The Opportunity Zone (OZ) program, a community development program created out of the Tax Cuts and Jobs Act of 2017, presents the largest potential capital equity infusion into tribal nations in the history of the United States. With an estimated $6 trillion of unrealized capital gains in the U.S. stock market, the legislation could transform development in these designated areas. Consider that almost 8,700 census tracts have been approved as designated Opportunity Zones, more than 300 of which are in Indian Country, according to the Native American Finance Officers Association (NAFOA).
The OZ program presents tribal nations with the opportunity to attract investors who may have never otherwise considered projects within those spaces. It could also encourage financial institutions that have solely worked on debt financings to also consider equity investments in Indian Country. While there are some concerns about the negative aspects of unchecked development, I believe that with smart planning and strategic thinking, the opportunities this program presents for tribal communities far outweigh the risks.
To take full advantage of the legislation, tribal nations need to develop strategic project plans that range in scale from large master-planned concepts down to neighborhood-level community investments. As part of that strategic effort, tribal nations will need to combine three actions to optimize potential OZ deal offerings that will attract investors:
- Identify specific investment strategies related to the targeted projects.
- Commit to completing predevelopment activities that either support targeted projects, such as infrastructure improvements, and/or build capacity to complete transactions, such as technical assistance and training.
- Clearly outline incentives that can be provided in exchange for tribal deal requirements. The financial calculus that makes a project “fundable” will usually require some incentive in addition to the OZ benefit.
The OZ legislation allows for investments of any size – from $5,000 to $50 million or more. Given the current bias towards real estate investments, it is easy to understand why tribal nations may have overlooked community-scale investments. But there are some key advantages to promoting investments at this scale. Firstly, community-scale investments do not require professional or accredited investors and therefore encourage broader participation. Secondly, this scale of investment can have a more immediate and direct impact on the economic growth and social equity of a neighborhood.
Although the OZ program encourages investments across a variety of asset classes, including housing, commercial, retail, agricultural, industrial, infrastructure and operating companies, I outline below four ways in which tribal nations can take full advantage of OZ opportunities.
1. Infrastructure and Clean Energy
For many OZ investors, infrastructure serves as both an investment that can generate a compelling return in and of itself, as well as a predevelopment activity that facilitates follow-on investments that leverage the infrastructure. The double benefit of infrastructure extends to both investors and to the tribal community.
Investors can leverage Opportunity Zones to invest in infrastructure with associated revenue sources (such as fees, tolls or public leases) to generate a return on the project while the project itself will often serve as a predevelopment activity that reduces the risk to investors with follow-on investments that benefit from said infrastructure. For example, many tribal communities are already leveraging clean energy projects – both solar and wind farms – to entice manufacturers and food processors to co-locate facilities near these sites. Indian Country is well-positioned to replicate some of these models and to take advantage of the double benefit of OZ infrastructure investments.
2. Agricultural Projects
More than 40% of all designated OZ census tracts in the U.S., and the majority of Indian Country tracts, are located in what is characterized as a rural market. There are several OZ strategies that can leverage underperforming farm or ranchland. These include using portions of unproductive ranch and farmland for clean energy development that can be leveraged to recruit manufacturers or food processors.
Farm and ranchland can also utilize the OZ legislation’s operating investment capacity to help transition modern farms to certified organic farming for increased profitability. Also, some tribal nations may choose to use OZ investment capital to develop vertical farming in controlled climate spaces. Vertical farming in rural markets not only helps to address farming income diversity needs but can also help reduce food desert-related issues. One of the ironies of our current economy and farming ecosystem is that food deserts exist in the middle of rural farmland due to the prevalence of single-crop farming.
3. Placed-Based Investments
Retail leakage is a serious issue in many tribal nations. The advent of big box retailers has helped to drive small mom-and pop-retailers that traditionally served these local communities out of business, thereby forcing residents to travel outside of their communities for many consumer purchases. The result has been more than simply the lost retailers: It has also meant lost jobs and decimated main streets and town centers.
However, Opportunity Zones are a way that tribal nations can turn back the tide and foster targeted population density through placed-based investment strategies. These strategies could help create the density for redeveloped main streets and town centers. Three such strategies for Indian Country include:
- Mixed-use residential and retail
- Mixed-use medical districts that combine residential and medical care facilities
- Entertainment and tourism districts with lodging, restaurants and retail
4. Operating Investments
Many tribal nations have made it a practice to own 100% of the equity in their community assets. This has resulted in a predisposition toward debt vehicles for investments from nontribal sources. While the OZ legislation requires that investments must be equity-oriented, that doesn’t mean that tribal nations must relinquish control of assets funded with OZ capital. Some convertible preferred structures as well as structured buyouts and long-term leases can be used to attract nontribal capital while maintaining tribal control.
With that said, encouraging operating investments may be one of the more important strategies to attract OZ capital in Indian Country. There is a series of possible operating investments to pursue that could both encourage new venture businesses as well as provide expansion capital for existing businesses. Many operating investments will also include real estate components that will provide investors the best of both worlds – the stability of real estate assets with the unlimited upside of the operating investment.
A robust strategy to attract operating investments can provide a boost to local entrepreneurship and job creation. The most successful strategies will contemplate an exit strategy at the outset to ensure there is a balance between encouraging nontribal capital investment while maintaining tribal ownership.
The ecosystem of both capital and support services is rapidly developing around the OZ investment environment. Many specialized funds are in development to serve as equity sponsors of targeted transaction types and industry segments. Tribal nations have an unparalleled opportunity to attract new capital to Indian Country by recasting and rebranding economic development opportunities to the private capital around the country.