If You Want To Improve Your Community, Think Like A Developer

If you want to improve your local community, think like a developer. 

Federal government programs spur billions of dollars of investment in real estate. For example, Opportunity Zones alone account for more than $14 billion per year in private investment driven by tax incentives.

But how do these programs work? What are we getting for all that spending? And how do the economic realities of building things in the US incentivize where money is and isn’t placed?

Brett Theodos can answer all of this. He’s Director of the Center for Local Finance and Growth at the Urban Institute and a leading researcher in place-based development. Whether you’re a mission-driven investor, a for-profit real estate owner, or a neighborhood advocate, looking at community through the lens of capital, as Brett does in this conversation, is incredibly helpful.

He spoke with Camber Creek Partner Alexandra Nicoletti and Head of Platform Lionel Foster.

The transcript has been edited for clarity.

Lionel Foster: Brett, welcome to Catalyst. Thanks for joining us.

So you and I have known each other for several years. We used to be colleagues at the Urban Institute, so I know you have an academic and professional interest in what places look and feel like and what they can unlock for people. But I think that runs much deeper for you than just academic and professional motivations.

How did you come to focus on community economic development?

Brett Theodos: Astute observation, Lionel Jane Jacobs Foster.

Honestly, I cared about place before I knew it was a thing, and it’s a byproduct, I think, of having grown up in Oak Park, Illinois initially, which is a walkable community.

I could walk to my school, one L stop outside of Chicago, two doors down from the subway, looking at the Sears Tower, bungalows, lower middle class, and in a city that intentionally prevented blockbusting.

So it’s one of only a handful of stably racially integrated cities in the country.

Partially, the reality is that if that were in the DC metro, it would have gentrified and wouldn’t have stayed stably racially integrated. But Chicago isn’t growing in the same way, so the same ice cream shop and laundromat are still down the block from my childhood home.

It meant my elementary school was half Latino and half white, and I thought that was normal. I thought that’s what the US looked like.

I had access to a subway, a little patch of yard, and I could walk to see all my friends. I had independence from a young age.

Then we moved—to exurban Illinois. I didn’t have a choice in this, mind you.

That’s where I went to middle school and high school. I went from looking at the Sears Tower from my front stoop and walking to school, to looking at cows from my front stoop. Ninety-five percent of people were white, and it wasn’t walkable at all. Acre-and-a-half lots.

Had I been raised there from the beginning, I would have thought that was normal too. But because I experienced both, it made me acutely aware that place matters.

The physical way we design places shapes our social lives, political lives, economic lives, schooling, everything.

Having both experiences made me realize how profoundly place influences life outcomes.

Alexandra Nicoletti: Brett, I’d love for you to tell us a bit more about your role at the Urban Institute, what you do as director of the Community Economic Development Hub. Set the stage for us a little bit.

Brett Theodos: Absolutely.

I study places and the tools, programs, and products designed to help them thrive.

That means small businesses, commercial real estate, multifamily housing, single-family housing.

A lot of what I’m interested in is money, because money is the stuff that makes stuff. Money sitting alone doesn’t do much, but deployed into communities, it has enormous power.

So we study mainstream finance, mission-driven finance, public efforts, and private efforts.

We want to understand the world as it is, understand interventions meant to improve it, evaluate their effectiveness, and identify unmet needs.

Sometimes that means refining the public understanding of a problem. Sometimes it means identifying solutions, best practices, or exciting innovations.

Alexandra Nicoletti: What are some of the policies you’ve been working on recently—or in the recent past—that relate to real estate owners, operators, and investors?

Brett Theodos: We’ve looked at federal programs like Choice Neighborhoods out of HUD, which is public and assisted housing revitalization. We’ve looked at the Community Development Block Grant out of HUD, which supports neighborhood development, planning, code enforcement, sidewalks, and many other things.

We’ve evaluated the New Markets Tax Credit program out of Treasury, which is used for a range of economic development and housing-related projects.

We’ve looked at the Economic Development Administration and the work it’s done to grow local economies. We’ve studied Opportunity Zones in depth. We’ve looked at small business lending, including the SBA 504 program, which is often used for real estate.

And we are studying private market efforts to grow and strengthen the bench of developers in different markets. That includes work on smaller, emerging developers in both multifamily and nonresidential spaces.

We’re tracking developer outcomes over time. Developers are businesses, and the data on them are incredibly hard to obtain. We’re quantifying who is doing real estate development in different markets, then comparing them.

We can tell you something about the nature of development in Nashville and San Antonio versus Chicago, DC, and Boston, and those markets look very different.

So we evaluate programs: federal, state, and local. We scan the market to describe how things work, and we articulate pathways and barriers to deploying more capital into communities where we want to see investment.

Lionel Foster: Brett, you evaluate the biggest tax-funded real estate programs in the country. Give us a report card. How are we doing?

Brett Theodos: Like the proverbial frog in the warming water, it’s very hard to step outside day-to-day life and reflect on where we actually are.

That’s why I like comparative work. We can look at how Singapore or the Netherlands structure housing policy—or countries with more comparable legal systems, like Australia or the UK.

We can also look historically. We’re not going to turn back the clock, but it helps widen the aperture of what’s possible.

A few observations stand out.

One hot take is that we are reasonably good at building nice buildings with a lot of subsidy in poor places. We’re also pretty good at building nice buildings without subsidy in affluent or appreciating places.

Outside of those market segments, we are not especially good at producing housing in this country or doing place-based development more broadly.

If there’s a strong federal tool like the Low-Income Housing Tax Credit, we can make projects work because there’s enough subsidy embedded in the program. But LIHTC also produces a very specific type of housing well.

If you’re in a market like St. Louis or Detroit, places that have lost population over time, you often already have housing stock. It needs investment. There’s an appraisal gap. It’s difficult work. Contractors are needed.

But you don’t necessarily need new large-format multifamily rental buildings when there are beautiful older single-family or attached homes in need of rehabilitation. Those units could come back online at a comparable per-unit cost while preserving community character.

We haven’t designed tools that are flexible enough, large enough, or profitable enough to keep enough actors engaged in doing the work many communities actually need.

That’s true of the New Markets Tax Credit, It works reasonably well for what it’s designed to do, but because of fixed transaction costs, projects generally need to be large.

Opportunity Zones are another example. They largely do what they were designed to do. The issue is that many expectations around them involved goals they were never really designed to accomplish.

We get what we incentivize.

Sometimes that aligns with community needs, and sometimes it doesn’t. That can vary by asset class, product type, and especially by market.

Policy isn’t nuanced enough to recognize that certain interventions make sense in hot markets but not weak ones, or vice versa.

We do have some flexible tools, like the Community Development Block Grant, where funds go to cities, counties, or states so local leaders can respond to local needs. That’s good policy design.

But first, adjusted for inflation, the program is only about 18% of its former size.

Second, not every jurisdiction uses it effectively.

And third, as a country, we’ve fundamentally shifted away from direct grants and subsidies toward tax expenditures: tax credits, capital gains exemptions, and similar structures.

There are political reasons for that. It’s difficult to secure discretionary spending through appropriations every year, especially amid concerns about deficits and spending caps.

Tax expenditures are often treated politically as though they are not “real spending.”

That’s helped programs like New Markets Tax Credits, LIHTC, and Opportunity Zones persist with bipartisan support—or at least bipartisan tolerance.

So we now live in a tax-incentive world when it comes to housing and community development.

There are things that model does well and things it does poorly, and the implications for communities are profound.

Opportunity Zones, for example, are a very flexible tool for providing equity investment into qualifying neighborhoods.

But if you think about how equity capital works in a time-limited structure tied to geography, the incentive naturally favors real estate.

It’s hard to use the structure for operating businesses because venture capital wants flexibility on exit timing. Businesses move, evolve, or get sold.

Real estate doesn’t move. It takes significant equity, and investors can reasonably model exit timelines.

So from the beginning, Opportunity Zones were structurally optimized for real estate.

The rhetoric around the program emphasized job growth and revitalizing local economies. In practice, roughly 97% of investment has gone into real estate.

There’s another important dynamic. Of the three Opportunity Zone incentives—the temporary deferral, the basis step-up, and the permanent exclusion of new gains—the permanent exclusion is by far the most economically meaningful. But to benefit from that, the asset has to appreciate significantly over 10 years.

If there’s no appreciation, there’s no capital gain. And if there’s no capital gain, excluding taxes on that gain is economically worthless.

So where is the incentive most valuable? In places with the strongest appreciation potential.

Unlike a tax credit, where investors can more confidently model economic value, Opportunity Zones introduce uncertainty because the value depends heavily on future appreciation.

Put all of those puzzle pieces together, and the reality is that Opportunity Zones are optimized for real estate investment in appreciating markets.

That may not have matched the original rhetoric, but it matches the economic incentives embedded in the structure.

Alexandra Nicoletti: Brett, thinking retrospectively, should Opportunity Zones have been structured differently? What, in your view, should have been done differently, if anything?

Brett Theodos: I think there are three dimensions where we can think about improving Opportunity Zones with an eye toward federal place-based policy more generally.

We can do a better job targeting programs based on where they’re used, who is making decisions about them, and what they’re being used for.

First, geographic targeting. If we want serious targeting of federal resources toward deeply disinvested places—tribal areas, rural communities, hollowed-out manufacturing cities, or persistently poor neighborhoods—that’s a very defensible policy choice.

If you have a place without a grocery store, without a gas station, without basic services, I can be reasonably convinced that almost any productive investment there—housing, businesses, community facilities—is additive. Setting aside predatory uses like pawn shops or liquor stores, investment in deeply disinvested communities is likely to help.

So that’s one possible funnel for OZs or any place-based policy: focus much more tightly on truly distressed places.

In practice, though, 56% of the country qualified as an Opportunity Zone, and governors selected zones from across essentially that entire continuum. If 56% of the country is distressed, we have a much bigger problem.

So I think OZs could have been more geographically focused. And in fact, some adjustments in that direction were made in the recent reconciliation legislation.

Second, who makes decisions?

Programs like the Community Development Block Grant, New Markets Tax Credits, or Low-Income Housing Tax Credits all place a decision-maker between federal money and the final project.

For CDBG, it’s the city, county, or state deciding which projects receive funding.

For New Markets, it’s a Community Development Entity, a legal entity designed for mission investing. Banks or even for-profit developers can create them, but there’s a competitive allocation process that incentivizes impact.

So you have an intermediary making judgments, and you structure incentives to push them toward public goals.

Third, what can the subsidy actually be used for?

LIHTC is a good example. For-profit and nonprofit developers alike can participate, but they have to meet affordability targets and comply with state housing finance agency requirements.

The government is essentially saying: you can make money producing affordable housing, but you must deliver affordability outcomes.

If Opportunity Zones had been more targeted along one or more of those dimensions—where, who decides, or what qualifies—you would have seen stronger alignment with need.

As it stands, Opportunity Zones are the least targeted federal economic development program we’ve encountered in terms of government spending, and they are large.

So we are spending substantial amounts subsidizing development in already affluent or rapidly appreciating places, subsidizing market-rate projects that likely didn’t need support, and subsidizing investors and sponsors who may not have any mission orientation.

From a cost-effectiveness standpoint, we spend a lot on OZs and get relatively modest social impact in return. That outcome simply reflects the program’s design.

And to be clear, that’s not a criticism of investors using the incentive. They are responding rationally to what the policy rewards.

Alexandra Nicoletti: But hearing you describe it—especially the approvals process and how localized and nuanced it all is—it seems to really take advantage of these programs, or even know they exist, you need very deep local market expertise.

Brett Theodos: There are huge barriers to entry with tax credit programs, and that’s a legitimate criticism of them.

Opportunity Zones, by comparison, have lower barriers to entry, which is one thing in their favor.

But Low-Income Housing Tax Credits and New Markets Tax Credits are arcane, expensive, and time-consuming. They make your brain hurt.

So what often happens is developers hire expensive accountants, lawyers, brokers, and financiers to navigate the process.

That ecosystem matters politically. I’m not naive about that. Having smart, reasonably well-paid professionals who understand and advocate for the program is part of why New Markets has survived and remained successful.

On the other hand, when we think about how neighborhood development used to happen through community development corporations, many of those no longer exist because the business model became untenable.

So yes, there are barriers to entry, but there’s also a reason these programs endure: they create enough profitability and enough ecosystem support to sustain themselves politically and operationally.

I genuinely think for-profit real estate developers operating in small or declining markets are among society’s underrated heroes. Taking risks with your own capital in a market that may not be poised for growth—that’s a real public good.

Whether for-profit or nonprofit, the amount of entrepreneurial hustle, persistence, and grit required to navigate planning, zoning, design, and financing processes is enormous.

Now, building another standardized multifamily box in a fast-growing Sun Belt market or producing another LIHTC deal exactly like the last one doesn’t personally excite me very much. We absolutely need housing supply, and I’m glad those units get built. But all real estate development is difficult work.

No two projects are identical. Projects take years. Very little money comes in until the end. There’s substantial risk sitting in the foreground the entire time.

Most development actually happens without subsidy. The majority of projects happen “out in the wild” on their own.

But when we’re talking about deeply affordable housing, we are much more in a subsidy world, whether that’s HOME funds from HUD, local housing trust funds, or other state and federal resources.

Those programs have their own language and systems, and developers need persistent exposure to learn how to use them effectively.

Cities and other institutions can help expand the developer bench, and there is work underway to do that.

For example, we can think about products like predevelopment lines of credit that allow developers to move more quickly, even if they don’t have large equity reserves.

There are financial tools that could help expand housing supply.

At the same time, there are real regulatory barriers. Cities and counties often need to get out of the way. Delays directly increase development costs.

I think there’s growing awareness of that and growing policy action at the state level.

But one person’s red tape is another person’s safeguard, and it’s genuinely difficult to determine what should stay and what should go.

All of this is happening in a market shaped by tariffs, constrained labor supply, immigration restrictions, demographic aging, and smaller generations entering the workforce.

Meanwhile, automation and off-site prefabrication still haven’t delivered the dramatic cost savings many expected. That may happen in the next decade, but we aren’t seeing it broadly yet.

So this remains difficult, risky work.

And I think we underestimate the extent to which developers are human beings with emotions, ambitions, fears, and competing opportunities.

They are constantly making complicated calculations about what risks are worth taking, what projects are worth pursuing, and what efforts they ultimately abandon.

If we want different outcomes from the development community, we need to think much more carefully about the realities developers actually face.

Lionel Foster: Brett, that’s great advice. Thank you.

Brett Theodos: Great to be with you. Thanks to both of you.