Opportunity Zones Expose Conflict Between Growth Advocates And Neighborhood Leaders
Theoretically, opportunity zones seem like a win-win for both developers and the residents living in those targeted areas. The whole idea is to provide a fresh flow of private equity to areas in need of a facelift. But that is not how all stakeholders feel. The new law exposes long-simmering tensions between both camps: One side wants growth, the other wants a say in how that growth happens.
The two sides brought their concerns to a panel discussion at Bisnow's Seattle Opportunity Zones event last week.
“You are coming into our house,” Seattle Chinatown International District Preservation and Development Authority Executive Director Maiko Winkler-Chin said. “You have to be willing to listen to what we want.”
Listening is fine, Seattle For Growth Director Roger Valdez said. But the rules have to be reasonable. He said the bureaucratic quagmire surrounding the city’s development process is bogging down growth at a time when Seattle needs it.
Winkler-Chin said her district wants jobs for the people already living there. Residents don’t want the ambiance of the neighborhood to change due to gentrification and higher rents. People and businesses there now shouldn’t be pushed out due to opportunities created by the tax-friendly zones.
When developers approach the neighborhood with plans, Winkler-Chin wants to see the benefit for the community.
“We do expect opportunity,” she said. “We want jobs. We want to see how this development is supposed to provide opportunity for us. We want jobs for people who live there and we don’t want those people who live there now or the small businesses who are there now to go away.”
The challenge, she said, is to show how the developers will meet the community needs. The Chinatown district would like investors that stay in the neighborhood and participate. She wants to see long-term investors who have a personal vested interest in the success of the neighborhood. She suggested investors should participate in and sponsor community events as one example of how they can show support.
Valdez countered that neighborhoods and the city of Seattle need to be more forward-thinking when it comes to development. It shouldn’t take so long to navigate the permitting process.
“Opportunity zones are supposed to create opportunity,” he said. “The city of Seattle is failing miserably in terms of processing permits.”
He warned developers that the city’s exceptionally slow permitting process and angry neighbors who are opposed to gentrification can have negative impacts on any proposed project.
“It can be a deal-killer,” he said.
These issues, along with the fact that the IRS’ rules governing the zones are still murky, leave many unanswered questions for developers to consider.
The risk is real, said Smartcap co-founder and CEO Tim Shoultz. Schoultz’s firm closed its first opportunity zone fund earlier this year. The price of land is soaring. Dirt in SODO is going for $100 a foot. Though the opportunity zone status provides some tax relief benefits, paying too much for land won’t necessarily pencil out, he said.
“Not paying taxes on losing money is still not a good deal,” he said.
Nitze, a longtime developer who is already in many of the downtown Seattle zones, looks to increase the value of the whole neighborhood when he enters markets. A healthy community is good for business, he said.
When it comes to investing in opportunity zones, creating the right neighborhood mix means looking for non-real estate business partners and identifying an anchor tenant to build around.
“It’s more of an art than a science,” he said.
Both Nitze and Shoultz said investors should use caution when selecting funds. The fund owners should fully understand the rules and understand what is yet to be determined.
Still, those unanswered questions shouldn’t stop investors from getting in on the ground floor, KPMG principal Orla O’Connor said.
“The IRS has been working on guidance,” she said. “I tell people: Don’t wait. The rules will be taxpayer favorable.”