Opportunity Zoning

An inside look at how three cities are aligning a new tax incentive with land-use plans to revitalize neighborhoods

July 25, 2019

The new Opportunity Zones tax incentive, created by the Tax Cuts and Jobs Act of 2017, was designed to drive capital to disinvested neighborhoods, spurring economic development and job creation. The incentive provides capital gains deferrals and tax breaks to investors in projects within any of the 8,764 census tracts designated as Opportunity Zones.  

The investments these areas will see, though, depend heavily on local zoning and land-use regulations. Those regulations not only shape what can be built but also can be used to mitigate potential harm, such as gentrification and the loss of affordable housing.

Census tracts designated as Opportunity Zones tend to have lower incomes, higher poverty rates, and higher unemployment rates than the national average. But they run the gamut from severely underinvested areas to those already attracting substantial capital.

To better understand how cities are aligning this new tax incentive with existing land-use plans and how they propose to ensure maximum benefit to the surrounding community, we looked at three cities with different market conditions and distribution of land uses: Fresno, California; Cleveland, Ohio; and Washington, DC.

We started by mapping current zoning designations across these three cities and then isolating the permitted land uses in the designated Opportunity Zones for each city. (For more information on how we analyzed local zoning data to create the maps and calculated land areas, see the methodology below). We then interviewed economic development and planning professionals in each city.

We found that although each city has taken a different approach to regulating land use, they share a common strategy to leverage Opportunity Zones to accelerate their existing community and economic development plans.

Fresno, California

Fresno is the fifth-most-populous city in California and a sprawling 112 square miles. Although Fresno is the epicenter of California’s Central Valley economy, it struggles to attract the development needed for citywide revitalization efforts. What’s more, the city has the nation’s second-highest rate of concentrated poverty, creating a need for targeted investment in certain pockets of the city. City leaders have been working to increase density and improve equity through mixed-use development along transit corridors, so when the Opportunity Zones regulation came along, they viewed it as a new way to achieve these ends.

When requesting Opportunity Zone tracts from the governor of California, Fresno city officials and urban planners focused on development in the downtown area and the main transit corridors in need of infill development. Ultimately, they got more Opportunity Zone designations than they asked for, highlighting the governor’s intention to target Opportunity Zone incentives in this area of the state.

In 2015, before Opportunity Zone designations, the City of Fresno adopted a new zoning code that aligned with their strategic general plan. This plan targeted areas with public transportation for growth and mixed-use development. In addition, it removed a barrier to investment by eliminating a complex and costly rezoning process.

Fresno has had trouble attracting development, as rents are so low that it’s difficult for private developers’ projects to “pencil out.” Urban planners and city policymakers hoped that loosening regulations and rezoning the city would make developers more likely to invest.

Dan Zack, the city’s assistant planning director, said the Opportunity Zone designations were separate from their rezoning efforts but complement them.

“A lot of thought and effort went into [questions like] what land uses do we need where? Where do we infill with walkable mixed use? Where do we focus our transit investments? Opportunity Zones really came in after that process was complete,” Zack said. “Hopefully [they] will be an extra tool to make those goals happen.”

As such, Fresno officials encouraged the governor to designate Opportunity Zone tracts in Fresno’s strategic economic development and transit-oriented corridors, which are primarily in the southern part of the city. They include areas zoned predominately for residential, industrial, and public institution use. Initially, city leaders were unsure how the Opportunity Zone incentive would work in residentially zoned areas. But many of the deteriorating strip malls that the city hoped to revitalize are in tracts with residential zoning.

 

Because of Fresno’s slow development climate, city leaders don’t expect concentrated investment to lead to gentrification, but an antidisplacement task force has been created as a precaution.

City leaders hope that Opportunity Zones will change the equation for developers and help Fresno realize its economic development goals.

Cleveland, Ohio

A Rust Belt city that had experienced decades of disinvestment and steady population loss, Cleveland is now in the midst of revitalization, heralded in 2016 by Forbes magazine as “America’s Hottest City.” This turnaround, though, has been uneven, concentrated in a few pockets of growth.

From the start, Cleveland city officials saw Opportunity Zones as a chance to leverage federal dollars to elevate preexisting city plans. Through the mayor’s Neighborhood Transformation Initiative, announced in 2017, Cleveland had already been encouraging private investment in four underresourced neighborhoods—Circle North, East 79th Street, Buckeye-Woodhill, and Clark-Metro—that are next to areas of growth.

“Part of our strategy is to build off those areas of growth…to focus our efforts along strategic commercial corridors that link areas of haves to areas of have-nots,” said Freddy Collier, Cleveland’s director of city planning. That work is “starting to stimulate private market interest in areas that historically have had some inherent disadvantages.”

Using form-based zoning overlays, the city plans to increase density and encourage mixed-use, mixed-income development along strategic corridors, which include downtown, Ohio City, Euclid Avenue, the lakefront, and University Circle.

In addition, the city hopes to leverage vacant, industrially zoned land near the airport to create jobs. Collier said that the transit connectivity to the airport makes it a desirable location for job creation. Any jobs created here would be accessible to a higher proportion of the city. Cleveland is also supporting revitalization efforts around vacant land in the Opportunity Corridor, a multimodal boulevard connecting the east side to University Circle. In both areas, the city owns large swaths of vacant property, which will give the city greater control over development of these parcels.

When Opportunity Zones were announced, city officials saw the tax incentive as another way to bring in capital and advance preexisting city goals. The four neighborhoods in the mayor’s initiative and the strategic commercial corridors targeted for development have been designated as Opportunity Zones.

“I believe we were already on the right trajectory,” Collier said. “When we found out about Opportunity Zones, we thought this could be a real benefit, an accelerant to the work that we’re already doing.”

Accordingly, Cleveland’s Opportunity Zone selections purposefully included a larger proportion of commercial and industrial uses. Land zoned for one- or two-unit residential properties makes up a comparatively smaller proportion of Opportunity Zones compared with the city as a whole. Land zoned for single-family housing was included either because it fell into the same census tract as a commercial corridor or to spur infill development and rehabilitation of single-family homes on vacant and foreclosed properties in Neighborhood Transformation Initiative areas. In addition, the city will provide corresponding homebuyer education, down payment assistance, and rehabilitation assistance through city programs in these areas.

 

Collier said that they are aiming to curb gentrification by ensuring different types of housing and financial products for different income levels, rehabilitating existing homes, offering rental properties, and wielding their zoning tools.

“We have design authority, so we can actually dictate how buildings will be built. And we believe that through our regulatory authority we can govern what goes in these communities,” Collier said. “The work that happens in these neighborhoods, and the investments, need to conform to the desires of the community.”

Washington, DC

As the nation’s capital, Washington, DC, has a significant amount of land that is owned by the federal government and does not fall under the District’s zoning code. But beyond the federal buildings and monuments is a city of more than 700,000 residents, diverse neighborhoods with a mix of housing types, walkable commercial districts, parks, and universities. DC allows higher-density housing across a broader swath of neighborhoods than the other cities we examined (27 percent of DC’s land is zoned for multifamily development, compared with 7 percent in Fresno and 8 percent in Cleveland).

DC is also distinct from other cities in that the District is not part of a state, so the city did not defer to a governor’s office when designating its Opportunity Zones. Instead, Mayor Muriel Bowser nominated the city’s Opportunity Zones directly to the Treasury Department after gathering public input. In selecting zones, the mayor and city agencies looked for areas with demonstrated need that also had investment opportunities that could be paired with complementary incentives to benefit residents.

According to Brian Kenner, former deputy mayor for planning and economic development, DC sought to align Opportunity Zones with the city’s mid- and long-range community development goals.

“Our focus has really been, from the beginning, not so much how do we attract the most investment, but how do we align it with our needs and priorities,” Kenner said. “We incorporated factors beyond land uses and zoning into the decisions. One of those factors was public input.”

The city saw Opportunity Zones as a vehicle to help finance commercial and mixed-use developments and to support businesses that could create jobs and wealth-building opportunities for residents. DC nominated a large share of tracts zoned for institutional uses, a category that includes DC’s special purpose zones (single large sites that require a cohesive, self-contained set of regulations to guide the development process).

Two particularly high-profile redevelopment areas were included in DC’s Opportunity Zones: the former Walter Reed Army Medical Center and St. Elizabeths East Campus. Both include a strong existing development pipeline and plans for large mixed-use developments that include a share of the residential units dedicated as affordable housing.

According to Kenner, DC selected these tracts because there already had been significant community engagement and planning in both neighborhoods, so clear goals had been established to guide Opportunity Zone investments. The city is also contributing public land and financing in these areas, which can help ensure that new projects will provide job opportunities for local residents and businesses through DC’s first source hiring and small business contracting requirements.

 

Now that Opportunity Zones have been selected, the District is creating incentives and tools to facilitate investments that align with community plans, while guarding against unwanted or harmful uses. The mayor’s office launched an online marketplace to match project sponsors with fund managers and investors and recently announced a $24 million commitment to projects that support affordable housing, workforce development, and the growth of small businesses in Opportunity Zones.

At the same time, the city is tracking and reviewing proposals for discretionary development and map amendments in Opportunity Zones to ensure that proposed projects align with existing plans and provide benefits to the surrounding community.

According to Andrew Trueblood, director of the DC Office of Planning, supporting and incentivizing affordable housing production and preservation is part of the city’s larger commitment to equitable economic growth through its zoning and land-use plans.

“As we refine and expand our established affordable housing programs, such as inclusionary zoning and the Affordable Housing Production Trust Fund, we have an eye toward Opportunity Zone geographies and alignment,” Trueblood said. “We are also looking at leveraging the benefits of zoning relief and adjustments to ensure we meet the needs of our residents and goals of the District, with housing affordability as a top priority.”

Key Takeaways

Cities are using Opportunity Zones to accelerate existing neighborhood plans, not rewrite them. In all three locations, city leaders recommended Opportunity Zone locations in areas that were already a focus of strategic development and growth. They saw Opportunity Zones as an additional way to catalyze development. Similarly, cities see the potential for Opportunity Zones to “tip” investments in mixed-use corridors and revitalization projects in which the public sector is already playing a significant role.

Strategies to attract private investment to Opportunity Zones vary by local market type. In these three cities, the strategies that urban planners and policymakers are using to attract developers to their Opportunity Zones vary by local market type. In DC, where the real estate market is hot, city players are taking a tailored approach: working with the already-interested private sector to ensure Opportunity Zone development is aligned with strategic public goals.

In cities where the market is slower, such as Fresno, city officials are hoping Opportunity Zones will help with market-making, attracting developers and helping project financing pencil out. In Cleveland, where the market strength falls between that of the other two cities, planners are taking a combined approach: targeting areas already attracting market interest to provide incentives for spillover growth into more disinvested neighborhoods and maintaining strong oversight to mitigate any future displacement.

Strategies to mitigate potential harms of Opportunity Zones vary by local approaches to land-use regulation. In all cases, planners were aware of potential negative consequences associated with Opportunity Zone investment in changing neighborhoods, specifically higher housing prices and subsequent displacement of long-term residents. In Cleveland, city officials plan to use zoning regulation to prevent harmful development in Opportunity Zone areas. In DC, which has a citywide inclusionary zoning policy, the mayor’s office is increasing resources for affordable housing preservation in Opportunity Zones and enhancing property tax relief to low-income homeowners. Fresno is not leaning as heavily on zoning and land-use regulations to mitigate potential harms, but it has designated Opportunity Zones along transit corridors and areas ripe for additional investment without displacement.

Can Opportunity Be Zoned?

As in Fresno, Cleveland, and Washington, DC, cities across the country are attempting to harness Opportunity Zones to accelerate their existing economic growth strategies and community plans. Whether providing incentives for needed development, spurring spillover economic activity to even out inequitable neighborhood growth, erecting guardrails to prevent negative outcomes, or channeling private investment toward community needs, city planning and economic development agencies are working to maximize the community benefit that results from this largely unrestricted federal incentive. With little federal oversight, localities face a difficult challenge in molding Opportunity Zone capital to community plans and benefit. Just as land-use policy was a key input to the initial selection process, it will be a vital tool in shaping what becomes of Opportunity Zones going forward.