Investing In People Over Profits
How Lenders & Investors Can Do More Than Just Talk About Equity
By Rudy Espinoza
When Trump established the Opportunity Zone program as part of his 2017 Tax Cut, people across the political spectrum were both happy and sad. Some thought this was an important moment to galvanize the super wealthy to invest in low-income communities (only about 11% of Americans have to worry about getting taxed on capital gains, so they’re really the target participant). Opportunity Zones were providing another tool to invest in low-income communities. I imagine that the rich, and those advising them thought, “wow, we can not only make a big return, we can also get our tax liability deferred, AND we can say we’re doing something good?”
Those that were concerned saw Opportunity Zones as a major tax shelter rich, and with such little regulation on how investments into communities labeled “opportunity zones,” many feared that while using the banners of equity and revitalization, the rich and their advisors will simply accelerate the displacement of families that some Opportunity Zones are already facing. Opportunity Zones are a trojan horse for gentrification.
For me, learning about the mechanics of Opportunity Zones, and the Qualified Opportunity Fund that is created to manage the capital gains, catalyzed imaginative talks at work about what a truly mission-driven fund would look like. These talks often involve big “blue sky” ideas that resemble the talks you have with your friends when you daydream about winning the lottery (“I’d be the best rich guy ever!!!!” I’d do this and I’d do that...), and they have also involved researching the investment strategy, or prospectus, of communities who are seeking investments from Qualified Opportunity Funds, private equity funds, and other pots of money.” These prospectuses are used to help investors make a more informed investment decision.
In many of the prospectuses we’ve seen, even those that espouse “community revitalization” and other mission-oriented terms as a guiding light, they are devoid of any meaningful engagement mechanism to center a community’s needs in investment decisions. Instead, what you’ll find are prospectuses that outline a community’s demographic make-up, the “profit potential” of a community defined in traditional financial terms, and any other systems that protect an investor’s money. These prospectuses showcase what I believe is the bare minimum of data points that the typical investors are looking for and devoid of the elements that actually matter; the community’s residents themselves.
I think that the finance and investment industry should do better. If I were advising a mission-driven fund I would recommend that they add the following to their prospectus:
Establish a strong and clear vision for your community - Every investment strategy should have a clear vision for the community. If grounded in equity, this vision should be formed in partnership with community members. The vision is the “guidepost” for all investing. I’m confounded by how investors are so focused on making a deal, that there is no consideration on what the vision for the community or a city is. Without an overarching vision, the investments in a respective area are done without consideration of other public and private investments which results in a “patch work” of strategies that don’t advance a whole community first. We need investments to be assembled under a clear vision for a community that’s led by and monitored by the people that actually live there. Investors should seek to invest in an authentic planning process with community members or take the lead of existing community-driven planning processes like “El Plan del Pueblo” in Boyle Heights or the “People’s Plan” in South LA.
Create a community engagement strategy - The best prospectus will outline how community members are engaged throughout the investment process. Are community members helping to identify investment opportunities? Are community-based organizations involved in developing a “pipeline” of projects? Better yet, are they part of the management of those projects time? One of the exciting examples I’ve seen of this is in Birmingham, Alabama where they created a committee of 11 leaders to oversee investments in their neighborhoods. They also trained 500 people on how Opportunity Zones work. I’ve seen some investors lose patience with the idea of engaging community members, they may see it as an “extra step” - that is time consuming. But to me, an engaged community makes sense in more ways than one. Engaging the community meaningfully is a way to ensure that an investment is done wisely, and projects that enjoy widespread community support also reduce the risk of a project failing.
Identify community assets - Investors must recognize that every community has unique assets that should be preserved and uplifted. Many community members shudder when they hear investors say, “there was nothing here before we got here,” “we’re really interested in bringing ‘culture’ to this community,” “we ‘discovered’ this community that nobody knew existed.” If I were advising a mission-driven fund, I would say, “don’t be like these guys.” Instead, a community-oriented prospectus will include an analysis of the existing assets in a community that must be preserved and complemented with any new investment. These “assets” come in various forms: a long-standing church, a playground, a network of leaders who are self-organized, a mural that tells the story of the community, an employer who is dedicated to hiring locally, a pedestrian pathway that families use to go to school and work, etc. Supporting, not replacing, these assets is an important principal in mission-driven investing.
Diversifying the base of investors - Qualified Opportunity Funds and other private equity firms that are influencing development in cities are created by a mix of very wealthy individuals who expect a decent return from their investments. Rationally speaking, funds that only consist of these individuals focus on appealing to their interests and their definitions of what a financial return should look like. An alternative prospectus will not only outline existing investors but also intentional methods to diversify the investment pool to include community members, philanthropic partners and more. In some cases, there is no legal minimum of money required to invest in a fund, and mission-driven funds should encourage systems that allow community members to participate in an investment pool. And in addition to money, why can’t a fund recognize other forms of investment in a fund? Time? Labor? Knowledge?
Redefine return - The key audience for a prospectus is the investor. The whole document seeks to persuade investors to “pick them.” In this wooing process, most prospectuses layout the grand potential for return, and in some cases, they lay out specifically what amount of money an investor can make for selecting the respective project. A mission-driven prospectus should broaden the financial services industry definition of “return”. As a society, we have to expand our perspective on return and push back on the notion that the only indicator to a project’s success is how much money investors make. This only exacerbates income inequality and harmful development in communities. Instead of focusing on only financial returns, a mission-driven prospectus should lay out the other, non-monetary returns an investor will participate in: the creation of new jobs, the preservation of affordable housing, the increase in stability of long-time residents, and more. When an investor asks, “What’s my ROI (return on investment),” we should answer with a list of all the elements we value, not just money.
I don’t think these modest additions to a prospectus are radical, but I can imagine that they may make some partners uncomfortable. Some may choose to be iterative in nature, and look for small changes here and there, but I’d encourage all of us to consider the very systems that got us to the place where we are: where black and brown people have 1% of the net worth of their white counterparts, where financial institutions consistently discriminate against people of color, and where 60,000 people are living on the streets of Los Angeles. These issues didn’t happen overnight, and to combat them, everyone -even the wealthy - should be willing to contend with the undergirding of how our financial industry works and the impacts it has on our communities. Anything less is simply not authentic community investment.