As part of the December 2017 Trump tax cut, a generous new tax break was created, designed to lure investment into struggling neighborhoods known as “Opportunity Zones.” Approximately 8,700 of these opportunity zones were designated nationwide, in big cities, small towns and rural areas. However, investors cannot invest directly in opportunity zones.
Instead, they must invest through “qualified opportunity funds.” These funds can invest in just about anything--from real estate to tech startups--as long they are located in an opportunity zone. Investors in the funds can defer tax gains in the funds until December 2026. This law was meant to catalyze investment in depressed communities.
How were these opportunity zones designated?
State governors were allowed to designate up to 25% of their state’s low-income census tracts based upon poverty rates and income levels. Given that, there should not have been too much political maneuvering, but, as with all things political, shenanigans are playing out.
Governors were caught balancing the need for funds in poor areas against the areas most likely to attract private investment. As a result, some convoluted choices have been made. For example, much of Boston’s financial district is a designated opportunity zone, a Wall Street Journal article reported that nine Ritz-Carlton hotels nationwide sit inside such zones, as do parts of Stanford University.
Where are the opportunity zones? Have a look at this map:
At Compound, we are currently focused on Manhattan real estate investment. So, let’s look at some of the designated Opportunity Zones here:
- Corlears Hook: We wrote about Corlears Hook a few months back. The area on the Lower East Side bordered by Montgomery Street, East Broadway, Grand Street, and the FDR Drive has been designated as an Opportunity Zone. There’s not much available development space in the area, but some available properties may be found on Madison Street or Grand Street. Here’s one from Cushman & Wakefield.
- Lower East Side: There are two Opportunity Zones within the LES. The first is bordered by Clinton Street, Columbia Street, Delancey Street and East Houston Street. The second is between East 3rd and East 6th Street and Avenue B and Avenue D. Here is a property for sale and here is an interesting project that is currently in development.
- Hell’s Kitchen: The Opportunity Zone in Hell’s Kitchen is between 50th and 58th Street and 10th Avenue and the West SIde Highway. We were surprised to see this as one of the designated zones as its a few blocks from Central Park, just north from Hudson Yards, and a few steps away from some of the most expensive properties in Manhattan. We think this is the zone that developers are going to target. There are only a few properties for sale in this zone. Here’s a condo for sale right smack in the middle. As you can tell from the $9 million price tag, this is certainly an area of the country that the government should be subsidizing capital investment into.
There are some other designated zones around the island of Upper Manhattan in neighborhoods you might expect to find them, parts of Harlem, Washington Heights and Inwood.
We believe there will be a flurry of activity that will occur after the IRS clarifies the process and certification of eligible funds. We expect price increases which are disproportionate to the tax benefits in less risky zones--places like Hell's Kitchen and the Lower East Side.
What does this mean for us?
At Compound, we’re watching the opportunity zone program take shape. The IRS has still not yet formalized how opportunity funds will be certified. We’re skeptical that this legislation will create dramatically positive changes in blighted areas. But, we firmly believe that it will spur investment activity and pricing, and so we’re watching the space closely and expect a flurry of activity in the very near future.
We’ll keep you updated.
In the meantime, read some of these articles for more information about Opportunity Zones.
- Triple Play Tax Break: New Opportunity Zone Funds Cut Your Taxes Three Ways. (Forbes)
- An Unlikely Group Of Billionaires And Politicians Has Created The Most Unbelievable Tax Break Ever. (Forbes)
- How Opportunity Zones could become a big catalyst for inner-city development. (Curbed)
- As States Pick ‘Opportunity Zones’ for Tax Breaks, a Debate Over Who Benefits. (WSJ)
About Compound Asset Management:
Compound is a venture capital-backed asset management firm that creates residential real estate funds designed for the next generation of investors.