Bruce Katz is a big believer in the power of investing locally.
Keeping local wealth within the region and using it to fund businesses and development projects is an essential part to building a vibrant and sustainable economy, said Katz, the co-founder of a Drexel University think tank on metro area finance who helped shape the Western New York regional economic development plan earlier in the decade.
“You have to have local wealth invest locally,” said Katz, the director of Drexel’s Nowak Metro Finance Lab and a former Brookings Institute official.
While it’s encouraging that the Buffalo Niagara region has started to attract some outside investment – notably from Washington, D.C., developer Douglas Jemal and a few Toronto-based apartment investors – what’s really important is convincing wealthy investors here to put their money into local projects.
“I’m very encouraged by that” outside investment, Katz said during a stop in Buffalo last week. “I’d be more encouraged if there was more local capital that was invested here and not exported.”
That’s because local capital allows a community to take control of its own destiny.
“Waiting for someone else to invest is usually a losing proposition,” Katz said. “The places that have really succeeded in the last 10 or 15 years beyond what you would have suspected are the places that have locked up a lot of local capital.”
And keeping that investment local means that it won’t go to help other places grow.
“How did Silicon Valley get built?” Katz asked. “It was built with Buffalo wealth. It was built with Kansas City wealth. That’s got to change. I think outside capital is great, but you have to leverage local investors.”
Of course, the reason capital flows to other markets is because investors see more opportunities there – and the chance to make more money from those investments than they could locally. That outflow is bolstered by investment vehicles favored by the wealthy, like hedge funds, private-equity and venture capital that have a national scope.
Katz is hoping that the new federal opportunity zone program will help cities like Buffalo retain more of its local wealth and channel it into new investments in projects to help the region grow.
The Opportunity Zone program, in a nutshell, allows investors to defer and reduce capital gains from other investments by funneling that money into a fund that makes long-term investments in qualified projects in certain low-income areas, like much of downtown Buffalo.
The Buffalo Niagara region has 32 different opportunity zones, including much of the area directly to the south of downtown and portions of downtown Niagara Falls.
“What it’s done, in a very healthy way, is cause a rethink about what is possible,” said Katz, who was in Buffalo for a presentation on the potential of opportunity zones.
“My message is less around the opportunity zone tax incentive, than the potential for many of the areas that were designated,” he said. “I think what this tax incentive has forced everyone to do is think about what is the economic potential of low-income neighborhoods in cities, or in areas downtown or in industrial areas.”
But opportunity zones aren’t a silver bullet. They’re just another tool to help fund economic development projects. Only this time, that tool is funded by the capital gains reaped by businesses and wealthy individuals.
“What this has really done is bring a different class of investor to the inner city space,” he said. “This is really bringing people and corporations with large capital gains to think about how to invest in the market in cities.”
But there’s also plenty of competition, with 8,762 different opportunity zones all competing for the attention of investors. About one in every 10 Americans live in an opportunity zone.
Katz is an advocate of metro areas creating an “investment prospectus” that spells out for potential opportunity zone investors the projects and initiatives underway in a community and how it ties in with the region’s growth and development strategies and challenges. About 40 metro areas are taking that approach, he said.
Buffalo is not one of them.
“For investors to find opportunities, sometimes it’s like looking for a needle in a haystack,” Katz said.
“You’ve got to show your wares and not wait for the market to find you,” he said. “The cities that organize themselves and make the market transparent are going to be the ones that will be the early first-moves.”
“You have a lot of zones here that were designated that have more potential but were overlooked by prior investors,” Katz said. “This feels like a city with the right market conditions that could take advantage of the zones and unlock a lot of local capital to invest.”