Framework for Equitable Community Redevelopment
Bart Binning, Ed. D.
It is suggested that we are seeing a paradigm shift in the way redevelopment of properties in low income, high unemployment areas that need public financing. To accommodate these changes, we are proposing that re-development projects initially develop a micro-community prospectus that will act as a guide to consolidate investment capital to project(s) that meet the social equity concerns of the micro-community. The focus of the prospectus is to encourage investor and community confidence.
This paradigm shift is occurring, in part, because of the following challenges:
- Demographic changes – the Pew Research Center reports that the GenZ, Millennials, and GenX population cohorts have outvoted the Boomers and older for the first time during the past bi-elections in 2018[i]. The result of this demographic shift can be seen locally in a significantly younger Oklahoma City Council, with a corresponding shift in the council’s priorities towards more social equity concerns.
- The 2017 Tax Cut and Jobs Act created the Qualified Opportunity Fund (QOF), a type of corporation that can be used to provide tax breaks by deferring capital gains taxes on the sale of asset by investing those gains through a Qualified Opportunity Fund. The purpose of the QOF is to provide incentives to create jobs and economic activity in previously designated opportunity zone census tracks.[ii] The QOF can be used to consolidate public and private financing to rehabilitate micro-communities.
- Requirements for a QOF are fluid and are expected to be modified, at least, on an annual basis by the issuance of IRS rules (second round issued April 17, 2019[iii] ) and at least bi-annual tweaking of the federal statute. Current regulations require tangible property used in a trade or business of the QOF if the property to be purchased after Dec. 31, 2017. If the qualified business is operational by the end of 2019, tax deductions are available if the property is held for 10 years, until 2029. Projects placed in service in 2030 need to be held for 9 years, etc. For this reason, time is of the essence when determining financial viability of Opportunity Zone Projects. As a creature of politics, there is no guarantee that the requirements for a QOF one year, will be the same as the next year’s.
- At this time, there is significantly more money chasing a very few QOF projects. Because federal requirements for QOF projects change annually, there is a time-is-of-the-essence need to fast-track QOF projects through city planning processes. Once fast-track procedures are developed for QOF projects, there will be demand for these procedures to be available for all developments.
As a result, it is suggested that tools used to evaluate QOF projects will also be used to evaluate non-QOF projects that require public funds. It is expected that public governing bodies will be taking an increasingly proactive role in assuring that redevelopments, which require partial public funding, also have a micro-community focus (not a project focus) and address the social equity and other needs of these micro-communities to develop a place where people want to live, work, and play.
It is suggested that a micro-community prospectus be used as a tool for consolidating the funding sources as well as the social equity needs of the redevelopment project(s). In effect, this prospectus would be a planning document that would provide a tool for a Framework for Equitable Community Redevelopment, identifying community needs as well as a prospectus for attracting redevelopment capital. The City of Oklahoma City has developed an Investment Prospectus that describes economic benefits and incentives for Opportunity Zones.[iv]
How to develop a Prospectus of redevelopment needs for a micro-community will impact the development community in Oklahoma will be a topic of discussion during the Commercial Real Estate Summit to be held September 25, 2019. What follows are resources that might aid in developing this prospectus.
Redevelopment is most profitable when focusing on the lowest-income communities that are in need of equitable investments. There are at least two problems with this type of focus on redevelopment:
- Many of these low-income communities lack physical and social infrastructure that is needed for a thriving micro-community.
- There is often a gentrification or displacement of existing elderly, disabled, and other low-income residents as the development becomes more attractive, commanding higher rents.
The goal of Equitable Community Redevelopment is to provide a mechanism for a coordinated effort at determining a micro-community’s needs, identifying specific projects to meet those community needs, and consolidating public and private financing mechanisms to help promulgate these developments.
This paper describes several resources that may be useful when redeveloping properties using tax incentives and public/private funds as they apply to projects in Oklahoma City.
(Re)Building Downtown: A Guidebook for Revitalization provides guidance for communities initiate a process of developing a micro-community prospectus through public engagement, strategic planning,
public commitment, and ongoing support, to re-invigorate and strengthen neighborhood centers of economy, culture, and history through a smart growth approach to development.[v]
The items in this document are source materials for a community charrette that will be offered in conjunction with the Commercial Real Estate Summit the afternoon of September 25, 2019.[vi] The purpose of the Charrette is to create a community development prospectus for Community Hubs for the Oklahoma City Bus Rapid Transit System that will run along Classen Blvd to the NW Highway, terminating at Lake Hefner (NW Highway and Meridian).
Since the turn of the 21st century, the growth of the knowledge-based economy has seen a change in development demand out of suburban office parks and walkable, mixed-use micro-communities that support creative collaboration and will attract highly educated workers. The Catalytic Development framework is a model of redevelopment and investment that has been used for about 10 years to successfully develop walkable community that meet the needs of this new economy. Catalytic Development has three defining features:[vii]
- Employment First – Substantial employment growth early in the redevelopment process, or an existing employment base with significant entry level opportunities.
- Integrated Development – Assembling land parcels that together reshape the area and help spur additional growth, as well as combining traditionally separate real estate real estate roles (financing, land consolidation, development of projects to satisfy community needs, etc.) into a single organizational structure
- “Patient Equity” the expectation of lower returns on investment unless supplemented by supplemental public funding sources and tax incentives. Opportunity Zones are a tool that can be used to assist in consolidating public/private financing at sufficient rates of return to promulgate development
It is generally accepted among many urban planners that Walkable Urban Places (WalkUPs) are a goal of urban planning and redevelopment. In a study of Dallas/Ft Worth WalkUp areas, it was found that:[viii]
- Average rents (office, retail, and multi-family) were 37% higher on a vacancy adjusted rent per square-foot basis that the regional average
- Net absorption (2010-2017) was 2.36 times the 2010 base market
- WalkUP adjacent for-sale housing (1/2 mile surrounding) has a 71% price per square foot premium
- A conscious strategy for each WalkUP community is required to create and maintain social equity, including the provision of affordable and workforce housing and increased transit accessibility
- Of the eight type of WalkUP communities identified, several could be used as models along the Express Bus route:
- Downtown-Adjacent (near the Plaza District)
- Urban-Commercial (Penn Square / 50 Penn Place)
- Urban University (Medical Center) and Potential for Innovation Districts (near OCU & Asian District, as well as Integris/Baptist Medical Center)
- Redeveloped Drivable Sub-Urban (around Classen and NW 36, as well as the terminus at
- Meridian / NW Highway / Lake Hefner
It is likely that the processes of community redevelopment will be changed as a result of new tools and incentives that are being promoted by the federal government. Foremost among the new tools are Opportunity Zones.
The newly created Opportunity Zones program will likely go down as the largest and most significant federal community development initiative in U.S. history, with trillions of dollars in new private investment about to start flowing into pre-designated low-income communities around the country.
The biggest question today is this: will these investments benefit the people living in these communities now, or will they be displaced as new interest and development brings increased property values and rents? And what kind of development will this incentive bring? Unsustainable, car-dependent sprawl (the dominant growth paradigm in the United States today) or walkable, mixed-use communities with a variety of housing options for everyone?[ix]
Fundamentally, Opportunity Zones are designed to provide work incentives for underdeveloped areas. The effect of the opportunity zone structure is to allow for a platform for everyone to participate in economic development; a zone will allow for capital aggregation to redevelop specific areas of need and meet specific community goals. While opportunity zones provide a framework for investor ready and development ready projects, the framework may also be used in redevelopments without opportunity zone benefits.
One of the issues promulgated by the Tax Cuts and Jobs Act of 2017 that created the Opportunity Zone tax cuts is that there is now too many opportunity zones that are not ready for investment, and too much money in funds wanting to invest in opportunity Zones. Smart Growth America sponsors Locus Leadership Summits that provide a forum discussion of progressive redevelopment ideas. Suggestions for speeding up the development side include:[x]
- State and Local Government can Inspire Investor and Community Confidence
- Designate staff to serve as one-stop-coordinating office and point of contact for interested investors and business
- Establish a city/state based development fund by pooling existing community development dollars to attract diverse equity partners (ex. local pension funds and crowdsourced funders.)
- Institute “do no harm” policies that protect vulnerable populations and existing businesses measured by performance-based metrics, such as equitable development scores
- Institute community engagement process for determining projects and initiatives needed by the micro-community
- Update zoning codes to facilitate a mix of uses (live, work, and play in the same general micro-community)
- Transit Oriented Development – “a mixture of housing, office, retail, and/or other commercial development and amenities integrated into a walkable neighborhood and located within a ½ mile of quality public transportation”[xi]
- Tax Assisted Districts
- Other items for consideration:
- Housing – Supports developments that encourage affordable housing, can both renters and homeowners live in the micro-community
- Economic Opportunity – encourage and employment program so the development results in increased employment levels for existing residents
- Social Cohesion – supports developments that seek to enhance the social impact of public spaces through social/cultural events and activities and address specific needs of vulnerable populations
- Promotion of physical activity – In addition to walkability, promote exercise spaces, playgrounds, open access to green spaces, potable water access stations, etc.
- Social Equity – Residents in areas of redevelopment are particularly vulnerable to displacement by higher-income households, through a process often called unmanaged gentrification. As a way to manage this process, developments should be cognizant of:
- Walkability – Companies who chose to relocate tend to select neighborhoods that are significantly more walkable than their previous locations[xiv]
- Transit Accessibility – how easy is it for residents of the micro-community to
- access inexpensive mass transit; he car economy is often a barrier for low income, people with disabilities, and elderly populations;
- can a resident of the Micro-community, live, work, and play without the need for an automobile?
- How easy is it for people living outside the Micro-Community to access Transit – is free parking available?
- Micro-Community development should address items Social Vulnerability Index (a metric produced by the Centers for Disease Control measuring social vulnerability by fifteen components such as unemployment, education level, age cohorts, single-parent household, disability, multi-cultural status, access to health care and food)
- Oklahoma Redevelopment Corporation – Opportunity Zone Redevelopments require a separate corporation to coordinate tax advantages. One option for corporate structure provided by Oklahoma Statute is the Redevelopment Corporation (§11-38-110)[xv] While the Redevelopment Corporation is designed to work with Urban Renewal Authorities in redevelopment of blighted properties, (it contains provisions that limit the ability for private individuals to make excessive profits from the redevelopment) the Redevelopment Corporation may be a quasi-public/private corporation. The Redevelopment Corporation could also obtain a not -for-profit, tax exempt status from the Federal Government.
[i] Anthony Cilluffo and Richard Fry. “Gen Z, Millennials and Gen X outvoted older generations in 2018 Midterms. FactTank News in the Numbers, Pew Research Center. May 29, 2019. HTTPS://pewrsr.ch/2HMKjJz
[ii] “Qualified Opportunity Zones” National Association of REALTORS: Real Estate Topics. https://www.nar.realtor/qualified-opportunity-zones
[iii] “IRS issues guidance relating to deferral of gains for investment in a qualified opportunity zone.” IR-2019-75. IRS. https://www.irs.gov/newsroom/irs-issues-guidance-relating-to-deferral-of-gains-for-investments-in-a-qualified-opportunity-fund
[iv] New Localism Advisors, in collaboration with the City of Oklahoma City. “OKLAHOMA CITY INVESTMENT PROSPECTUS: A Platform For Action.” Funded by ACCELERATOR FOR AMERICA. June 23, 2018. http://www.acceleratorforamerica.com/sites/default/files/inline-files/NewLocalism_InvestmentProspectus_OklahomaCity_2018-06-23_PRINT.compressed_0.pdf
[v] Smart Growth America. (Re)Building Downtown: A Guidebook for Revitalization. December 2015. https://smartgrowthamerica.org/app/uploads/2016/08/rebuilding-downtown-1.pdf
[vi] Commercial Real Estate Summit, September 25, 2019 at the Health Science Center Embassy Suite Hotel/Conference Center.
[vii] Leinberger, Christopher B., Tracy Hadden Loh. “Catalytic Development: (Re)creating walkable urban places” The Metropolitian Policy Program at Brookings. May 2018. https://www.brookings.edu/research/catalytic-development-recreating-walkable-urban-places/
[viii] Loh, Tracy Hadden and Christopher B. Leinberger. “The WalkUp Wake-up Call: Dallas-Fort Worth” Center for Real Estate and Urban Analysis at George Washington University. January 2019. https://cpb-us-e1.wpmucdn.com/blogs.gwu.edu/dist/a/326/files/2019/01/DFW-WalkUP-Wake-Up-Call-2019-yjel01.pdf
[ix]Coes, Christopher. “Sprawl or smart growth: the future of Opportunity Zones” Smart Growth America. December 13, 2018. https://smartgrowthamerica.org/sprawl-or-smart-growth-the-future-of-opportunity-zones/
[x] Coes, Christopher A. and Tracy Hadden Loh. “Locus: Nation Opportunity Zones Ranking Report” Locus|Smart Growth America and Center for Real Estate and Urban Analysis at George Washington University. December 2018. https://smartgrowthamerica.org/program/locus/
[xi] Jana Lynott, Mariia Zimmerman, and Patricia Happ. “Communities are Embracing Development near Transit: A Snapshot of Transit-Oriented Development Support Across the United States.” AARP Public Policy Institute. September, 2017. https://www.aarp.org/content/dam/aarp/ppi/2017/08/communities-are-embracing-development-near-transit.pdf
[xii] Tax Incremental Financing District, City of Oklahoma City https://www.okc.gov/departments/economic-development/tax-increment-finance-tif
[xiii] Business Improvement District. City of Oklahoma City https://www.okc.gov/departments/planning/programs/commercial-districts/how-to-get-started
[xiv] Smart Growth America. “Core Values: Why American Companies are Moving Downtown” In partnership with Cushman & Wakefield and Center for Real Estate Analysis at The George Washington University. June 18, 2015. https://smartgrowthamerica.org/resources/core-values-why-american-companies-are-moving-downtown/
[xv] The Oklahoma Redevelopment Corporation is described in Oklahoma Statutes at §11-38-110, which is part of the Oklahoma Urban Renewal Act, Title 11, Sections 38-101 through 38-123. Title 11 covers Cities and Towns.