Wednesday 23 October 2019

New York, Florida developer taps a tax break aimed at needy areas

Land of opportunity: Michael Stern is also co-developer of a skyscraper on West 57th St in New York where the penthouse is listed for sale at €57m
Land of opportunity: Michael Stern is also co-developer of a skyscraper on West 57th St in New York where the penthouse is listed for sale at €57m
Michael Stern

Jonathan Levin and Noah Buhayar

New York Developer Michael Stern is joining in the frenzy over the latest US real estate tax break, with four projects in 'opportunity zones' on the east coast.

Stern, whose JDS Development Group is also building ultra-luxury condos on Manhattan's Billionaires' Row, said he is investing with family offices in eligible sites in New York's Brooklyn and Queens, and the Allapattah and Opa-Locka areas of Miami-Dade County, Florida.

Opportunity zones emerged as a component of the 2017 federal tax law, as a way to draw development and jobs to low-income neighbourhoods. Investors who fund projects in the zones and meet certain requirements can defer capital-gains taxes on profits earned elsewhere and eliminate them on the new investments within the more than 8,700 designated census tracts.

Stern - co-developer of a skyscraper on West 57th Street in Manhattan where a penthouse is listed for $57m - said he's seen an uptick in deals related to the zones, especially since last October, when the US Treasury Department and Internal Revenue Service issued proposed regulations on the incentives.

"Opportunity zone money is starting to flow," Stern said in a phone interview. "There are still some out there that are cautious. But I think we feel very confident that the rules of the game are firm enough for us to engage in some of these investments."

His deals since the zones were designated include at least $139m in property purchases - the two Florida sites, which now have mostly industrial buildings, and one in the Jamaica neighbourhood of Queens, where he plans to convert six buildings into housing with some light industrial and office space.

In Brooklyn, Stern is bringing opportunity zone financing into an ongoing project at 9 DeKalb Ave, where the borough's tallest residential tower is set to rise on the former Dime Savings Bank site.

Critics of opportunity zones question whether the money will really go to areas of need, or if it would simply accelerate gentrification in certain communities, potentially displacing existing residents. In at least some of the neighbourhoods, developers probably would have gone ahead with the projects anyway. For his $725m Brooklyn tower, Stern said the programme created a new way to raise equity financing, which he hopes to close on in a few weeks. He said he also owns four or five other projects that happen to fall in opportunity zones, and he is analysing how the new rules would affect those investments.

The idea that the funds could help communities could be "a sweetener for some investors," Stern said. In Opa-Locka, where he plans improvements to a group of warehouses, about half of the population of about 15,000 lives below the poverty level, and the violent-crime rate is among the highest in the nation. And opportunity zones could help replace EB-5, a controversial visas-for-investment programme that's fading as a fundraising tool for the real estate industry, he said.

'Opportunity Zones' QuickTake

1. What are they?

Buried in the Republican tax overhaul that US President Donald Trump signed into law in late 2017 are incentives for investors who fund businesses or develop real estate in new opportunity zones. Banks, private equity firms, insurance companies and wealthy individuals are rushing to take advantage. Critics have raised questions about whether the tax breaks will spur development in places that really need it or just stimulate growth in communities that were destined to see investment anyway. One of the more controversial sites is the New York City zone where Amazon had planned a new headquarters - before it walked away in the face of criticism over the tax breaks and subsidies offered to the project.

An opportunity zone is a US census tract that meets the law's criteria for high poverty or low incomes and has been nominated by its state for inclusion. More than 8,700 of all census tracts - about a 10th - have won designation as opportunity zones. They're found in every state, in Washington DC and in US territories such as Puerto Rico. Some of the rural zones span giant swathes of land out west, while some urban zones are just a few square blocks.

2. So why are there so many?

Economic growth in the US has been uneven. A handful of cities are booming, while much of the country - from rural counties to aging Rust Belt towns - get left behind. Giving investors an incentive to plough some of their $6 trillion in unrealised capital gains into these distressed communities could help jump-start growth, create jobs and lift incomes. Nearly all of the opportunity zones have poverty rates north of 20pc or family incomes that are lower than 80pc of the state or metro median.

3. So what's the problem?

There's a debate over whether investors will pile into places that were already seeing development. An analysis by the Urban Institute found that most of the zones are in fact hurting - fewer than four per cent had experienced an influx of wealthier, college-educated people that would signal gentrification. But in Washington DC, about a third of the tracts have seen significant socioeconomic change. Critics also note that there's no requirement that investments in opportunity zones benefit the community.

(© Bloomberg)

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