As part of the December 2017 Tax Cuts and Jobs Act, a generous new tax break was created, designed to lure investment into struggling neighborhoods known as “Opportunity Zones.”  This law was meant to catalyze investment in depressed communities in need of capital improvement. Approximately 8,700 opportunity zones were designated nationwide, in big cities, small towns and rural areas. The zones were selected with input from city and state agencies responsible for economic development and affordable housing.

In June 2018, the IRS released a map of all designated opportunity zone locations nationwide, but the map is not terribly useful (to the point of being inscrutable) in dense urban areas where one side of the street may be in a zone, while the other side of the street is not.

In Manhattan, there are only a few designated zones, and they are most heavily concentrated in upper Manhattan, north of 125th Street in Harlem, Washington Heights and Inwood.

The opportunity zones south of Central Park are:

  • (1) Corlears Hook/Two Bridges: 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 can be found on Madison Street or Grand Street.
  • (2) 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.
  • (3) Alphabet City/East Village: Between East 3rd and East 6th Street and Avenue B and Avenue D.
  • (4) East 20s: This opportunity zone is located between 23rd and 34th Street, and 1st Avenue and the FDR. The area is located just north of Peter Cooper Village and Stuyvesant and it includes many hospitals such as Bellevue and Tisch Hospitals.
  • (5) 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.

It will be interesting to watch these neighborhoods evolve once the Opportunity Zone capital is deployed. There is, of course, a delicate balancing act between catalyzing investment and job growth while maintaining affordability for the city’s long-time residents. Politicians are,  of course, well-aware of these and are working with non-profits and foundations to develop guidelines around affordability and other metrics. Time will tell how it all plays out.

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 to incentivize investors to re-invest their unrealized capital gains back into the funds.

While the final details of the Opportunity Zone program have yet to be confirmed by the Treasury Department (due to a delay courtesy of the recent Government Shutdown), Opportunity Zone funds are still being created--with many backed by enormous amounts of capital--as they wait for these designated zones to finally get the green light.

Since this designation was announced, development sites in opportunity zones nationwide have been acquired rapidly and in some places, prices have increased by 80% just in the last year. Projects that qualify include new construction as well as those that include “substantial improvement” to an existing building in one of the zones.

At Compound, we’re watching prices in opportunity zones carefully.  Our concern is that prices have increased to levels that are difficult to justify, even incorporating the potential future value of the tax benefits.