In Opportunity Zones, Opportunity for Everyone?
February 1, 2019
February 1, 2019
When Amazon announced that it was building one of its two new headquarters in Long Island City, most attention focused on the lavish $1.2 billion tax incentive package that helped lure America’s eighth largest company to the five boroughs. But there was an additional, less noticed sweetener. Tucked into President Trump’s 2017 tax overhaul was a program offering tax breaks to investors who put their money into certain distressed neighborhoods that had been designated as “Opportunity Zones.” Part of Long Island City, a post-industrial neighborhood that is now home to a Michelin-starred restaurant and an outpost of the Museum of Modern Art, had apparently qualified as sufficiently distressed, meaning Amazon was eligible for an even better tax deal under the opportunity zone program.
Opportunity Zones offer preferential tax treatment to investors who pour their capital gains into poor areas. In the short term, investors can avoid up to 15 percent of taxes they would have owed on those gains, and if they stick around for a decade, they can avoid taxes altogether. New York City has a tantalizing 306 opportunity zones – 60 percent of the census tracts designated in the state.
But the opportunity zone program begs some big questions: Is Long Island City, already the fastest growing residential market in New York City and the most expensive neighborhood in Queens, actually distressed? Will opportunity zones really give a shot in the arm to neighborhoods that need it, or will investment simply flow to places where it was already headed?
I attended a ULI event last week where three panelists predicted how these tax incentives would play out. Rachel Diller, head of U.S. real estate at Bridges Fund Management, speculated that Opportunity Zones already on the upswing will likely see the most investment, echoing criticism that the program will merely accelerate development that would have happened anyway. The program could make a good deal better or a marginal deal good, she speculated, but won’t make a bad deal good. Opportunity Zones, Diller said bluntly, are not an investment strategy.
Seth Pinsky, a former head of New York City’s Economic Development Corporation (NYC EDC) under Mayor Michael Bloomberg, finds those marginal opportunities particularly intriguing. In fact, as leader of strategy for emerging opportunities at RXR, those areas with strong fundamentals but low investment are exactly what he’s looking for. Pinsky sees two varieties of opportunity zones: areas where investment is already happening and truly distressed areas where nothing has been happening for decades.
In the first category, owners already sense that their property has become more valuable overnight, and are marking up asking prices by 50 percent or more. Higher purchase prices for land could actually make capital difficult deploy in those areas, Pinsky says. But in the second category, the tax incentives could work as intended, making marginal districts more attractive. Pinsky believes it’s the developers who manage to sniff out opportunities there who will be really successful.
Real estate isn’t the only kind of investment made more compelling by the Opportunity Zone program. The statute also enables people to invest in businesses (excluding some “sin industry” businesses like liquor stores and tanning salons). But Eric Clement, senior vice president in the Strategic Investments Group at NYC EDC, cautions that just because money flows into a community doesn’t mean the community actually benefits. For example, an investor could build affordable office space for startups and invest in the companies that choose to relocate there. That’s great for those startups and potentially beneficial to the city overall (for example, it could move job density out of crowded Manhattan and into the outer boroughs), but it doesn’t necessarily draw investors to the laundromats, grocery stores, and coffee shops that are already in the neighborhood.
The Opportunity Zone program is undoubtedly a boon to developers and investors. One tax lawyer tweeted that he heard it described as “the greatest thing for real estate in, like, the last hundred years.” For neighborhoods, the outcomes could be mixed. Either way, Opportunity Zones offer an exciting chance to work with local communities to benefit everyone.