By the time the authors of the Opportunity Zone legislation introduced their proposed reporting requirements in April 2019, The Kresge Foundation had not only spotted potential weaknesses in the law, but its leadership had also devised, funded and implemented a responsible investment strategy, complete with long-term impact measures, to help ensure low-income neighborhoods experience the economic revitalization that the OZ federal tax incentive program was intended to spur.
Driven by its mission to build and strengthen pathways to opportunities for people with low-incomes across America, Kresge in March announced that it has committed to providing $22 million in investments to two goal-aligned investment managers, with an eye toward developing affordable housing and creating living wage jobs.
Arctaris Impact of Boston and Community Capital Management (CCM) of Fort Lauderdale, chosen from over 100 applicants, were both selected to partner with Kresge after a thorough vetting process and their agreement to abide by Kresge Foundation’s comprehensive list of covenants.
These covenants were written well before the authors of Opportunity Zones introduced legislation on reporting requirements this April, and, according to Kresge’s press release of March 18, 2019, “go beyond what’s required in the Opportunity Zone legislation, including measures that: prioritize the development of affordable housing units and prevent displacement; invest in the creation of living wage jobs; and prohibit non-productive investments. Managers will also form community advisory boards.”
Kimberlee Cornett, Managing Director of the Kresge Foundation’s Social Investment Practice, spoke with us recently to discuss the risk the foundation took in devising such a plan, the partnership selection process, what success of the OZ program could look like, and what she believes philanthropy’s role in economic revitalization ought to be.
Kimberlee Cornett, Managing Director, Kresge Foundation Social Investment Practice
Joshua Pollard: Can you talk about why you chose the two organizations that you did, and can you remind us how many applications you received?
Kimberlee Cornett: We heard from about 140 applicants last summer, and we broke the applicants into three groups: OZ-experienced funds, CDFIs and community-based funds.
OZ-experienced funds were fund managers that had experience raising capital from what we thought were the likely OZ investors: institutions and families with significant capital gains. There were six applicants that fit this profile.
There was a group of CDFIs. With the CDFI group, it’s quite possible we might partner with one or more of them in the future, but in broad strokes that group ultimately took a wait-and-see approach to see how the Opportunity Zone marketplace evolves.
And, last, there was a group of community-based funds that do great work, and were trying to do something very important in their community using Opportunity Zone capital, but had less experience with likely OZ investors. With that final group of community-based funds, we have attempted to incubate a few of them so that in the future they can have a successful OZ offering.
Of the six funds that had the most germane experience with OZ investors, we have made two guarantee agreements. We may make a third agreement. Two other OZ-experienced funds appreciated the opportunity to be considered but really were not interested in signing onto legal reporting requirements which might otherwise limit their investing style. The size of the final OZ-experienced fund grew so much that the guarantee we could provide was insignificant.
Pollard: I’m surprised only six of the 140 applicants fell into that qualifying bucket. It seems that number would’ve been higher.
Cornett: Well, we knew from the beginning that we were working with a small pool of guarantee capacity relative to the size of the OZ market. We were also looking for managers that spoke genuinely and meaningfully to social impact in their applications.
So, the six that we selected, we felt, 1) had the experience, 2) spoke to us in terms of social impact, and 3) had a fund size where we thought our guarantee would be meaningful, and that’s how we arrived at that number.
Pollard: How much of a guarantee are you providing?
Cornett: We have $22 million committed now and have the authority for $25 million.
Pollard: What would have to happen from a success standpoint for Kresge to increase its level of guarantee?
Cornett: We have authorized up to $25 million of our total $150 million in guarantee capacity to this single program. We don’t have any plans to increase past $25 million any time soon.
Pollard: What does success in Opportunity Zones look like, from your guarantee perspective? What does success look like for Opportunity Zones, overall?
Cornett: From our guarantee perspective, this may be one investment where we actually know if we made the right decision or not in the relatively near future, which often we don’t have the luxury of seeing.
I know this is an audacious goal, but if our efforts, combined with the efforts of others, are able to elevate the importance of social impact, we will have felt we made a contribution and that it was worth the commitment of resources.
We are encouraged that two banks have reached out and are performing diligence on the funds we have provided guarantees to because of the binding covenants that are attached. We’ve also had steady outreach from the public sector, especially from states, trying to understand how they can implement standards of practice for managers. If we’re able, in a small way, to influence the actions others take to increase social impact, that is success for us.
“If our efforts are able to elevate the importance of social impact, we will have felt we made a contribution and that it was worth the commitment of resources.”
--Kimberlee R. Cornett, Managing Director, Kresge Foundation, Social Investment Practice
I think, in the long term, success for Opportunity Zones is the addition of meaningful reporting standards that lead to equitable dispersion of OZ capital. There are more than 8,000 Opportunity Zones. I think broad distribution of the tax incentive that has been provided to Opportunity Zone investors would be a success. I think elected officials and the communities they represent are going to want to see a pretty wide spread of the capital, and right now I’m not sure that’s going to naturally occur.
Pollard: What, if any, notable ideas came out of the applications that you received but didn’t select?
Cornett: I think one of the really positive things that‘s come from the OZ program already is that it clearly catalyzed a conversation, organization and activity in communities that, but for this program, I’m not sure would’ve happened as fast.
For instance, Kresge received responses to our summer 2018 request for letters of intent from almost every nook and cranny of the US. I think that’s really a positive.
Opportunity Zones are an important addition to the community development toolkit. They’re not the toolkit. Opportunity Zones are not a replacement or substitution for any other program, federally or at the state level. We must figure out how to make it work as effectively as we can while maintaining the other programs.
What concerns me is that, absent robust data in the public domain, that it is an offset of the public responsibility on the market, and that’s not going to bode well for really distressed communities.
Pollard: What can you recommend to others who are wondering what philanthropy’s role should be in community revitalization, specifically within Opportunity Zones?
I think, too often, philanthropy is there to evaluate something at the end and is reluctant to take the risk of—monetarily and reputationally—trying to positively impact the trajectory. Some people have said, point blank to us, “This is too big of a market, there’s no way to implement this.”
So, particularly when public policy has a gap, I think there’s a moment for philanthropy to really do its job. That’s what we have tried to do with Opportunity Zones, and we hope others in the philanthropic community will find unique ways to do the same in Opportunity Zones and in other places.
The conversation has been edited and condensed for clarity.
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