PDP Community Series – Blog 14 – Funding Options

One of the main options available for funding of the Pilot Demonstration Project is to show sites that could be used for Opportunity Zone investments (see Opportunity Zones map above). The objective in doing this is to show how sites could be used using Pilot Development Projects (PDP) as the development project.

Place Based Projects

The information shown about Opportunity Zones was obtained on the internet through several sources. Anybody investing will probably use professional advisors, so the main purpose of this paper is to provide an introduction of Opportunity Zones and development options using the PDP concept. The Tax Foundation presented the following findings:

  • The Tax Cuts and Jobs Act created the Opportunity Zones program to spur investment in economically distressed census tracts. Opportunity zones reduce capital gains taxes for individuals and businesses who invest in qualified opportunity zones.
  • The Tax Cuts and Jobs Act created the Opportunity Zones program to spur investment in economically distressed census tracts. Opportunity zones reduce capital gains taxes for individuals and businesses who invest in qualified opportunity zones.
  • Research suggests place-based incentive programs redistribute rather than generate new economic activity, subsidize investments that would have occurred anyway, and displace low-income residents by increasing property values and encouraging higher skilled workers to relocate to the area.
  • While opportunity zones present certain budgetary and economic costs, it is unclear whether opportunity zone tax preferences used to attract investment will actually benefit distressed communities.

Some of the past problems of developing in Opportunity Zones will be discussed here so everyone can understand how the proposals recommended later (by the use of the Community Land Trusts) can make the PDP provide low cost housing for many years.  Investing in Opportunity Zones occurred for many years until 2018 when it was discontinued and this new law was used in its place.  This new law allows for investments in Opportunity Zones in order that the investor can reduce capital gains taxes that they may have accumulated.  These investments in Opportunity Zones are also called place based tax incentive programs.

The use of place based tax incentive programs has a clouded history regarding their benefits for helping the poor and a historical perspective is discussed in detail in an Abstract written by M. Layser titled THE PRO-GENTRIFICATION ORIGINS OF PLACE-BASED INVESTMENT TAX INCENTIVES AND A PATH TOWARD COMMUNITY ORIENTED REFORM.  This Abstract (article) will be referred to quite often since it provides such an in depth analysis on the subject of Opportunity Zones (OZ) and the use of place based sites within the OZ.  The problems of Opportunity Zones for fulfilling their intended function of helping the poor is described in the abstract. This should be read in full to understand a different view of Opportunity Zones development practices.

M. Layser’s Abstract which was mentioned earlier should be read before investing in opportunity zones, since it describes how most in-place Opportunity or Enterprise investments do not help the poor and many times the poor people are driven out of the zones by gentrification.  The projects generally help the developers, real estate agents and other wealthy people associated with the development activities.  There are four types of in-place benefit projects and only one is community orientated.  This type is rarely used.  (See Abstract)

This abstract is divided into five parts which she describes as follows:

Part I of this Article explains why spatial inequality, including concentrated poverty , is an important area of inquiry for tax law research, and it introduces place-based investment tax incentives as the subject of study . Part II describes the cur-rent landscape of place-based investment tax incentives and demonstrates that neither theory nor evidence supports the optimistic rhetoric that drives the bipartisan popularity of these tax incentives. The central problem presented by current place-based investment tax incentives is this contradiction between rhetoric and reality; though they are presented as laws that benefit low-income communities, the dominant types of place- based investment tax incentives are not designed for this purpose. Understanding the reasons for this disconnect is key to assessing the limits and potential of place-based investment tax incentives as anti-poverty tools.

Part III confronts this problem by tracing the development of today’s dominant types of place-based investment tax incentives to their pro- gentrification origins in order to provide an explanatory theory about their development. Namely, it argues that the hidden objective of these types of laws is to support gentrification for the benefit of place entrepreneurs and other wealthy parties. Part IV argues that most current place-based investment tax incentives should be abandoned as bad policy. Even if gentrification is a legitimate policy goal, most current place-based investment tax incentives are less efficient or equitable than alternative types of incentives.

Accordingly, Part V argues that lawmakers should introduce alternative types of place-based investment tax incentives designed to improve neighborhood conditions in poor communities for the benefit of poor communities. After analyzing imperfect models of these types of incentives under current law, it presents a theoretically and empirically grounded road map for using mental mapping techniques to design community oriented investment tax incentives that are more likely to benefit poor communities. Until these community oriented investment tax incentives are tested, our understanding of the potential for place-based investment tax incentives to fight concentrated poverty will remain incomplete.

Tax Cuts and Job Act 2017 Tax Law Opportunity Zones History

The following information is provided by the Economic Innovation Group (EIG) who played a large part in getting the law passed:

  1. Opportunity Zones were conceived as an innovative approach to spurring long-term private sector investments in low-income communities nationwide.

    The Opportunity Zones provision is based on the bipartisan Investing in Opportunity Act, which was championed by Senators Tim Scott (R-SC) and Cory Booker (D-NJ) and Representatives Pat Tiberi (R-OH) and Ron Kind (D-WI), who led a regionally and politically diverse coalition of nearly 100 congressional cosponsors.

    The concept was originally introduced in a 2015 paper, “Unlocking Private Capital to Facilitate Economic Growth in Distressed Areas,” to help address the persistent poverty and uneven recovery that left too many American communities behind. The idea has since been championed by a wide-ranging coalition of investors, entrepreneurs, community developers, economists, and other stakeholders.

WHAT ARE OPPORTUNITY ZONES?

Opportunity Zones are low income census tracts nominated by governors and certified by the U.S. Department of the Treasury into which investors can now put capital to work financing new projects and enterprises in exchange for certain federal capital gains tax advantages. The country now has over 8,700 Opportunity Zones in every state and territory.

WHAT ARE OPPORTUNITY FUNDS?

Opportunity Funds are new private sector investment vehicles that invest at least 90 percent of their capital in qualifying assets in Opportunity Zones. U.S. investors currently hold trillions of dollars in unrealized capital gains  in stocks and mutual funds alone— a significant untapped resource for economic development. Funds will enable a broad array of investors to pool their resources in Opportunity Zones, increasing the scale of investments going to underserved areas.

WHAT ARE THE INCENTIVES THAT ENCOURAGE LONG-TERM INVESTMENT IN LOW INCOME COMMUNITIES?

Opportunity Zones offer investors the following incentives for putting their capital to work in low-income communities:

  • A temporary tax deferral for capital gains reinvested in an Opportunity Fund. The deferred gain must be recognized on the earlier of the date on which the opportunity zone investment is sold or December 31, 2026.
  • A step-up in basis for capital gains reinvested in an Opportunity Fund. The basis of the original investment is increased by 10% if the investment in the qualified opportunity zone fund is held by the taxpayer for at least 5 years, and by an additional 5% if held for at least 7 years, excluding up to 15% of the original gain from taxation.
  • A permanent exclusion from taxable income of capital gains from the sale or exchange of an investment in a qualified opportunity zone fund, if the investment is held for at least 10 years. (Note: this exclusion applies to the gains accrued from an investment in an Opportunity Fund, not the original gains).

The following information explains the potential of the proposed development opportunities in the Opportunity Zones.  This shows the potential for obtaining finding using the PDP program. (Blog: Opportunity Zones: Tapping into a $6 Trillion Market, EIG, Mar 21, 2018)

Another was the testimony before the Joint Economic Committee of the US Congress in May 17, 2018.  The testimony included (among others) Maurice A. Jones, President and CEO of the Local Initiatives Support Corporation (LISC), Senator Cory A. Booker and Senator and Senator Tim Scott.

The Local Initiatives Support Corporation (LISC) is a national non-profit Community Development Financial Institution (CDFI) that is dedicated to helping community residents transform distressed neighborhoods into healthy and sustainable communities of choice and opportunity — good places to work, do business and raise children. LISC mobilizes corporate, government and philanthropic support to provide local community development organizations with loans, grants and equity investments; technical and management assistance; and policy support.

LISC has local programs in 31 cities, and partners with 86 different organizations serving over 2,000 rural counties in 44 states throughout the country. Over the course of LISC’s nearly 40 years of work, its comprehensive approach to community development and its broad national reach have made it a unique and valuable leader in the fight to improve quality of life in communities across the country. LISC’s greatest success over these years has been working with under-resourced communities and their residents to help them get ahead. Today, the growing inequality, concentrated poverty and racial inequity that our country is experiencing make the work that we and our partners do as urgent as ever before.

They noted further:

As one of the largest national nonprofit housing and community development organizations in the country, LISC often relies upon public-private partnerships to engage in the type of comprehensive community development work that is needed in low-income communities. Two of the most critical federal tools that support our efforts are the Low Income Housing Tax Credit (the Housing Credit) and the New Markets Tax Credit (NMTC).

Since these programs were established in 1986 and 2000, respectively, they have become an integral component of efforts to support affordable housing development and, as importantly, the revitalization of the surrounding neighborhoods. Driven by the private sector, the federal investments made into these programs by way of tax expenditures have paid strong dividends by sparking investment in areas that would otherwise be overlooked.

The Housing Credit has financed the development of approximately 3 million affordable homes across the nation with projects in every state, leveraged more than $100 billion in private capital, and helped to create well over 3 million jobs in the construction property management industries. It is the country’s most successful affordable housing production program.

LISC, through its subsidiary the National Equity Fund (NEF), is one of the nation’s largest syndicators of Housing Credits. To date, NEF has invested $14.4 billion in more than 2,500 housing properties, creating approximately 166,600 affordable homes for low-income families in 47 states, and spurring the creation of an estimated 203,300 jobs. In recent years, LISC has been able to use the credit to support disaster recovery efforts, a veterans housing initiative, and an initiative to link housing to critical community health services.

NMTCs are the perfect tool to complement the work we’ve been doing in support of affordable housing. LISC believes that housing is just one component of vibrant communities; that residents also need to have access to good jobs, a thriving retail environment, and critical community services such as childcare, education, and health care. With NMTCs, LISC has revitalized commercial corridors and fueled commercial and retail jobs; funded new and expanded community facilities supporting jobs in the fields of education, healthcare and childcare; and redeveloped industrial brownfields to return land to productive use for offices, warehouses and new manufacturing ventures.

LISC has placed $963 million of NMTC investments in 118 different businesses and real estate projects, supporting $2.5 billion in total project costs. These funds have helped to develop or rehabilitate over 600 units of housing and 9.5 million square feet of commercial and community space, and have supported the creation or retention of 20,000 jobs.

It is precisely because we’ve seen first-hand the impacts that tax incentives can have on spurring community revitalization that we are convinced of the potential held by the Opportunity Zones initiative – not as a replacement for these programs, but as a valuable new tool that can attract new investor capital.

The Promise and Potential Perils of Opportunity Zones

The Opportunity Zones initiative is unlike the Housing Credit and NMTC program in several ways. First, the main source of investment capital is likely to be high net worth individual investors, as opposed to the financial institutions that are the primary investors in the other community development credits. This means that an entirely new pool of investor capital can be attracted to community development finance through Opportunity Zones. Second, there is no “cap” on the amount of investor capital that can be invested in Opportunity Funds, meaning that the program has the potential to shift massive amounts of new investor capital into low-income communities. And third, there are no designated agencies (e.g., the state Housing Finance Agencies, the Treasury Department’s CDFI Fund) pre-approving projects or business plans, which should significantly lower transaction costs and expedite investments into these communities.

Yet there are potential negative outcomes that may occur as well. For example, the way the incentive is structured, investors will get a modest return through deferral of initial capital gains taxes, but a potentially huge return with the forgiveness of any additional capital gains that result upon exit from the Opportunity Fund investment. This means investors may be incentivized to seek out the deals with the highest long term yields, which may not be the projects that bring about the most impact for the community or its residents. And without any Federal or state agencies overseeing the selection of projects and investment plans, there is no direction to necessarily pursue higher impact community development investments. Additionally, one could potentially see this program leading to displacement of lower income community residents, either because the neighborhoods themselves get “overheated” with investment capital, or because the structure of the incentive rewards investors seeking the higher yields offered by market rate or even luxury housing.

It is LISC’s intent to design an Opportunity Zone investment plan that will attract capital from impact investors throughout the country while maximizing the benefits for low-income communities and their residents. We are planning to focus our Opportunity Zone investments in three areas where we see the greatest potential to benefit community residents:

  1. Operating businesses – providing growth capital for companies that are creating job opportunities for Opportunity Zone residents. We will inject equity capital to catalyze the growth of manufacturing, health care, and other companies in growing sectors that are providing quality job opportunities that are accessible to community residents.
  2. Business infrastructure – investing in new real estate developments and rehabilitation of existing underutilized buildings within targeted communities to attract businesses, bringing quality jobs to underinvested communities and their adjacent neighborhoods.
  3. Affordable housing – increasing the stock of quality affordable and workforce housing in Opportunity Zones

We will raise capital from mission-aligned investors including the corporations located in Opportunity Zones that we are already targeting for investment, high net worth individuals sourced through our community foundation relationships, and the growing impact investment community. With strong continued leadership from Congress and the implementation of our recommendations herein, we believe that the Opportunity Zones incentive can spur billions in private investment activity in the country’s most distressed census tracts and play a major role in closing the existing opportunity gap that is leaving these communities behind.

New Markets Tax Credits are allocated through an annual competitive application process, one which helps ensure that the most qualified entities are provided with credit allocations, and that the scarce credits are directed to the highest and best uses. While it is not feasible to hold competitions among Opportunity Funds in the manner that entities apply for NMTCs, Treasury could certainly consider employing some of the best practices from its NMTC review process into its Opportunity Fund certification review. For example, through the NMTC allocation process, entities are encouraged to commit to more rigorous outcomes as a condition of receiving an allocation, and then are held to these commitments as part of their allocation agreement. These include, among others:

  • targeting investments in areas of severe economic distress;
  • offering below-market rates and terms to their borrowers;
  • investing more than the minimally required 85% of the NMTC investment proceeds into their low income communities;
  • financing (if applicable) affordable housing; and
  • making “innovative” investments, including investments in small businesses.

In addition to these provisions, which become a compliance requirement of the NMTC allocation agreements, applicants also receive higher scores for being able to demonstrate a likelihood of achieving significant community impacts, such as: creating high quality jobs; providing goods and services to low income community residents; financing minority-owned businesses; and ensuring environmentally sustainable outcomes.

This was not their entire testimony and it can be found on the internet.  Both Senators stated their approval of the Opportunity Zone program.

Descriptions of the Opportunity Zone Funding

What advisors need to know about this new policy and the tax benefits for their clients.

Oct 02, 2018.   By Adam Hooper

Opportunity Zones is a new community development program established by Congress in the Tax Cuts and Jobs Act of 2017 to encourage long-term investments in low-income urban and rural communities nationwide.  The idea originated from tech billionaire Sean Parker, the former president of Facebook and creator of Napster. In 2013, Mr. Parker enlisted powerful allies and formed the Economic Innovation Group, a Washington think tank to help him press the policy into law.  The program essentially rewards reinvestment of profit into “Opportunity Zones” defined as low-income census tracts selected by state governors and certified by the U.S. Treasury Department.

There are roughly 8,700 Opportunity Zones throughout the U.S., providing real estate investors with the opportunity to defer or even eliminate capital gains tax. 

The Triple-Threat Tax Treatment

Capital gains tax deferral, step-up in basis, and capital gains tax elimination are the triple-threat tax advantages real estate investors may see with investment in Opportunity Zones.

Derek Uldricks, President of Virtua Partners, a global private-equity real estate investment firm that recently created its first opportunity zone fund, demonstrates the tax benefits that can be realized by investors.

Assume an investor has a $1 million gain in Apple stocks and decides to sell. To keep it simple, let’s also assume the investor is in a 20 percent tax bracket, totaling $200,000 in capital gains tax. But instead of paying, the investor reinvests the $1 million in an Opportunity Fund.

Here’s what happens next:

  • Deferment of gains: By investing those gains in the Opportunity Fund, the tax due on those gains is deferred until the earlier of selling the investor’s interest in the Fund or December 31, 2026.
  • If the investor holds the investment for 5 years: That payment of $200,000 is completely deferred, plus the investor gets a 10 percent step-up in basis on the original gain deferred. So now the investor pays $180,000, saving $20,000 in capital gains taxes.
  • If the investor holds for 7 years: They receive an additional step-up in original basis of 5 percent, and the capital gains tax bill goes down to $170,000, saving $30,000 on the taxes owed from the investor’s initial gain.
  • If the investor holds for more than 10 years: the investor pays ZERO capital gains tax on the appreciation of that asset.

Let’s break down the last point.

If the investor holds the $1 million investment for 10 years, any gains made on that investment are tax-free. The investor pays ZERO capital gains tax on all of the appreciation above and beyond the $1 million. So even if the $1 million turned into $3 million, that $2 million in lift achieved through investing in the Opportunity Fund is tax-free. Essentially, the federal government is allowing the investor to keep the capital gains at 0 percent interest and use those funds to invest in one of these Opportunity Zone projects for 10 years. After 10 years, the investor pays no capital gains tax on the appreciation of the asset.

Another description of the Opportunity Zone funding is provided by the Tax Foundation.

Breaking Down the Investment Vehicle: The Opportunity Fund. (in EIG website)

We’ve now explained how Opportunity Zones came into being and what the tax advantages are. But how exactly do investors go about investing in these zones? The answer is “Opportunity Funds.”  According to EIG:

“Opportunity Funds are private sector investment vehicles that invest at least 90 percent of their capital in Opportunity Zones. The fund model will enable a broad array of investors to pool their resources in Opportunity Zones, increasing the scale of investments going to underserved areas.”

So, investors can’t just purchase a property in an Opportunity Zone and expect the tax advantages. Nor can they team up with a Sponsor or Fund Manager who doesn’t abide by the guidelines for Opportunity Funds that will be set forth by the Treasury Board and IRS.

The tax incentive is for investors to re-invest their unrealized capital gains into Opportunity Funds within 180 days. And these funds must be dedicated to investing into Opportunity Zones designated by the Governors of every U.S. state and territory.

This new investment vehicle will be organized as a corporation or a partnership and can be any array of equity investments in a variety of different sectors. EIG explains.

“This is critical, because low-income communities have a wide range of needs, and Opportunity Zones at their best will recruit investments in a variety of mutually enforcing enterprises that together improve the equilibrium of the local community.”

There are certain rules that are still being fleshed out. What we know so far in terms of guidelines, the Opportunity Funds:

  • Must be certified by the U.S. Treasury Department.
  • Must be organized as a corporation or partnership for the purpose of investing in Qualified Opportunity Zone property.
  • Must hold at least 90 percent of their assets in a Qualified Opportunity Zone property, which includes newly issued stock, partnership interests or business property in a Qualified Opportunity Zone business.
  • Must have investments are limited to equity investments in businesses, real estate and business assets that are located in a Qualified Opportunity Zone. Loans are not eligible for the tax incentives. Opportunity Fund investments in real estate are subject to a substantial rehabilitation requirement.

Ultimately, Opportunity Zones is a game changer that will provide significant tax benefits for real estate investors while looking to revitalize America’s depressed communities through social impact investments.

Key Findings

  • The Tax Cuts and Jobs Act created the Opportunity Zones program to spur investment in economically distressed census tracts. Opportunity zones reduce capital gains taxes for individuals and businesses who invest in qualified opportunity zones.
  • Opportunity zones were estimated to cost $1.6 billion in revenue from 2018-2027. New regulations stipulate that the program’s benefits would continue through 2047, meaning the program’s revenue impact could increase over time depending on how many investors utilize the program.
  • Research suggests place-based incentive programs redistribute rather than generate new economic activity, subsidize investments that would have occurred anyway, and displace low-income residents by increasing property values and encouraging higher skilled workers to relocate to the area.
  • While opportunity zones present certain budgetary and economic costs, it is unclear whether opportunity zone tax preferences used to attract investment will actually benefit distressed communities.

The Tax Cuts and Jobs Act (TCJA) created the Opportunity Zones program to increase investment in economically distressed communities. The program provides preferential capital gains treatment for investments within designated low-income census tracts. Policymakers hope opportunity zones will unleash investment in low-income communities throughout the country.

One of the questions EIG explains is: Who can invest in OZ funds?

The statute allows for broad participation in the creation of Opportunity Funds with the goal of drawing a wide array of investors to support the broad variety of needs in low income communities nationwide. Any entity, from large banks to a community development financial institution, from a venture capital group to a developer consortium, as well as regional economic development organizations and even individual tax payers can establish a fund as long as they follow the guidelines set out by the statute and Treasury (in the process of being finalized). Other questions are on their website.

Opportunity zone program incentives, reviews both academic and government evidence on the effects of place-based incentive programs, and discusses possible outcomes for opportunity zone residents. Overall, we find opportunity zones will present certain budgetary and economic costs to taxpayers and investors, but based on evidence from other place-based incentive programs, we cannot be certain opportunity zones will generate sustained economic development for distressed communities.

Place-based incentives can also pressure non-subsidized firms out of business by providing subsidies to their competitors. For instance, in a 2010 report, Louisiana Economic Development cautioned that of the 9,379 jobs attributed to the state’s Enterprise Zone program in 2009, only 3,000 jobs could be considered new. The report cautioned many of the projects associated with the program would have occurred regardless of the incentive, and many new jobs simply replaced others.

Place-based incentive programs could displace low-income residents by increasing property values.  As capital and labor move into a zone, this could put upward pressure on wages and housing prices. While this would benefit landowners in a region, it could be problematic to low-income individuals if it makes housing unaffordable. In the case of opportunity zones, the site-selection process which places zones in gentrifying areas could exacerbate this effect.

Opportunity Zone Data is Necessary to Compare the Program’s Outcomes with Alternative Approaches

Given that there is no consensus on the efficacy of place-based incentive programs, gathering data on opportunity zones is crucial. Senators Corey Booker (D-NJ) and Tim Scott (R-SC) had originally included provisions for annual data collection beginning five years after the bill passed, but those provisions were dropped in the final version of the TCJA.

Without data, it is impossible to judge the merits of place-based incentive programs relative to other economic development approaches. Take the federal government’s experience with Empowerment Zones, Enterprise Communities, and Renewal Communities, all place-based incentive programs that subsidized firms for locating in particular areas to help develop distressed communities. In 2010, the Government Accountability Office found:

Data limitations make it difficult to accurately tie the use of the credits to specific designated communities. It is not clear how much businesses are using other EZ, EC, and RC tax incentives, because IRS forms do not associate these incentives with the programs or with specific designated communities.… making it difficult to begin assessing the impacts of these tax benefits.

Fortunately, future rounds of opportunity zone regulations will likely include reporting requirements that would allow economists to evaluate program impacts. The White House has also created an Opportunity and Revitalization Council that will, among other things, assess “what data, metrics, and methodologies can be used to measure the effectiveness of public and private investments in urban and economically distressed communities, including qualified opportunity zones.” Both developments can help policymakers assess the effectiveness of opportunity zones relative to other economic development policies.  However with the makeup of the PDP proposal data gathering will be much easier because all of the project will be eligible. 

Conclusion

With opportunity zones, and any other place-based incentive program, it’s important to consider what we know, as well as what we don’t. We know the program will attract at least some investment to low-income census tracts designated as zones. We also know that this investment will come at both a budgetary and economic cost.

But we don’t know how effective opportunity zones will be at improving the lives of low-income people in economically distressed communities. Both research and state level experience raise concerns that opportunity zones could actually be counterproductive to generating sustained development in these communities.

For now, policymakers should emphasize the data collection necessary to measure the effects of this program. Without it, we will be unable to measure the merits of this place-based approach compared to other alternatives that could more effectively develop economically distressed communities.

To expand the list of companies to contract for help there are many private firms that have track records understanding the process of permitting and developing Opportunity Zone projects.  One of these is Greenberg Traurig.  They have 39 offices worldwide.

Community Land Trusts

Another alternative not mentioned in the discussions about Opportunity Zones is the use of designating the placed based project as a Community Land Trust.  The following information is from the website Sharable.  As much as possible, it provides a method of preventing Gentrification occurring within the projects.

According to community-wealth.org, there were 242 community land trusts in the United States in 2011 with about 10,000 housing units serving over 12,000 residents. A majority (82%) of those residents had incomes below 50% of area median, had 31% were non-white.

The CLT model works by purchasing land on behalf of the community and holding it in trust in perpetuity. The CLT can sell the land and structures on the properties, with option to repurchase, or enter into a long-term lease, typically a ground lease, during which the tenant can make improvements to the property, and during which time the CLT maintains an interest in maintenance of the structures and property. If the buyer chooses to sell, the CLT retains the right to re-purchase the structures for an agreed-upon formula giving the buyer partial equity. The remaining equity stays with the CLT, and the structure is re-sold below-market rate. The cost of the land is forever retained within the trust.

The National Community Land Trust Network provides resources and coordination for CLT’s in the United States.

Steps for Establishing a Community Land Trust

1. Determine Rationale

Several rationales exist for starting and supporting a CLT. When establishing a CLT, one or more of the following rationales are commonly identified:

  • Developing communities without displacing people (avoiding gentrification and displacement of low-income residents),
  • Perpetuating the affordability of privately owned housing (avoiding market-rates on housing that was developed intentionally for affordability by public or private measures)
  • Retaining the public’s investment in affordable housing (avoiding market-rates on housing that was developed for affordability by with public dollars)
  • Protecting the occupancy, use, condition, and design of affordable housing (ensuring occupancy, stewardship and maintenance of affordable housing over time)
  • Assembling land for diversity of development (assembling land under which CLT tools can be used to develop multiple types of development within the CLT’s service area)
  • Enabling the mobility of low-income people (providing additional routes to housing for lower- and moderate-income people beyond what the market offers)
  • Backstopping the security of first-time homeowners (stepping in to cure defaults and prevent foreclosures, protecting the homeowner, the housing, the bank and the community)

2. Determine Sponsorship

CLTs generally get their start from some sort of impetus initiated by one of the following four potential sponsors:

  • Individuals and institutions at the grassroots level (typically faith-based and community organizations).  Advantages of grassroots organizations include acceptance by the community being served, legitimacy in the eyes of lenders and funders, market insight, and a lack of baggage from other of organizations. Disadvantages include challenges in building staffing and financial capacity, credibility, competition with existing organizations, and difficulty in selecting beneficiaries.
  • Governmental officials at the local, regional, or state level (typically municipal government), Advantages include access to public community development funds, staff support, regulatory assistance, and a view f the entire housing non-profit local landscape to establish the appropriate niche for a CLT. Disadvantages include public distrust of government, political tainting, a top-down approach that may be perceived to be out of touch with community needs, and resistance to including community members in the CLT governance structure.
  • Other nonprofit organizations operating within the CLT’s service area (typically community development corporations, social service organizations or housing non-profits, which may convert, spin-off, adopt a CLT as a program, or establish an affiliate organization). Advantages can include foundational capacity form the existing nonprofit, increased productivity, credibility, compatibility within the nonprofit housing network, and diversification and renewal of an exsting nonprofit.. Disadvantages can include political baggage attributed to the parent non-profit, difficulty in adjusting leadership and board structure to accommodate the need for a CLT to be accountable to leaseholders and the community, divided loyalties and lingering control.
  • Local businesses and banks (typically businesses concerned about the ability of lower-income employees to secure affordable housing).

Advantages can include early capacity and sponsorship, provision of starter homes for working families, and leveraging of private dollars for public funds. Disadvantages can include control and power concentrated at the business, failure to embrace the CLT model where it contrasts with traditional business models, and a tendency to target higher on the income scale (towards working families and above the structurally unemployed).

3. Identify Beneficiaries

The CLT must decide early on who its target beneficiaries are, as this will determine the type and tenure of housing, the amount of subsidy the CLT will need to provide to make housing affordable to the targeted beneficiary, the types of funds the CLT can access, and design of the resale formula, marketing plan, selection criteria, and organizing strategy.

When determining beneficiaries, an assessment of community need revolves around three main decision points:

  • Where on the income scale to begin
  • Whether future sales should target lower on the income scale (increasing affordability) or at the same level (to maintain affordability)
  • Whether other factors beyond income (families, disability, age, geography of residence or work) be factored into a decision

Targeting higher incomes will mean challenges with nonprofit incorporation and securing means-tested public funding, greater resistance in lower-income neighborhoods, and less risk of default and maintenance issues resulting in lower administrative costs.

Maintaining affordability may mean a better equity share for sellers; expanding affordability may speed the rate at which a CLT can expand and meet its mission, as resources that would go into subsidy on subsequent rounds of sale can be used instead to acquire new properties.

Advantages of taking other factors beside income I to account can include neighborhood development objectives, broadening appeal, and tailoring developments to meet the unique needs of specific targeted groups. Risks include losing out on public funding targeted towards  low-income persons, running afoul of equal-protection housing laws, and perpetuating patterns of discrimination based on income an color

4. Delineate Service Area

CLT’s are place-based organizations and must define the geography within which they will operate and serve. A CLT can operate at the scale of a neighborhood, a city, and metropolitan area, or a state.

Advantages of operating over a large geography include mobility for low-income people, establishing a ”fair share” of affordable housing in the suburbs, securing lower-cost land for development outside of the urban core, a wider pool of applicants allowing increased selectivity, opportunity to build a broader constituency,  increased opportunities for collaboration and funding, and opportunity to participate in regional smart growth planning and development.

Disadvantages of going large include increased management costs, loss of accountability, perception as absentee landlord, competition from other organizations operating locally, NIMBY-ism, contributing to sprawl, and less community development and organizing.

5. Organize

Key constituencies of CLTs include grassroots community advocates, nonprofits, and government agencies, housing professionals, public officials, private lenders and donors.

The three key organizing principles for a CLT include:

  • Community organizing: campaigning at the grassroots level within a neighborhood. Advantages include early awareness and acceptance, recruitment, marketing, and fundraising, Disadvantages include time consumption, engendering high expectations in the community,  and opening up for criticism before the CLT is established.
  • Core group organizing: approaching influential institutions and individuals to engender support. Advantages can include faster support, faster development, credibility, borrowing capacity; disadvantages can include the burden of elitism, borrowed baggage, and increased market risk.
  • Resource organizing: a few advocates secure resources (funds and/or ands) from donors to seed the fund and staff the CLT, then staff commences community or core group organizing, Advantages can include acceptability, early staffing, and leveraging of resources. Disadvantages can include guilt by association with a donor who has earlier been perceived to have wronged or neglected a community, building projects before the organization has time to develop, too much money at once risking misuse of funds by forcing development into a single direction, possibly a bad one, quickly.

6. Develop or Improve Land

Some options for CLT land development include:

  • CLT-Initiated Projects: CLT acts as developer. Issues include role of the CLT, conflicts, capacity, and resources.
  • Buyer-Initiated Acquisition: CLT purchases land and building from the seller and executes a ground lease with the buyer. Issues include pre-qualification for homebuyers, source and amount of subsidies, neighborhood targeting, types of housing accepted, and inspection and maintenance.
  • Developer-Initiated Projects: Developer approaches CLT and assumes risk during construction. Issues include protections for CLT and evaluation of projects.
  • Stewardship Projects with Partners Doing all Development: CLT makes parcels available to developer partners, taking an active role in land assembly and stewardship but not developing. Issues include sources of funding for the CLT of developer fees are foregone, CLT’s role in ensuring quality development, and partnerships.
  • Municipality-Initiated Projects: Municipality conveys land to CLT for a specific purpose (typically for the CLT to develop affordable housing). Issues include cost of land, allocation of risks, and any reversion clauses.
  • Municipally mandated units (inclusionary zoning): CLT monitors and enforces inclusionary requirements on behalf of municipality. Issues include compensation for services to the municipality and responsibility for units not on CLT-land.
  • Public Housing Authority: Divested Property: Land is conveyed from the PHA to the CLT to ensure continued affordability. Issues include CLT’s role in managing existing tenants, price of land, and post-conveyance services to residents.

7. Secure Funding

CLT’s need funding to pay for a variety of functions related to land acquisition, construction, and subsidies. Sources of project funding include:

  • Federal Programs: CDBG and HOME Funds- may require special designation of CLT as a Community Housing Development Organization by Local Participating Jurisdiction. HUD Funds for organizational planning and development are also available.
  • Federal Tax Credits: Low Income Housing Tax Credits and Historic Preservation Tax Credits
  • Federal Home Loan Bank
  • Private Lending Institutions
  • State Housing Finance Agencies
  • Institute for Community Economics’ Revolving Loan Fund
  • Housing Trust Funds
  • Tax Increment Financing
  • Municipal Real Estate
  • Private Developer Exactions
  • Pension Funds
  • Private Foundations
  • Private Land Donations
  • Development Fees
  • Lease Fees
  • Add:  Opportunity Zones – Capital Gains Funding

Specially based tax Credits: New Market Tax Credits (NMTC) – Low Income Housing Tax Credits (LIHTC)

Sources of Operational Funding:

  • CDBG & HOME
  • Private Institutions
  • Private Donors
  • Grassroots Fundraising
  • Development Fees, Rental Income, & Lease Fees

Project funding issues include avoidance of subsidy erosion over time; a CLT seeks to retain the subsidy in the housing stock, acquiring grants to subsidize both land costs and building construction, and strong partnerships with local lending institutions. Issues in securing operational funding include competition with other nonprofits, surviving foundation fads, and staffing levels.

It takes about three years for a CLT to establish itself within a community. It’s may seem like a lot of work and time, but CLTs offer a lasting, systemic solution for affordable housing.

This how-to is based on the publication, Starting a Community Land Trust: Organizational and Operational Choices, by John Emmeus Davis. Highly recommended if you need more detail.

This is one way to use possible funding from Opportunity Zones to fund the Pilot Demonstration Project (PDP) so that the funding is used for community benefits rather than just providing  a way for the wealthy to become richer.  The forming of a Community Land Trust will help insure that this ideal will last a long period of time.  The governing structure established within the community itself can provide additional safeguards that this goal is possible.

The funding will have to come from people wanting this to be used in this manner as well as any people or organizations associated with its development.  The multi-use adaptability of the project will add to the project’s viable lifespan.  This is not found in other projects and it will take visionaries and innovators to make it happen.  The training aspect of the community will insure that this type of community can be formed and developed in other areas so that it is continually reinventing itself to meet changing social and environmental conditions.

Additional information about this process of development will be discussed in later blogs showing how the Pilot Demonstration Project (PDP) would be used in Opportunity Zones.  The climate map of the U.S. on page 8 shows what areas would have climate problems.

Rather than to continually adding information and ideas to the book, Toward Self-Sufficiency, I will use the website to show what alternatives and options could be available that would make the project better by fulfilling different needs.  This will include suggestions from the readers of the blogs.  This is important because other viewpoints are necessary, since they reflect opinions from people that are innovative and have lived in different situations which should be mentioned.  We not only need to know what conditions people are living in but what circumstances caused them to be where they are – both good and bad.

Investor Income from PDP Projects

The investors tie up a considerable amount of money in Opportunity Zone projects so they also have to generate money besides their capital gains tax credits.  Some options available if the PDP format is used could be as follows:

  1. Use the project as a non profit donation.  Under the Community Land Trust or a separate non profit community it could be a donation to a charity.
  2. A mortgage company owned by the investors could get a designated income under the rules of the Community Land Trust.
  3. Any investor could invest in any of the businesses that are operating in the community.  They would have the first opportunity to do so.
  4. There would be income generated from the training/education and research programs in the project.
  5. The data collection information could be sold for extra income worldwide.
  6. Companies could offer payments to the project for research on their products (roofing, paint, mechanical systems, etc) that are used.
  7. Companies could have some of their personnel trained by working in the project.
  8. Government agencies would pay the project to see if their programs could be improved.  This self contained community would make it easier to do this type of research.  It would be eligible for other government subsidy programs making development costs cheaper.
  9. In the case of a pandemic a self-sufficient community could be tested easier so they could socialize and work together faster.
  10. Combinations of any of the above. (See graphs below for needs – EIG)

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.