New 'opportunity zones' will drive investment in underserved communities

• Key insight: The first iteration of the opportunity zones program was a valuable proof of concept. Now the question is how can OZ 2.0 catalyze development that creates economic durability in distressed communities while attracting investors who want to make measurable impact?
• Supporting data: Treasury data analyzed by the Tax Policy Center found that Kansas, New Mexico, Alabama, Iowa and Illinois had the lowest share of OZs receiving any investment at all, a finding echoed by the Economic Innovation Group, which put Illinois at one-fifth of eligible tracts through 2020.
• Forward look: First generation OZs largely focused on attracting capital. The next challenge is to pair capital with institutions dedicated, at the mission level, to building self-sustaining economies in communities across this country.

As of July 1, America's governors have 90 days to nominate the census tracts that will become the country's next opportunity zones, the first new map since this promising program was made permanent. These decisions will shape where billions of dollars flow over the next decade, and should be based on both need and impact potential. The first iteration of the program, though not perfect, was a valuable proof of concept. Now the question is how can OZ 2.0 catalyze development that creates economic durability in distressed communities while attracting investors who want to make measurable impact?

In nearly 40 years of banking, I've seen the "invisible hand" of markets guide capital toward incentive. I've also witnessed the not-so-invisible hand of public policy nudge capital toward communities where aligned incentive yields greater impact. Capital resists unfamiliarity, wrongly calling it "higher risk," overlooking the borrower it doesn't understand even when that risk is "acceptable." The inaugural opportunity zones bear this out.

The investor base operated on market and private equity logic. It needs underwriting it can trust: predictable cash flows and experienced developers in markets with good data. Deeply distressed communities seemed too difficult to understand, even though their perceived risk and long-term potential was, and is, significantly greater. So, capital went where underwriting was easy and familiar. According to Novogradac's latest QOF report, funds with more than $100M account for nearly 60% of all equity, concentrated in high-growth metros. Meanwhile, Treasury data analyzed by the Tax Policy Center found that Kansas, New Mexico, Alabama, Iowa and Illinois had the lowest share of OZs receiving any investment at all, a finding echoed by the Economic Innovation Group, which put Illinois at one-fifth of eligible tracts through 2020. Investment has likely spread since then. But the fact that we cannot say how far, or to whom, is itself the problem. Arguably, much of what did flow stayed within the financial system, generating returns for investors without necessarily connecting to the real economy of the communities the program was built to serve. This is not a rural/urban, big/small city problem. It's a function of capital flowing to communities already well connected to the financial system, while disconnected communities, whether a struggling pocket of the Mississippi Delta, or a block on the west side of Chicago, remain underserved.

OZ 2.0 makes real improvements with new guardrails. Eligibility is tighter and rural zones get enhanced incentives, including a 30% basis step-up after five years. And funds now have some reporting requirements. But that tells us where capital went geographically, not whether a small business expanded, a family bought its first home or neglected community facilities stabilized. I think all would agree that the intent of the program is to enhance community quality-of-life via economic activity aimed at affordable housing, mixed-used developments, educational and healthcare infrastructure, and the like. Validating this intention with reporting that includes local participation and long-term accountability, with investor incentivization that leverages the energy and creativity of developers will unleash the tremendous power of this program. How so?

Local knowledge (need) and local capital (opportunity) are the superpowers of mission-oriented financial institutions, or MOFIs. This is the strategic advantage they offer outside capital. OZ 2.0 outcomes will be significantly enhanced if the program involves MOFIs — local CDFI banks, credit unions, venture capital and loan funds. These institutions are proven enablers with decades of deep knowledge and lending relationships that outside capital cannot replicate. CDFI banks are regulated institutions and often have lower delinquencies. Notably the projects they've financed have withstood some of the country's deepest economic shocks. This proves that risk in these markets is mispriced, not unmanageable. The work of several MOFIs demonstrates their significant role in orchestrating capital flow within these communities.

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Texas National Bank deployed more than $885 million in the Rio Grande Valley from 2022 to 2025 by building credit frameworks that reflect how regional immigrant communities actually earn, save and borrow. In rural Louisiana, BOM Bank keeps nearly 75% of its branches in communities that are not standalone profitable, while aligning lending to impact. In coal-economy communities across Kentucky, West Virginia and Tennessee, Community Trust Bank convened partners and shaped transition strategies, something no qualified opportunity dund is structured to do.

None of these is an OZ "deal," and that is the point. These banks are critical infrastructure that enable opportunity zones to become community outcomes. Those intentions can be codified at the local level with community benefits agreements that bring alignment and transparency between investors, developers, local banks and entrusted advocates. Similar to New Market Tax Credits, such models could incentivize local hiring and leverage additional public capital and existing philanthropic initiatives. The practical opportunity for OZ 2.0 is partnership, with fund managers bringing patient equity and local institutions bringing pipeline, underwriting judgment, senior debt, and the accountability that remains after the fund exits. And this time horizon is essential.

Imagine if OZ capital was invested in high-impact projects in underserved communities in partnership with local organizations and CDFIs. Funds are deployed intentionally as needed by the project, but pending actual use, the capital is deposited in a CDFI bank, lent to a CDFI loan fund or invested in a CDFI venture capital fund. This could significantly increase impact with normal financial returns and retention of tax benefits in the community for the long-term.

Can we prove that OZ investments made alongside local institutions outperform those made without them? The data does not exist because OZ 1.0 never required it. OZ 2.0's reporting mandate is the new floor for MOFIs to build the datasets to further prove that return and impact are not mutually exclusive.

First generation OZs largely focused on attracting capital. The next challenge is to pair capital with institutions dedicated, at the mission level, to building self-sustaining economies in communities across this country. Governors started drawing the new map on July 1. The institutions that know the needs and opportunities within these communities should already be at the table.