The federal Opportunity Zone tax incentive was billed as an economic development tool to help businesses in low-income communities raise capital for growth.

New research shows that across Ohio, the incentive is mostly supporting projects in just a third of Opportunity Zone-designated census tracts. Those census tracts were, as a group, already experiencing economic gains prior to designation. Those projects are producing mostly market-rate rental housing that’s more expensive than most other rental units in the communities surrounding each project.

That’s according to two-part analysis (part 1 and part 2) of Opportunity Zone-financed projects in Ohio, released last week by the Urban Institute, a nonpartisan research group based in Washington, D.C.

Since it was created as part of the Tax Cuts and Jobs Act of 2017, the Opportunity Zone tax incentive has accounted for at least $100 billion of investment nationwide, meaning it’s already one of the largest federal policy tools for low-income community investment. But who ultimately benefits from those investments, other than the wealthy individuals and corporations who stand to gain healthy tax-free investment returns down the line? The answer remains the subject of speculation and debate.

Hardly any data is available on specific projects or businesses financed using the Opportunity Zone tax incentive. When it was originally passed, the policy contained no public reporting requirements for individuals or corporations using the tax incentive, nor any requirements for the federal government to collect or disclose any information about the businesses or projects it helped finance. The Ohio data are an outlier, as it’s one of a few states that have been collecting project-level data on Opportunity Zone investments.

The researchers at the Urban Institute hope their new analysis can encourage and inform broad input as governors and state chief executives across the country are already in the process of selecting the next round of Opportunity Zones.

Earlier this year, the One Big Beautiful Bill Act made the tax incentive permanent. In doing so, it directs states and territories to designate eligible census tracts as Opportunity Zones every decade.

Governors and state chief executives across the country are already in the process of selecting the next round of Opportunity Zones. The next designations will be finalized by July 1, 2026, with the new set of zones going into effect at the beginning of 2027.

“This is the game in town,” says Brett Theodos, practice area lead for mission finance and community and economic development at the Urban Institute. “It’s a game many places would like to rewrite the rules for [but] that’s not a possibility, at least not right now.”

The new analysis offers some insights into how to maximize impact when selecting this next set of Opportunity Zones.

He encourages local governments to “set aside their disappointments with the Opportunity Zone policy and its significant limitations and instead enter into the process of helping determine, given what this thing is and what it’s going to do, where will it do the most possible good and the least possible harm?”

Where Ohio OZ dollars are flowing

For those who have had concerns about Opportunity Zone tax incentives potentially supercharging displacement pressures, there is some good news in the Ohio data. The tax incentive does not appear by itself to be enticing enough for investors to fuel any displacement pressure beyond that already caused by existing market factors.

“It might lead to displacement pressures in some communities, but often it follows market interest rather than drives it,” Theodos says.

At the same time, it’s bad news for anyone hoping that Opportunity Zone tax incentives can drive investors or developers to areas they don’t already consider attractive.

“If you’re deciding to build on this side of the street versus that side of the street, and both are market attractive, I could see that it did make a difference to a given property,” Theodos says. “So I don’t want to be too definitive in saying it never influences investor behavior. But what it does do is it reflects existing market investor preference for where and what gets financed.”

The Urban Institute researchers analyzed data from the state of Ohio covering 444 Opportunity Zone investments. The caveat: The data don’t quite cover all Opportunity Zone investments in Ohio, only those where the investors also applied for a matching state-level tax break.

Looking at those 444 Opportunity Zone investments, the Urban Institute researchers found they were located in only one-third of Opportunity Zone-designated census tracts across Ohio. Over half of Ohio’s Opportunity Zone investor dollars went to just nine designated census tracts.

The concentration of Opportunity Zone investments in Ohio comports with other research showing that just 5% of Opportunity Zones nationally received 78% of investment, and just 1% of zones received 42% of Opportunity Zone investment.

The Urban Institute found census tracts that got Opportunity Zone investment in Ohio were those that were already seeing rising population, rising income levels, a 50% increase in households with at least a bachelor’s degree and an overall 15% rise in property values in the years prior to their designation as Opportunity Zones.

Meanwhile, there were 220 Ohio census tracts that were designated as Opportunity Zones but didn’t get any Opportunity Zone investment. As a group, these census tracts were losing population, saw a slight increase in poverty rate, a slight decrease in income levels, just a 29% increase in households with at least a bachelor’s degree and an overall 15% fall in property values in the years prior to Opportunity Zone designation.

The researchers say the pattern makes sense given how the tax incentive rewards investments in appreciating assets. As long as Opportunity Zone investors wait at least 10 years before cashing out their investments, income earned from the appreciation in the value of those investments upon cashing out is exempt from the usual capital gains tax at the federal level.

Which means Opportunity Zone investors, and perhaps more importantly the mostly for-profit developers who are courting those investors, are doing what they would normally do even without the tax incentive — constantly gathering information to predict where property values are most likely to appreciate and locating investments accordingly.

“Investors are gatekeeping with what they will and won’t put their money in, but developers are the first agent movers, and so they really are the more important people in shaping where [Opportunity Zone] activity does and doesn’t go,” Theodos says.

“Most Opportunity Zone projects are not designed or intended to, nor do they in reality, have a strong social purpose, mission or outcome. It does happen, but it’s more exception than rule.”

What OZ dollars are fiinancing in Ohio

Even as of late October, the Internal Revenue Service webpage for Opportunity Zones says the tax incentive program’s purpose “is to spur economic growth and job creation in low-income communities while providing tax benefits to investors.”

That’s not quite how things have turned out. Only 2% of Opportunity Zone investment dollars nationally have gone to operating businesses, with the rest going to real estate development — and the largest portion of that real estate has been market-rate housing or mixed-use projects that include market-rate housing.

Across Ohio, 64% of Opportunity Zone investment dollars went to housing projects or mixed-use projects with housing included, according to the new analysis from the Urban Institute.

But — other than the investors who will eventually cash out of Opportunity Zone investments tax-free starting as early as 2028 — who does all that market-rate housing ultimately benefit?

The Urban Institute researchers found rental data using the addresses for individual Opportunity Zone real estate projects and running them through online listing services, or in some cases calling property managers to ask for current rents. They then compared the rent for each project to the median rent for the census tract where the project was located.

The researchers found that 80% of Opportunity Zone-financed housing units in Ohio were listed at rents higher than the median rent for the census tract where the building was located. About 61% of units were asking for at least 20% more than the median rent for the census tract where they were located.

“There’s now a preponderance of evidence across qualitative, administrative, tax, programmatic, community level data sources that are all pointing to this being a market rate housing program for real estate in ascending markets,” Theodos says. “That’s what we see in terms of the types of communities that investors want to be in and the types of projects they want to deliver.”

For those who believe increasing the supply of housing at any price level is good for cities, it’s good news that Opportunity Zone tax incentives are helping to finance new housing construction. In theory, if not for these units, their current and future occupants would be bidding up rents in existing units.

On the other hand, it’s not the greatest news for those who believe that tax subsidies should be going to housing or other real estate that’s actually affordable to existing residents in the communities around those new projects.

Nor is it good news for those who are concerned that a wave of new market-rate rental units in a low-to-moderate income area will drive up rents and property tax rates for existing tenants or long-time homeowners nearby who might be living on fixed incomes.

Then again, it seems to be becoming clearer that Opportunity Zones probably aren’t a primary driver for gentrification or displacement.

“The implication for cities with respect to mitigating displacement pressure is to just come up with a good strategy for mitigating displacement pressure, apart from Opportunity Zones,” Theodos says.

“Because whether a project does or doesn’t have Opportunity Zone capital in it, [mitigating displacement] is going to be a need in their city if it’s a need in their city, almost regardless of what zones are getting picked.”

Why the Opportunity Zones selection process still matters

So if Opportunity Zones tax incentives aren’t capable of driving investment to places that aren’t already attractive to developers and their investors, and they’re supporting mostly market-rate housing that is more expensive than most existing housing nearby, what’s really at stake for local officials or community groups in the zone selection process?

“We can be more clear-eyed this time around about what the program will and will not produce,” says Brady Maixell, senior research associate. “So in thinking through designations, governors can be thinking through that this is largely a market rate, residential and mixed-use program. That’s what it’s producing, so think through where in your city, where in your state, where in your region we want to be directing those investments.”

To help with selection, Urban Institute also used the Ohio Opportunity Zone dataset as the basis to divvy up potentially eligible census tracts based on their likelihood of attracting investment. (The Treasury Department hasn’t yet released the official set of eligible census tracts.)

There is a notable change in eligible census tracts from the first go around.

In 2018, eligible census tracts included those with poverty rates of at least 20% or median family incomes no greater than 80% of the surrounding area, as well as census tracts that were adjacent to them.

This time around and going forward, Opportunity Zone-eligible census tracts include those with median family incomes no greater than 70% of the surrounding area, or poverty rates of at least 20% with a cap of median family income no greater than 125% of the surrounding area. The new cap is meant to ensure certain high-income census tracts aren’t eligible this time around.

With the new, slightly stricter criteria, the number of potentially eligible census tracts fell about 20% from the first round to the second round. Each governor or territorial chief executive (as well as the District of Columbia’s mayor) can select up to 25% of eligible tracts in their jurisdictions for Opportunity Zone designation, with a minimum of 25 census tracts. The potential maximum number of selected tracts fell from 8,764 in the first round to 6,555 in this second round.

Looking at potentially eligible census tracts, the Urban Institute team split them up into three categories.

The first group were those eligible tracts that are not likely to attract any Opportunity Zone investment, based on demographic factors and recent capital flows that were predictive of where Ohio Opportunity Zone investments did or did not end up.

The second group were eligible tracts that are likely to attract investment even without Opportunity Zone designation. These are tracts that, despite low median family incomes or high poverty rates, were already in the top 10% nationally for new incoming capital flows across all census tracts, not just eligible tracts.

The third group are eligible tracts outside of that top 10% nationally but still have at least some prior market-based investment interest. It’s these tracts where the Urban Institute team believes Opportunity Zones can make a meaningful difference. They’ve dubbed them the “Goldilocks” tracts.

The researchers are encouraging governors, state economic development officials, local officials and communities to prioritize goldilocks tracts in identifying, recommending or selecting Opportunity Zones — while also being aware of what Opportunity Zone investments tend to produce.

“Most of this is multi-family or some commercial or industrial, so picking neighborhoods that are largely single-family is also not the right fit,” Theodos says.

“The mayor knows the local land use or the planning department knows what transit or other city or state or even federal investments are coming to the community that might be shifting things…things that are not just changing now, but will be changing in the next couple years, that are planned for and reasonably certain.”

Poorly picking tracts could mean directing federal tax benefits to support projects that don’t need the support. Or it could mean minimizing Opportunity Zone investment for a city or region.

Ohio’s city-by-city experience was illustrative. It wasn’t just a rural versus urban disparity in Opportunity Zone investment. Relative to population size, Cleveland and Columbus were over-represented in the amount of Opportunity Zone dollars they attracted; meanwhile, Cincinnati, Toledo, Akron, Youngstown and smaller urban areas were under-represented.

While there are many factors at work in those patterns, the selection of zones within each specific metro area is one of them.

In other words, the researchers are saying, there is potential for some cities and rural areas to be more strategic about advising governors and state officials who are in the process of selecting the next set of Opportunity Zones.

“Advocating for the selection of the zones that best match local priorities, and what the program offers is critical in the next four to eight weeks,” Theodos says. “There are many, many census tracts that need investment that Opportunity Zone capital will overlook, even if you pick them. So as much as we want to pick certain tracks that are worthy of investment, pick tracts that at least have some potential for appreciation.”

This post was originally published on Next City.