Are Opportunity Zones A Good Thing For Philadelphia?
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The qualified opportunity zones created by the tax law passed late last year have still yet to be finalized, but that hasn’t stopped a whirlwind of activity from popping up in Philadelphia and the rest of the country.
After the IRS and the Treasury Department released the first version of guidance for investing in opportunity zones on Oct. 19, investor interest has picked up dramatically, BDO National Tax Office Managing Director Marla Miller told Bisnow.
“Before, we received a few calls or emails a day [about opportunity zones], and now it’s probably up to 15-20 calls a day to our group, from prospects, clients and internally,” Miller said. “The release of that guidance made people more motivated to look at it and cleared up some of the questions, and we have seen an increase in interest.”
The guidance release was only characterized by the White House as a set of “proposals,” and it is soliciting suggestions and comments until Dec. 14 ahead of the official public hearing Jan. 10. That such a level of activity has already been reached ahead of anything being set in stone speaks to the program’s potential to spur investment.
Treasury Secretary Steven Mnuchin said he expects around $100B in private investment into opportunity zones out of the estimated $6 trillion in capital gains accrued across the country that would theoretically qualify for tax breaks through the program.
Unlike many government initiatives designed to drive investment into underserved or destitute areas, opportunity zone investing does not come with many restrictions on how the money is spent within the zones, or who must be involved in the construction or occupancy of any development involved. The open-ended nature of the plan is due to its basis in tax breaks rather than actual government funding, Philadelphia Director of Planning & Development Anne Fadullon said.
“[The lack of restrictions] is something we’re taking a close look at, and the answer is that if it’s purely a market-rate, private real estate deal, there’s not a whole lot we can do [to add more restrictions],” Fadullon said. “Because this isn’t a government program per se, but a tax break. So any company that’s certified can invest in these zones and we might not even know about it.”
If a development in an opportunity zone requires zoning variance or a purchase of public land, then the city can do more to influence the nature of that development, Fadullon said. But private investment can likely move more quickly than the city can in that regard.
The Planning Department is still taking inventory of the various programs it could potentially leverage, Fadullon said. PIDC, which owns quite a few properties in opportunity zones, is soliciting applicants for an opportunity zone consultant position it has just created.
The process of creating a Qualified Opportunity Fund is so simple, “it can take a day and a half to put together,” Duane Morris partner Brad Molotsky said at the Oct. 30 Bisnow event. The funds self-certify and the audit process is not proposed to be overly frequent or invasive, which considerably lowers the barrier to entry for interested parties.
The bulk of early activity has seemingly come from established and well-funded capital sources, Mosaic Development Partners principal Gregory Reaves told Next City. A tax break that looks likely to be largely utilized by larger companies and the wealthy, and does not include language to ensure local participation in an opportunity zone’s growth, opens up serious questions about its potential effects.
Without restrictions, Miller and Fadullon believe that the bulk of investments will go into opportunity zones where development and revival has already begun. In Philadelphia, that applies to long stretches of North Broad Street and neighborhoods surrounding University City, and does not apply to the vast swaths of Philadelphia that have been deeply impoverished for decades without little meaningful development.
“What we’re hearing from investors is that these deals still have to pencil as real estate deals,” Fadullon said. “They may get a little bit easier to finance, but it doesn’t take a bad deal and make it a good deal.”
In Powelton Village and Mantua, the neighborhoods that sit just to the north of University City, there are especially good deals thanks to the unrelated, statewide tax break program, Keystone Opportunity Zones. At least 53 parcels in Philadelphia are located within both a KOZ and a QOZ, according to Miller, allowing for some potential “double dipping.” The city government has little recourse to prevent such a loss of tax revenue.
“Those kinds of investments could happen, and we may not even be aware of them,” Fadullon said. “As much as we can, we’ll try to keep track of that, and wherever we can put any guardrails in place from the city’s perspective, we’ll want to look at that.”
Regardless of how an opportunity zone looks now, nothing in the program as currently constituted ensures that the growth it is meant to spur will have positive effects on current residents. In areas like North Broad that are at risk of gentrification and displacement of those who can’t afford higher property taxes or rents, opportunity zone investment could accelerate those processes, which Fadullon acknowledged as a “danger.”
But if the city is limited in what it can do to stem the tide of unregulated opportunity zone investment, it could potentially have more impact by adding more incentives to try to influence where and what kind of development gets off the ground.
“If [developers] are close to being able to pencil [a project] but need a little assistance and are willing to do something with community benefits, then we would like to talk to developers to help get those deals done,” Fadullon said.
If a developer is considering a multifamily project, Fadullon will look to add some public assistance in exchange for assurances that such a project would include affordable units. In the case of retail development, she expressed similar willingness to incentivize populating a project with locally owned or staffed businesses.
Philadelphia has experienced its recent revival as a value option compared to New York or Washington, D.C., but a market-rate development boom driven by opportunity zones could have the potential to negate that advantage, Fadullon said.
The city does not plan on making any official comments or suggestions in the refinement process of the opportunity zone guidance, but Fadullon has been in contact with several private organizations that will be part of the conversation. Neither she nor Miller are optimistic that the Trump administration will add restrictions or protections at a federal level. For now, all anyone can do is keep their fingers crossed.
“We’re kind of looking at it both as an exciting time, because it would be great to attract additional capital to Philly, but also using our peripheral vision to see where this investment is going to come from and ensure it does as little harm as possible,” Fadullon said.