In a former warehouse on a dimly lit street in the South Bronx, developers sipping Puerto Rican moonshine listened as a local official urged them to capture a new U.S. tax break by rebuilding the decaying neighborhood.
In Alabama, a young lawyer quit his job after seeing the same tax break’s potential to help one of the nation’s poorest states. He now spends his days driving his Hyundai from town to town, slideshow at the ready, hoping to connect investors with communities.
And on a conference call with potential clients, a prominent hedge fund executive pitched investments in a boutique hotel in Oakland, which he described as San Francisco’s Brooklyn. The project is eligible for the same tax break, designed to help the poor.
Fervor about opportunity zones is heating up across the U.S. For a limited time, investors who develop real estate or fund businesses in these areas are able to defer capital gains on profits earned elsewhere and completely eliminate them on new investments in 8,700 low-income census tracts. The goal is to reinvigorate these areas. But the question is whether the 2017 tax law will, as U.S. Treasury Secretary Steven Mnuchin predicts, pump $100 billion into places that need it most, or if investors will play it safe by funding projects in a few zones already on the upswing.
There’s no lack of optimism among officials in shrinking Rust Belt towns, wind-swept Western landscapes and hurricane-ravaged Puerto Rico, who hope to jump-start local economies. The incentives are so flexible they could be used for everything from affordable housing to solar farms.
Yet on the investor side, much of the attention is fixed on how to turn a profit in already thriving areas. They include neighborhoods surrounding Manhattan, Atlantic beach towns drawing vacation-home developers, bedroom communities near Silicon Valley and anomalies like Portland, Oregon, where the entire downtown was deemed eligible for the breaks.
“The phrase I keep thinking of is ‘gold rush,’ ” said Michael Lortz, an accountant who works with developers in Portland. “There’s a lot of money from out of town that’s coming here.”
Already, a policy debate is raging. Backers are urging people to reserve judgment and say the tax breaks have galvanized cities, businesses and investors to think creatively about boosting parts of the country most in need. Critics say the incentives were poorly calibrated and may amount to a boondoggle far in excess of the official $1.6 billion projected cost.
Americans may have to wait months or years to learn which side is right. That’s because the law doesn’t require investors to disclose projects, making it difficult to tell which areas are benefiting the most.
But there’s plenty of evidence that a boom is brewing. Goldman Sachs Group Inc., which already had an investment team focusing on struggling communities, has disclosed about $150 million in projects in recent months. Purchases of sites inside opportunity zones spiked as the tax law took effect, outpacing growth in other areas, according to Real Capital Analytics, which tracks property sales. Altogether, investors spent 62 percent more on properties eligible for tax breaks in the 12 months through September, compared with those in the same census tracts a year earlier, its data show.