Paul L. Caron

Friday, August 13, 2021

Weekly SSRN Tax Article Review And Roundup: Layser Reviews Kaye's The Low-Income Housing Tax Credit And Opportunity Zones

This week, Michelle Layser (Illinois; Google Scholar) reviews Tracy Kaye (Seton Hall), Ogden Commons Case Study: A Comparative Look at the Low-Income Housing Tax Credit and Opportunity Zone Tax Incentive Programs, 48 Ford. Urb. L.J. __ (forthcoming 2021).

Layser (2018)

Many tax experts, policy watchdogs, and anti-poverty advocates doubt the Opportunity Zones tax incentive will benefit low-income communities (see here, here, and here for just a few examples). Nevertheless, proponents of the incentive love to highlight success stories, in which the tax preference has been used to subsidize pro-social investment in distressed communities. Stories like Ogden Commons, a mixed-use affordable housing development in the North Lawndale neighborhood of Chicago, which is being funded, in part, using Opportunity Zone capital. Even the law’s harshest critics are forced to acknowledge that such examples exist. But are they evidence that the Opportunity Zones law will have a positive impact on low-income communities, after all?

In a new essay, Professor Tracy Kaye answers this question in the negative. Kaye took a deep dive behind the scenes of Ogden Commons, reviewing the details of that project and conducting in-depth interviews with “developers, project sponsors, lawyers, investors, nonprofit agencies, community development institutions, city and sate level officials’ staff, and employees of the community’s anchor institutions.” Based on what she learned, Kaye argues that even this best-case example reflects the reality that “community engagement and community benefit only arise when [an Opportunity Zone] project’s other funding sources require it or when anchor institutions, particularly nonprofit organizations, are involved in the project.”

Kaye begins her analysis by describing the neighborhood where the Ogden Commons project is located. After all, the Opportunity Zones law is a place-based tax incentive that was intended to drive investment to distressed areas. Many critics have focused on the locations of Opportunity Zones, some of which are in gentrifying areas, college campuses, and even relatively high-income areas. But the Ogden Commons project is in “exactly the type of community that Opportunity Zone investment is supposed to target.” The neighborhood is distressed by traditional economic markers, with high rates of poverty, unemployment, and cost burdened renters, and it has a long history of disinvestment.

The Ogden Commons project has the potential to improve this distressed neighborhood in several ways. Ninety percent of the project’s residential units will be rent-restricted and affordable for low-income tenants. In addition, the new commercial tenants will create “an estimated 150 jobs.” A new medical facility will increase medical access to the community and help “remedy some of the health disparities that have been highlighted by the COVID-19 pandemic.” Meanwhile, the developer has already “exceeded Chicago’s minimums on local hiring preferences” by employing minority and women owned enterprises.

In my own writing, I have argued that place-based tax incentives are most effective when they target places experiencing geographic inequality and promote investment that matches the specific deficits of the targeted communities. In this case, Kaye describes a targeted community suffering from disinvestment, and a project to improve the built environment while providing for new affordable housing, creating jobs through minority-owned enterprises, and addressing community health needs. Sounds good to me. So, what’s the problem?

The problem, Kaye explains, is that the benefits of Ogden Commons are hardly attributable to the Opportunity Zones law itself. Rather, many of the benefits Kaye describes flow from the developer’s participation in the Low-Income Housing Tax Credit (LIHTC) program (the source of funding for the residential component of the project) and compliance with development agreements made with the Chicago Housing Authority (CHA). As Kaye explains, these other laws and agreements require developers to benefit low-income communities in ways that the Opportunity Zones law does not. Based on Kaye’s observation, one might wonder how often Opportunity Zones developers might be subject to additional compliance obligations as a result of incorporating LIHTC financing in their capital stack. My own work-in-progress on this point suggests that the answer is “not often,” as several legal and practical barriers make OZ-LIHTC twinning challenging.

Kaye further argues that the Ogden Commons success story reflects a relatively uncommon mix of project sponsors and investors. The project was sponsored by The Habitat Company (a for-profit developer that once served as a court-ordered receiver for the CHA for 23 years to ensure compliance with the Gautreaux order), and two nonprofit organizations: Mount Sinai Hospital and Cinespace Film Production Studios. But nonprofits like these are not likely to be the norm in Opportunity Zone deals, as several barriers exist to their participation.

In this case, the Opportunity Zone investor, PNC Bank, was comfortable making a mission-driven investment consistent with the goals of the nonprofit sponsors. This was because the bank was motivated by regulatory requirements under the Community Reinvestment Act. Unfortunately, banks like PNC are also unlikely to be major participants in the Opportunity Zones program because most do not have significant capital gains to invest in Opportunity Funds. Meanwhile, other types of Opportunity Zone investors may be reluctant to invest in mission-driven projects, which often generate far less profit than for-profit alternatives.

Kaye’s essay is notable in that it provides a rich and textured account of the Opportunity Zones law at its best—a part of the story that is touted by proponents but rarely highlighted by critics. While it is tempting to look away from these rare success stories and evaluate the program based on more common examples, Kaye’s work demonstrates the value of looking closer at these cases. Ogden Commons is a cool project that will (hopefully) benefit North Lawndale. It is also a unicorn. After looking closely at all the legal and practical elements that made that deal work, it’s easy to see why Kaye concludes that “under no circumstances should this tax incentive be continued without serious reforms.”

I recommend this essay to any tax or urban law scholar interested in place-based policy, geographic inequality, development tax incentives, or tax and inequality.

Here’s the rest of this week’s roundup:

Michelle Layser, Scholarship, Tax, Tax Scholarship, Weekly SSRN Roundup | Permalink