strategically selected by looking at data on where market-driven investment activity was already starting to take place within the city and where there is potential to accelerate investment through this new incentive.

Philadelphia’s Opportunity Zones are well-positioned to provide opportunities for investors with projects that will have a positive impact on their communities.

Opportunity Zones differ significantly from existing federal tax-related programs, such as New Markets Tax Credits, Low Income Housing Tax Credits or Historic Tax Credits. Each of these provides a significant subsidy which acts like a grant or free equity to projects meeting specific criteria. In the case of Opportunity Zones, there is no requirement that investors accept a below-market rate of return on their capital and the tax benefit for the investors is maximized when the value of the underlying investment appreciates significantly within 10 years.

Projects in Opportunity Zones must be able to deliver a financial return as well as long-term value creation to attract investment. Philadelphia’s zones are well-positioned to provide opportunities for investors with projects that will have a positive impact on their communities, including creating jobs that are accessible to low-income residents, developing affordable commercial space for local businesses and nonprofit organizations, and providing new goods and services for community residents.

As Philadelphia’s economic development corporation for 60 years and a citywide community development financial institution, PIDC has a successful track record of attracting and deploying capital to support business growth and development throughout Philadelphia’s low-income communities. In the last five years, PIDC has invested approximately $130 million in low-income communities in Philadelphia through lending to businesses and real estate development projects. Nearly one-third of our lending activity has taken place in areas designated as Opportunity Zones.

Over the past two years, we have been working with a 100+ member Advisory Committee on Attracting Capital for Impact Development that includes for-profit and nonprofit developers, community development organizations, bankers and investors, philanthropic professionals, and city officials. This group has helped to guide and inform PIDC’s approach to Opportunity Zones.

In collaboration with the city and private sector partners, PIDC will focus on three immediate-term strategies:

1. Attract

PIDC attracts national, regional and local capital into Opportunity Zones, emphasizing outreach to investors seeking a social as well as financial return, to drive inclusive growth in Philadelphia’s neighborhoods.

Philadelphia’s Opportunity Zones make up just less than 1 percent of the 8,700 designated tracts across the U.S., and investors who want to take advantage of the tax benefits can invest their capital anywhere. As we saw during the Amazon HQ2 bid, Philadelphia’s product is better than our perception, so we must invest in positioning Philadelphia to attract investment for projects in our Opportunity Zones.

PIDC has partnered with the City of Philadelphia to repurpose the “Philadelphia Delivers” website and creative assets that were initially developed for Amazon for broader business attraction use, including serving as a new front door for Opportunity Zone investors looking for information about Philadelphia.

PIDC is building relationships with Opportunity Zone fund managers and prospective investors to attract local, regional, and national equity capital to Philadelphia through direct outreach, participation at relevant conferences and events, and targeted marketing communications.

We are focusing in particular on impact investors, which are those seeking to achieve both a financial return and a positive social impact return on their capital investment, and others who want to invest in the projects, businesses and neighborhoods that are often overlooked by the traditional capital market.

And we believe that there is a strong potential for Opportunity Zones to help unlock local capital in and the local and national philanthropic sector to support community and economic development in a whole new way in Philadelphia.

2. Connect

PIDC helps equity investors connect to projects and businesses located throughout all designated Opportunity Zones in Philadelphia.

To succeed in attracting capital to Philadelphia’s Opportunity Zones, there must be investment-ready projects and businesses. PIDC is currently tracking a pipeline of projects in various stages of development across 65 of the designated Opportunity Zone census tracts within Philadelphia. There are 200 projects in the pipeline, ranging in scale from $1.5 million to $3.5 billion.

The list includes a wide variety of project types ranging from commercial to residential, affordable housing to grocery stores, and arts centers to industrial spaces — it’s an accurate reflection of the diverse development opportunities that Philadelphia’s neighborhoods have to offer. Through the relationships we develop with Opportunity Funds and investors, PIDC will connect investment-ready projects with sources of capital.

3. Align

PIDC aligns its lending resources to provide gap-filling capital for high-impact projects and businesses in Opportunity Zones.

The Opportunity Zone tax incentive has limited restrictions on project type or on the community impact that investments must produce. In the absence of these requirements at the federal level, PIDC is developing a flexible, locally driven impact screening to evaluate the economic and community impact of projects located in the Opportunity Zones.

For projects that can demonstrate a positive community impact and benefits to existing residents and businesses within the Zones, PIDC will offer flexible, long-term debt capital that would complement Opportunity Fund equity investments to fill gaps in the capital stack.

Also, PIDC is already piloting a commercial mortgage loan product that provides access to long-term financing for small businesses located in low- and moderate-income areas. This loan, targeted particularly to minority-owned, immigrant-owned and women-owned enterprises, helps those who otherwise might not qualify for bank financing to acquire the properties in which they operate their businesses. This financing will allow these entrepreneurs to build wealth and assets in the local community and directly benefit from the appreciation that may result from new investment in these Opportunity Zones.

PIDC will also continue to leverage its existing resources, such as New Markets Tax Credits, in support of high-impact community revitalization projects throughout Philadelphia, including within Opportunity Zones.

Being chosen for the Amazon HQ2 short list elevated Philadelphia to the national stage, and confirmed that our city has the talent, infrastructure and spirit of innovation and collaboration that companies seek. Through Opportunity Zones, we have a new tool to attract investment and development to the low-income communities, neighborhoods and residents that need it most.

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