Environmental Risk in Opportunity Zones

Opportunity Zones (OZs) offer investors the ability to defer taxes on capital gains in designated low-income census tracts across the country, making OZ funds a potential incentive to spur economic development and community revitalization. However, the OZ program has also been met with skepticism by both developers and communities, unsure of the outcomes and associated risk. In 2019, the U.S. Environmental Protection Agency (EPA) awarded Brownfields Grants to 149 communities, 108 of which were designed as OZs. This statistic alone suggests that OZs may inherently have a greater investment risk relative to environmental factors, including Brownfields and Environmental Justice (EJ) issues.

Here we explore the relationship between EJ indicators (defined by EPA) and OZs across the nation, and how national trends may inform strategies for attracting capital investments, developing real estate projects, and engaging with community partners.

 

Highlights:

  • Environmental risk is elevated in OZs overall

  • Environmental risk is higher in urban vs. rural areas

  • Environmental risk is higher in urban OZs compared to all urban, lower in rural OZs compared to all rural

National Trends

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When we compare the average value of EJ variables in OZs to the national average, we see that OZs have a higher environmental risk, which we define as the probability of encountering an environmental concern at a particular location. Our analysis demonstrates that residential buildings in OZs are 24% more likely to have lead-based paint, 43% more likely to be near a wastewater treatment facility, and 23% more likely to be near a Superfund site.

Urban vs. Rural Disparities

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To better understand how urbanization affects environmental risk in OZs, we broke up the EJ data into three groups: Urbanized Area, Urban Cluster, and Rural Area. Unsurprisingly, environmental risk is elevated in Urbanized Areas compared to the national average, while environmental risk in Rural areas is much lower.

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When we compare the average value of OZs in each group to the average value of the group, we see the enhanced OZ environmental risk is most acute in Urbanized Areas, with excess OZ environmental risk values 20-50% higher than the mean national disparity. However, OZs in Rural Areas tend to have less environmental risk than is seen in the entire Rural Area group, with only respiratory disease and cancer risk having higher values in OZs compared to other tracts.

Recommendations

 

Our analysis of EPA’s EJ data supports our initial observation that environmental risk in OZs is inherently high, especially in Urbanized Areas. To mitigate risk for developers and maximize community benefit of OZ projects, we recommend a proactive and inclusive approach to OZ marketing, planning, and investing that considers environmental justice, community interests, and potential liability. By working with the EPA, State, and local Brownfields programs, communities and developers can be proactive by identifying environmental conditions through area-wide or project planning activities using Brownfields inventories and public environmental records databases. Many Brownfields programs also offer incentives and financing to defray assessment cleanup costs, as well as limit liability. Most importantly, EPA-funded Brownfields programs are, by design, rooted in community engagement and can offer a platform to facilitate outreach and elicit community input to inform reuse scenarios and cleanup strategies, and to gain public support for projects.