March 29, 2019

Approaches for Bringing Opportunity Zones and CDFIs Together

Dennis Fletcher in D.C.

Opportunity Zones and Community Development Financial Institutions (CDFIs) ought to be a great fit: both are designed to bring investment into low- and moderate-income communities that for too long have had inadequate access to financial resources.  

Yet CDFIs have struggled to find ways to use the Opportunity Zones tax incentive to benefit communities, which is due to the nature of the law. The central challenge is that Qualified Opportunity Zone Fund investments must be equity instruments, while CDFIs tend to operate more on the lending side. 

Now, however, a timely new report from the University of New Hampshire’s Center for Impact Finance offers a blueprint for how CDFIs can bring their expertise and tools into the Opportunity Zones space to foster equitable and inclusive growth. 

The report focuses on both the financial and non-financial value that CDFIs have to offer. For example, some of the non-financial value that CDFIs can provide includes: 

  • Knowledge of the communities and key relationships – as the authors state, “CDFIs hold a really valuable commodity: information.” This can be leveraged in various ways.
  • Origination of suitable transactions – given their established knowledge of communities, including the needs and investment opportunities, as well as their experience in structuring deals.
  • Facilitation of transactions – playing a mediating role between community needs and investor plans.
  • Due diligence and project monitoring – a role that CDFIs are well suited to play, and which many investors in a private development deal would be happy to outsource. 

As for financial roles CDFIs may play, the authors identify the following as some of the ways in which CDFIs are well positioned to participate in the raising and deploying of capital:

  • Providing below market rate Senior Debt – at or below prevailing market rates, and potentially more patient or flexible.
  • Providing Subordinated Debt – either concessionary or non-concessionary.
  • “Twinning” of tax credit equity investments – helping facilitate the layering of incentives that could be achieved using tax credit programs, such as New Markets Tax Credits.
  • Tapping into Federal Credit Agenda Programs – leveraging programs at HUD, the SBA and the USDA around residential, community facility, infrastructure and small business.
  • Offering innovative equity instruments – different kinds of Preferred stock or Preferred interest to tailor the cost of equity affordably to the cash flows of the asset.

This report is a major contribution to the field, and our industry owes its thanks to the authors as well as the report’s supporters through the Accelerating Impact Investing Initiative (Ai3), including the Ford Foundation, the Omidyar Network and Surdna Foundation. 

It is now up to us, as CDFIs and mission-aligned partners, to convert the ideas held within this report into action. In so doing, we can help realize the original intent of the Opportunity Zones legislation: to responsibly direct significant capital into communities that have been financially marginalized for too long.

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