Seven Hamilton County census tracts have been selected to participate in an evolving and little understood economic development program, which was quietly tucked into last year's federal tax bill and designed to spur investment in "distressed communities."
Urban experts like Bruce Katz, a Brookings Institute scholar who visited Chattanooga earlier this year and advised local leaders to pay attention to the new tax incentive, argue that the Opportunity Zone tool — which allow investors to avoid capitol gains taxes if they invest their capitol gains in a designated zone — is different from past federal economic development initiatives.
It is more market-driven, Katz said. It can be used for residential, commercial and businesses, and there is no cap to the amount of qualified investment in Opportunity Zones as long as the regulations, which are still being written, are followed.
"It is conceivable that this small tax incentive may catalyze large amounts of capital for a broad range of investments in communities left behind," Katz wrote in an article published on his book's website in March.
Other experts, however, fear Opportunity Zones will only heat up markets and raise real estate prices. Right now, the tool is being applied without measurable objectives and no reporting is required to show the effects of the incentive.
"Sadly, these policies almost inevitably result in tax giveaways for investment that would have occurred anyway, as we're beginning to see with Opportunity Zones," Timothy Weaver, professor of Urban Policy and Politics at the University at Albany, State University of New York, wrote in an article for CityLab.com. "Under such circumstances, displacement from gentrification is the likely result."
Thirty-three low-income census tracts in the county and 743 statewide qualified as Opportunity Zones, according to the parameters laid out in the Tax Cuts and Job Act. The state could pick up to 25 percent of the tracts, or 176 total.
At the beginning of March, Hamilton County Mayor Jim Coppinger submitted a prioritized list of 17 census tracts to Gov. Bill Haslam, who asked all county mayors in February to submit Opportunity Zone recommendations by March 23. The deadline was later extended to April 20.
Coppinger ranked the recommendations with the help of Ken Hays, head of The Enterprise Center — a city-backed organization focused on establishing Chattanooga as a hub of innovation — and input from the city of Chattanooga, the city of East Ridge, the Chattanooga Area Chamber of Commerce and the Southeast Tennessee Development District. His recommended areas were "poised for new or continued growth within the next two years, with existing infrastructure and developable sites, with planned projects and initiatives (and) with access to other development incentives," according to the application Coppinger sent to the state.
His top seven recommendations, which were all in or near downtown, were accepted by the state and designated as Opportunity Zones mid-May.
Chattanooga's Innovation District was a top priority, according to the application. Census tract 124, which includes the central business district as well as the Edney Innovation Center where The Enterprise Center is housed, was given the top ranking. Census tract 31, which includes the parts of the University of Tennessee at Chattanooga near M.L. King Boulevard, was ranked second, and census tract 4, which includes Erlanger hospital and the Lincoln Park neighborhood, was ranked third.
"Within the Edney and in nearby buildings, there are a variety of work spaces designed for workers and companies in the new knowledge economy, and their growing occupancy rates represent a thriving startup community that continues to grow," the application stated. "The Innovation District and the adjacent riverfront and Southside areas have experienced some of the most rapid growth in Hamilton County in the last ten years. The UTC Campus connects to the Innovation District and there are more plans for UTC to grow programming and physical presence within the District."
Census tract 4 was a high priority, according to the application, because Erlanger Health System was planning a $100 million expansion in the low-income tract and because a 2016 rail transit feasibility study "recommended a multimodal trail system to be built in conjunction with zoning and development changes in these neighborhoods."
"It is also a prime area for growth with proximity to the downtown core," the application stated.
The "southern expansion of Chattanooga's renaissance" was also prioritized in the ranking of census tracts for the Opportunity Zone application. Census tract 16, which includes the shuttered Alstom site, where nuclear turbines were once manufactured along the Tennessee River, was ranked fourth. Since making the Opportunity Zone list, the industrial site has sold.
Census tract 20, which includes the privately held former U.S. Pipe and Wheland Foundry site, a growing pocket of new single-family homes near the recent Riverwalk expansion and Howard School, was ranked fifth. The same neighborhood is the proposed site of a multiuse ballpark and entertainment venue on South Broad Street. Census tract 19, which includes the privately owned 40-acre, former site of Velsicol Chemicals and is in close proximity to the South Broad District, was ranked sixth.
"A significant number of real property has changed hands during the past two years in anticipation of development," the application read. "Proposed developments seeking permitting range from hotels and grocers to retailers and restaurants."
Census tract 123, which includes the Riverport Industrial Park and the 100-acre, former ADM site, was ranked seventh.
The application also noted that there were projects in all these census tracts that would be eligible for new market tax credits, payments in lieu of taxes and tax increment financing.
Coppinger said he hoped the state would choose at least 11 of the census tracts put forth by Hamilton County, but only the top seven recommendations were accepted as Opportunity Zones. Census tract 122, which included the 43-acre, former Harriet Tubman site that is now owned by the city of Chattanooga, was ranked eighth.
Some counties didn't get a single Opportunity Zone. Davidson County got 18. Shelby County got 32.
"We tried to do it proportionate to how many low-income census tracts are in the county," said Sally Avery, the director of the Center for Economic Research in Tennessee who helped oversee the process at the state level. Shelby County, for example, has 135 low-income census tracts compared to Hamilton County's 33.
"We were told that we had one of the best submissions in the state of Tennessee, and we got ours in on time, before they gave an extension," Coppinger said. "We will go back to the community and get input about how to move forward.
"We are grateful to get seven."
Hays, who Coppinger called an "integral" part of preparing the application, said Opportunity Zones caught a lot of cities off guard. Katz's stirred local interest when he stopped in Chattanooga in late January to promote his new book, "The New Localism," which praises Chattanooga's Innovation District.
"He said this could be transformational," Hays said. "He had been with the Conference of Mayors and was getting briefed at a high level and was showing excitement."
The financial incentives for Opportunity Zone investors are tiered. Profits from the sale of stocks, bonds or property typically face a capitol gains tax, but the new law allows investors to defer and partially reduced their taxes if they place their capital gains into a designated Opportunity Fund, which can be created by any tax payer and must invest in businesses or real estate in designated Opportunity Zones.
Putting money into a fund qualifies the investor for a capitol gains tax deferral until 2026. After a decade, the money earned from investments held for more than 10 years in qualified neighborhoods through an Opportunity Fund are permanently exempt from capitol gains taxes.
The idea for Opportunity Zones was born in 2015 out of a D.C.-based think tank called the Economic Innovation Group, which is co-led by a former Bush staff member and a former Obama staff member and was founded by Napster founder and tech investor Sean Parker. The provision was slipped into the tax bill by Sen. Cory Booker, D-N.J, and Sen. Tim Scott, R-S.C.
Joda Thongnopnua, founder of Chattanooga think tank Metro Ideas Project, said he had been tracking the proposal long before it appeared in the federal tax bill and was excited about the potential.
"An Opportunity Fund could reasonably leverage private investment and philanthropic dollars to invest in grocery stores, affordable housing, mixed-use retail development, and small businesses that would not have traditionally attracted investment from the private sector," Thongnopnua wrote on the Metro Ideas Project website in April.
In April, before the deadline to submit recommendations has passed, Thongnopnua published his own Opportunity Zone picks. Some tracts, such as 16, 19, 123 and 4, overlapped with Coppinger's top ranked recommendations.
Others — such as census tract 122, which includes the former Harriet Tubman site; census tract 23, which includes part of Alton Park and Clifton Hills; census tract 11, which includes Warner Park, McCallie Avenue and East Third Street — were lower on Coppinger's list of ranked recommendations and didn't make the cut.
Census tract 12, which includes the Glenwood neighborhood, census tract 26, which includes Oak Grove, Highland Park and Ridgedale, and census tract 13, which includes south Highland Park, Ridgedale and other neighborhoods along Dodds Avenue, were also identified as smart Opportunity Zone picks by Thongnopnua, but didn't appear in Coppinger's application.
Everlena Holmes, an East Chattanooga neighborhood leader who has been working to involve community members in local planning efforts, said she is frustrated by the final selections and wishes residents had been given a say in the ranking of census tracts for the application.
Riverside, Bushtown, parts of Churchville, parts of Avondale, Glass Farms, Boyce Station and Battery Heights are now included in Opportunity Zones, but it's unclear how leaders in those neighborhoods can engage with the process moving forward. A meeting was held on Tuesday at the Edney Building and facilitated by Liza Soydan, a local consultant hired by The Enterprise Center with funds from the city, the county and local foundations to help organize and research Opportunity Zone project ideas moving forward, but Holmes said she would never have known about the meeting if she hadn't randomly met Soydan at another community meeting the prior week.
Holmes said she took issue with some of the final Opportunity Zone picks at the meeting Tuesday, which she attended with several other neighborhood leaders who she invited after learning about the meeting last minute.
"I questioned at least three of the census tracts that were included that were industrial and downtown and looked like projects that had already been started," she said. "It made me feel like the plan was not to have the voices of the community."
Others expressed similar disappointment.
"The real question is, opportunity for who?" said Michael Gilliland, board chairman of Chattanooga Organized for Action, a grassroots group which has lobbied for the city to address the rising real estate prices driven by growth. "Opportunity Zones crafted right with the voice of the community could have a positive effect, but creating the ability for wealthy investors to be reaping profits at the expense of poor neighborhoods and on the back of poor neighborhoods, that is not what we need."
The incentive could have persuaded someone to invest in East Chattanooga, where so many residents are desperate for a grocery store, but instead it will benefit developers who were already moving forward with downtown projects, said Helen Burns Sharp, the founder of Accountability for Taxpayer Money.
"This selection process is an example of Chattanooga's top-down approach and lack of transparency," Sharp said.
Sharp added that it isn't too late for local government to set parameters on development in the zones by requiring community benefits agreements, mandating local hiring and ensuring new projects have at least some affordable housing, including home ownership.
Another way to ensure community benefits is through foundation dollars.
Maeghan Jones, head of the Community Foundation of Greater Chattanooga, said that the community foundation is beginning to learn about "impact investing" or using their capitol to invest in projects that promote high paying jobs, affordable housing and local ownership of property.
"The Opportunity Zone discussions have begun to spur broader community conversations with a growing number of stakeholders — neighborhood leaders, nonprofits, investors, foundations and others — about the potential for impact investments that create not only a financial but a social return and how those investments might support economic growth that is both sustainable and inclusive," said Jones.
Soydan, the consultant overseeing Opportunity Zone planning and research, said she is hopeful and believes the Opportunity Zone incentive will bring benefits to all parts of the community, especially if foundations begin to get serious about impact investing.
"As we take next steps, I am optimistic that our community can identify impactful projects that we can support whether it leverages this tool or others," she said.
Contact staff writer Joan Garrett McClane at firstname.lastname@example.org or 423-757-6601.