The Kresge Foundation in Troy will partner with two impact fund managers and provide $22 million in investments to anchor emerging Opportunity Zone Funds. Together, the managers expect to raise and deploy more than $800 million in capital nationally into census tracts designated as these zones.
Boston’s Arctaris Impact and Fort Lauderdale’s Community Capital Management each will receive a guarantee from Kresge that provides risk mitigation and first-loss protection to their Opportunity Zone Funds. The guarantees will look to improve the risk-return profile of the funds, making them more attractive to investors seeking social and financial returns.
The Opportunity Zones incentive was created as part of the 2017 tax reform legislation. The incentive’s goal is to direct investment to low-income communities. As written, the law includes no transparency, accountability, impact requirement, or disclosure on investments made during the incentive.
“Opportunity Zones will only be a positive force in low-income communities if paired with responsible investing principles,” says Rip Rapson, president and CEO of Kresge. “This legislation was passed without minimum transparency or reporting guidelines, permitting a ripe opportunity for misuse.
“Nearly a hundred are rumored to be currently seeking investment. Because of our mission to expand opportunity in low-income communities, Kresge has decided to put into action and model for other investors how solid deals can be constructed to meet the needs of investors and communities alike. Our intent is to establish proof points at scale to demonstrate that there is a responsible way to implement this incentive.”
Arctaris and Community Capital Management have committed to making investments that reflect the stated social and community goals of the Opportunity Zones program and address unmet needs in under-resources communities.
Both firms have agreed to go beyond the requirements of the legislation by prioritizing the development of affordable housing units and preventing displacement; investing in the creation of living-wage jobs; and prohibiting non-productive investments such as those into self-storage facilities. Managers will also form community advisory boards.
“The level of transparency and reporting Arctaris and CCM have agreed to have set the standard for what investors should ask for before committing dollars to Opportunity Zone Funds,” says Kimberlee Cornett, managing director of Kresge’s social investment practice, which has a $350-million-impact investing pool.
“These firms are already established leaders in the impact investing space, and we’re thrilled they are taking up a leadership position in this new market. Our desire is to signal strong public endorsement of these funds to potential investors who care about getting it right and acting with the best interests of low-income communities in mind.”
The agreement listed complements the principles put forward in the Opportunity Zones Reporting Framework that was developed in part through Kresge grants to the U.S. Impact Investing Alliance and the Beeck Center for Social Impact and Innovation at Georgetown University.
Arctairs manages four impact funds focused on operating businesses in low-income communities. It has received $15 million from Kresge in guarantee commitments to provide principal protection to its Opportunity Zone Fund, pending final IRS guidance on business investments expected. Arctaris plans to launch an Opportunity Zone Fund with more than $500 million in initial capitalization from U.S. commercial banks, institutional investors, and family offices.
“Arctaris has been investing in the same geographic areas now referred to as Opportunity Zones for more than a decade, and we’ve seen first-hand how businesses located in these communities have faced systemic challenges and barriers to growth capital, which restricts job creation,” says Jonathan Tower, managing partner and co-founder at Arctaris.
“In some target cities, most local businesses have already fled. This fund seeks to provide capital and incentives to bring them back – accelerating the growth of existing businesses and attracting companies from elsewhere to set up new offices or build factories. The Opportunity Zones legislation has encouraged Arctaris – and hopefully other investment managers – to use Wall Street’s tool box for the common good as funds are formed with community impact at their core.”
Community Capital Management is an impact investing manager and will receive a $7-million guarantee commitment for its National Opportunity Zones Fund, which will provide equity investments into projects that support one or more of its 18 impact themes. It plans to assemble a diverse portfolio of investments in qualified Opportunity Zone businesses and is targeted to attract $300 million from investors.
“The Opportunity Zone Program represents a unique way to bring new investors into the impact investing arena. The tax advantages may draw people in, but they may be pleasantly surprised by the positive impact outcomes that are as rigorous, granular, and transparent as traditional financial reporting,” says David F. Sand, chief impact strategist for Community Capital Management. “The covenants we have agreed to might not be required by legislation or regulation, but we believe they should be – we are going above and beyond to demonstrate to the market what this can look like when done right.”
Actaris and Community Capital Management were selected from a pool of more than 140 proposals.
Kresge invests more than $160 million each year to foster economic and social change.