Easy money?
Program allows tax breaks for sites already going vertical
Since enacting 18 months ago the Opportunity Zone program, which awards developers huge tax breaks for new projects within designated Census districts, commercial real estate listings are increasingly peppered with references to properties as “rare” redevelopment opportunities under the program.
Rarer still? Opportunities to invest in a project already underway in an Opportunity Zone — but they are being offered up by savvy developers look to capitalize, if not in keeping with the intent of the program to jump start the redevelopment of neighborhoods stuck in neutral.
In early May, the trade publication Real Estate Alert reported that Stamford-based Building and Land Technology is soliciting new investors in the Allure at Harbor Point residential high rise under construction on the Stamford waterfront, joining 10 others built by BLT in the past decade.
Bringing in fresh capital is nothing new in the development world — except that BLT is pegging its pitch as an opportunity for investors to cash in on the Trump administration’s Opportunity Zones program, created under the Tax Cuts and Jobs Act of 2017 as a way to unleash a torrent of investment in underdeveloped communities coast to coast.
Ten years into its development, Harbor Point is hardly that with BLT having added another two apartment high-rises to the development plan this year. As renters have swelled the population of Harbor Point, businesses have followed, to include upscale eateries like Dinosaur BBQ and Harlan Social; shopping options like Fairway Market and the headquarters furniture showroom Design Within Reach; and powerhouse white-collar employers like Bridgewater Associates and McKinsey & Co.
The same day Real Estate Alert reported BLT’s dangling Allure as an Opportunity Zone play, the publication estimated at more than $20 billion the aggregate amounts sought by about 50 new funds designed to pool money to invest in projects that lie within designated zones. Those entities include the Belpointe REIT real estate investment trust formed last year by Greenwich-based Belpointe Capital, which aims to raise $50 million in initial capital in a public offering of securities; and Westport Capital Partners in Wilton, which is participating in a $3 billion fund.
‘That’s a travesty’
Connecticut has more than 70 districts that qualify for Opportunity Zone tax breaks, dotted throughout the rectangle formed by Harbor Point, Torrington, Putnam and Groton, and including swaths of Bridgeport, Hartford, New Haven, South Norwalk and downtown Danbury, and several smaller communities like Ansonia.
In response to a Hearst Connecticut Media query, BLT did not say whether it plans to seek Opportunity Zone tax breaks for any other projects it has in Connecticut or nationally. Speaking in mid-May at a Westport real estate forum, BLT’s general counsel cited the Opportunity Zone program as a significant opportunity for the real estate industry, while suggesting the program does not go far enough to ensure that potential projects in downtrodden areas are not squeezed out by gentrified blocks that happen to lie within designated zones.
“The concept is a good one,” said David Waters, BLT general counsel. “But it’s not actually been thought through very well, as far as where you designate them and how you designate them, … on a strategic and surgical basis.”
A fellow panelist who leads the development firm Spinnaker Real Estate Partners derided the program as ripe for abuse, with investors filing a single-page form to claim the tax break.
“Portland, Ore. — which is one of the most forward-looking, progressive and viable cities in the country — all of downtown Portland … is an Opportunity Zone,” said Spinnaker CEO Clay Fowler. “That’s a travesty.”
In its own analysis of the program in January, the commercial real estate advisory firm Newmark Knight Frank cited another example in Seattle, where the booming Pioneer Square development adjacent to downtown qualifies for Opportunity Zone incentives.
Vague authority, enforcement
In Spinnaker’s own backyard in Norwalk, Brookfield Property Partners is racing to complete the SoNo Collection mall in advance of a mid-October opening date, with the developer having stated its intention to bring in outside investors without indicating whether it would dangle it as an Opportunity Zone tax break. At an April investment conference in California, the CEO of Brookfield Property said his firm will create an Opportunity Fund by this summer.
The mall is located in an Opportunity Zone corridor that runs from the southern terminus of Water Street, where construction is commencing on the Washington Village and Harbourside SoNo developments, north through West Avenue where Belpointe Capital is planning another addition to its Waypointe district and nearly to the Merritt Parkway. Just north of the Merritt outside that Opportunity Zone corridor, BLT is building what is currently the largest single apartment project in southwestern Connecticut, the Curb at North Seven.
Other major southwestern Connecticut projects located inside designated Opportunity Zones include Bridgeport’s Steelpointe district; downtown New Haven where Spinnaker and Stamford-based RMS Companies have projects under way; and downtown Danbury, where BRT has proposed a new apartment complex across the street from Kennedy Flats which sold for $86 million last year.
In a May blog, an analyst with the Washington, D.C.based Center on Budget and Policy Priorities critiqued the Opportunity Zone program’s regulations as ensuring investor flexibility to put their money in projects with the greatest odds of success, at the expense of where their money could do the most good.
“The proposed regulations add one rule that gives the IRS limited authority to combat abuse, but it’s vague and its enforcement is uncertain,” wrote Samantha Jacoby, senior tax legal analyst for CBPP. “The IRS may challenge any investment that it finds isn’t intended to increase investment or business activity in an (Opportunity Zone) ... (but) the rule is extremely weak because it doesn’t specify the types of transactions that it will consider abusive, other than, perhaps, blatant land speculation.”