For almost two decades, a Goldman Sachs Group Inc. unit has tended billions of dollars in bets off Wall Street, funding projects in struggling neighborhoods around New York and beyond.
Now, thanks to a new U.S. tax break, its deals could become a lot more lucrative.
The tax overhaul Republicans pushed through in December includes a lesser-known passage creating a new type of investment vehicle -- “opportunity funds” -- that can win steep tax breaks for supporting projects in low-income communities. Few if any banks are as well positioned to capitalize on the incentives as Goldman Sachs, which began creating funds days after the law passed. It’s now weighing whether to set up more to let clients invest, too.
“We have a big leg up,” said Margaret Anadu, who heads the bank’s Urban Investment Group. “This is investing that we’re already doing.”
Opportunity funds are both innovative and controversial. They have to focus their investments in roughly 8,700 low-income communities selected by state governors and other officials. Zones range from gritty urban neighborhoods to shrinking Rust Belt towns.
Proponents say the program will provide a much-needed jolt to areas typically avoided by developers. But detractors have warned the law is written too broadly, giving savvy investors a break on projects they might have pursued profitably anyway. There are also concerns the program may accelerate gentrification, driving out low-income residents.
Goldman Sachs, for its part, is hardly shy: It’s racing to make use of the new tax break and potentially popularize it on Wall Street. Anadu said the firm wants its investments to have a positive impact.
Days after the legislation passed, Goldman Sachs created an opportunity fund to invest in a project that will add affordable housing to New York’s Jamaica neighborhood. In April, it did the same for money it put toward a development in East Orange, New Jersey, that will expand a grocery store in an area short on healthy food. In June and August it did deals in Brooklyn and Baltimore.
The funds are especially attractive for firms looking for ways to redeploy capital gains -- of which Goldman Sachs and its clients have plenty. Investors start by plowing those proceeds into opportunity funds, deferring taxes until 2026. And, if the funds buy and hold qualifying assets for at least five years, investors can reduce the tax they pay on appreciation, or eventually eliminate it altogether.
The deferrals are expected to cost the government $7.7 billion by 2022, an impact that will eventually wane as investors resume payments, according to the Joint Committee on Taxation. There’s no limit on the ultimate benefit for investors, whose profits depend on the gains generated by their projects and how long they hold onto the assets.