Could New York opt out of Opportunity Zones?
Could New York opt out of Opportunity Zones?
When in 2017 Congress passed a tax incentive program meant to increase investment in low-income communities, dubbed “opportunity zones,” it’s possible lawmakers didn’t scrutinize who exactly would be on the receiving end of those opportunities. As a recent investigation by The New York Times revealed, the program – which allows investors to defer capital gains taxes for investing in opportunity zones designated by governors in each state – has so far been benefiting wealthy investors and residents of high-end developments, not those living in the country’s poorest neighborhoods.
The Opportunity Zones program was a part of congressional Republicans’ and President Donald Trump’s Tax Cuts and Jobs Act. New York chose to conform with the program, meaning that investors can defer or avoid state and local taxes on capital gains as well. Now experts are drawing attention to the fact that little is known about which projects in New York’s 514 qualified opportunity zones are benefiting, while lawmakers weigh changes to how New York complies with the federal program.
A report released last month by the fiscal policy think tank Citizens Budget Commission pointed out that there is no commitment from federal officials to monitor the program or evaluate how well it’s working. There are also few reporting requirements for investors using the funds or developers benefiting from them. “They have to report how much money they're investing in funds, but not necessarily how that money is being used,” said Sean Campion, senior research associate at CBC. “There's no real way to track how that money is making its way to projects on the ground, and what impacts those projects are having or not having in the surrounding community.”
Individuals and corporations with capital gains from investments are typically taxed on that income, but the Opportunity Zones program allows both groups to sell an asset and reinvest any gains in a “qualified opportunity fund,” an investment vehicle designed to invest in projects in opportunity zones. Individuals and corporations are then able to defer taxes on those capital gains until 2026, and if the investment is held for at least five years, the amount of gains subject to taxation is reduced. It’s reduced even further, if the investment is held for seven years. Additionally, if a person holds on to their opportunity fund investment for 10 years, they’re able to avoid taxation on any new capital gains from that investment. In short – if investors hold on to investments for the right amount of time, they pay less tax on existing capital gains and don’t have to pay any capital gains tax on new gains. The Citizens Budget Commission report found that the tax breaks could lead to annual losses of up to $63 million for the state and $31 million for the city.
Altogether, New York has 514 approved, designated opportunity zones. Opportunity zones are designated low-income community census tracts in each state – “low-income community” being defined as a census tract in which the poverty rate is at least 20% or, if located in a non-metropolitan area, the median family income does not exceed 80% of the statewide median family income, and if located in a metropolitan area, the median family income does not exceed 80% of the greater of statewide median family income or the metropolitan area median family income.
But the Opportunity Zone program also allows census tracts that aren’t low-income to be designated by the state as opportunity zones, as long as they are contiguous with low-income community tracts and their median family income doesn’t exceed 125% of that of the low-income tract. “New York state worked within federal guidelines and submitted Opportunity Zone recommendations based on guidance from the State’s Regional Economic Development Councils, local and public input, prior public investment, and the ability to attract future private investment,” said Kristin Devoe, a communications director at Empire State Development, the state agency that recommended census tracts to the U.S. Treasury Department. “This was a data-rich, regionally focused process, and all nominated tracts were subject to federal approval.”
While the opportunity funds don’t have to report on which projects they’re investing in or their impacts on the community, some high-profile developments have drawn attention for being located in opportunity zones. These are often rapidly gentrifying census tracts: they still qualify as low-income communities because of the existing low-income population, but they’ve seen a surge of high-end developments since before the Opportunity Zone program was established. Income data for determining which census tracts are low-income is based on the 2011-2015 American Community Survey Five-Year Estimates. In some cases, as the Times notes, census tracts that qualified as low-income a few years ago have since become wealthier. In other cases, these are census tracts that don’t qualify as low-income communities, but are designated opportunity zones because they’re contiguous with actual low-income tracts – the idea being that investments in these communities could lead to jobs for low-income residents of neighboring communities.
The planned and now-cancelled Amazon headquarters in Long Island City, for example, was set to be located in an opportunity zone and could have benefitted from opportunity fund investments. “There are many locations in Manhattan and Queens and Brooklyn, that are in areas that are incredibly hot, areas where there's just been a tremendous interest in commercial development,” said John Kaehny, executive director of the good government group Reinvent Albany. One report found that fifteen of New York City’s opportunity zones are already areas of “high growth,” including neighborhoods like Long Island City, Williamsburg and Gowanus. “There may be parts of the state where Opportunity Zones are warranted and perhaps potentially even useful, but the ones in New York City are just a gigantic taxpayer rip-off,” Kaehny added.
While still weathering the intense public blowback to Amazon HQ2 that eventually killed the project, Amazon executives said that they did not intend to take advantage of the fact that the new headquarters would be located in an opportunity zone. But that’s not to say most others wouldn’t. “I would assume that 100% of people who can take advantage of it will,” Kaehny said.
In addition to the proposed Amazon headquarters, other developments that have drawn attention for being located in opportunity zones include six Brooklyn Heights properties owned by Jared Kushner’s family’s real estate firm, and a luxury apartment building in New Rochelle that offers a spa for residents’ pets. While there’s no comprehensive tracking of which projects could be benefitting from opportunity fund investments, the funds themselves do have to report on certain information like investment and geographic focus, and the National Council of State Housing Agencies has compiled a directory of publicly announced funds. Opportunity funds focusing on New York are being led by major developers including Heritage Equity Partners, RXR Realty and the Shorewood Real Estate Group. Some developers with opportunity funds have explicitly said which projects will receive investments, like the Lightstone Group, which identified a Marriott Moxy hotel in Williamsburg as its first development.
Following the Times’ reporting on the program last month, others are drawing attention to additional concerns about the tax break program. This week, The Real Deal reported that the Manhattan-based landlord Stellar Management lobbied for a census tract on Manhattan’s West Side to be designated as an opportunity zone, which it now is. Census tract 135 is in Hell’s Kitchen. As of 2017, it had a mean household income of nearly $112,000, according to The Real Deal, but a median household income of almost $65,000. Even so, the neighborhood features luxury developments that could benefit from the opportunity zone designation. According to the CBC, census tract 135 is a low-income, low-poverty tract, meaning that it meets the income threshold but not the poverty threshold. “These tracts are not as disadvantaged as the high poverty tracts, but still are home to a significant number of low-income households,” the report by the CBC states.
Issues like these are why some New York lawmakers are proposing stricter reporting rules for opportunity funds, or even decoupling from the program. Earlier this year, state Sen. Michael Gianaris proposed eliminating state tax breaks for capital gains when investing in opportunity zones. “There's not much we can do about federal tax law, that has to be driven by the federal government, obviously,” Gianaris told City & State. “But the state tax code mimics the federal code, so if someone gets a break on capital gains in their federal taxes, that slides over and they get the same break on their state taxes. What I'm proposing is that we decouple the state benefits from the federal benefits, so at least if someone's taking advantage of this corrupt federal program, they don't simultaneously get a state tax benefit for doing that.”
In his CBC report, Campion suggested several approaches New York could take to have more oversight of the program. The state, for example, could require opportunity funds to report on their activity in order to receive the state tax break, including the location of projects, the creation of jobs or number of housing units built. New York City Mayor Bill de Blasio and New York City Council Speaker Corey Johnson have also proposed adding additional transparency and reporting requirements in order to receive local tax breaks.
Gianaris said he will take up the issue again next session, and in the meantime, scrutiny of New York’s opportunity zones is unlikely to abate. “It's only gained increased exposure and attention as a program that is not working the way it was advertised,” Gianaris said. “It's becoming just another giveaway to real estate developers and investors.”