The much-hyped Opportunity Zone tax break program, offering shelter from capital gains taxes for people who invest in designated struggling areas, saw little activity for more than a year after it was signed into law as part of President Donald Trump $1.5 trillion tax-cut package in 2017.
But that is changing fast, as new tax rules have spurred a virtual stampede — in Louisiana and across the country — of investors scrambling to get in ahead of looming deadlines.
It’s not only the last-minute rules-setting that has given the Opportunity Zone scheme a sense of anarchy: Literally anyone can set up a qualifying OZ fund, and there is no formal way yet for the government to track them and determine if they're directing investment to truly deprived areas as intended.
"Any individual can just self-identify as a QOF," or qualified opportunity fund, as long as they do it via a partnership or limited liability company with another individual, said Anu Varadharajan, an enrolled agent with the Internal Revenue Service and a tax lecturer at Tulane University's Freeman Business School. "How you invest it is up to you."
Critics of the OZ scheme argue that investment likely will flow to areas that really don't need the tax incentives.
While the designated areas are mostly places that are indeed starved for investment, a few of them are hardly impoverished. Also, there was no accountability built into the program, a topic the government is only now starting to address.
"From the beginning, the law was only going to work as intended with robust public-private collaboration, focusing on community impact and economic growth," said Tulane professor Rob Lalka, executive director of the Lepage Center for Entrepreneurship and Innovation.
"That must remain the focus as investments begin to take shape," he added, noting that there have been some academic initiatives to develop a system of accountability.
Investors were initially in the dark about how the IRS would operate the scheme, which is designed to delay or eliminate capital gains taxes on investment made in the designated lower-income zones, which were chosen by each state's governor.
The first set of rules, which mainly covered property investment, was issued by the IRS in October and helped stir some interest. But last month’s rules covering how an investment in OZ businesses would qualify — including that the business derives at least 50 percent of its income from within an OZ, or has 50 percent of its employees located there — have opened the floodgates.
'Like the Wild West'
“It’s like the Wild West out there now,” said Dennis Stump, who has been a property investor and developer in Baton Rouge, the north shore and Jefferson Parish for decades.
“I usually deal with investors who have maybe $40,000, but I’ve had three people call me in the last month with $100,000 to $500,000 in capital gains to invest, calling me saying, ‘Hey, you got a place to invest it?' ” said Stump. “This is really something different.”
The experience appears to be widespread, with conferences devoted to Opportunity Zones and qualified OZ funds sprouting like mushrooms.
Cullan Maumus, an executive with the New Orleans Redevelopment Fund, a private-sector property developer in New Orleans, said his firm has been getting 50 to 100 inquiries from potential investors every day since the regulations were clarified.
“We jumped off the diving board a year ago, before the regulations were in place, not knowing what water was below,” said Maumus, whose firm previously has mainly taken advantage of historic building tax breaks to redevelop property in New Orleans. “Now, investors are becoming more comfortable, but the timeline is trickier about getting money in and having a place to put it once you get it. The pressure is on us to show we have the qualifying investments.”
The rules of OZ investment and the time it took for the IRS to clarify the tax situation mean there is now a tight deadline looming. The rules say an investor must put any capital gains he intends to invest in a qualified OZ fund within 180 days of realizing the gain. The fund then has 180 days to invest at least 90 percent of the money in a qualifying investment, or it starts to incur penalties.
Dan Walter, a tax attorney at the firm Stone Pigman, said investors who want to get the maximum gain from the scheme would have to get their money invested by the end of this year and hold it until at least the end of 2026. Investors who pull that off would see a 15 percent reduction on the amount they must pay taxes on, while also avoiding capital gains on the appreciation in their OZ investment fund.
Still, the biggest target of OZ investment seems likely to remain real estate, rather than riskier business ventures.
A lot of the interest in OZ investment is coming from stock-market investors who have enjoyed the longest bull market ride in history over the last decade. They're looking not to put their gains in risky startups, but to park them in safer havens.
"All the baby boomers are in the stock market and they’ve got significant gains; they’re afraid another 2008 is going to happen again," said Stump. "If you've got like $1 million gain in the stock market, rather than taking a chance of losing it in a day, they're selling and looking for a place to invest that's relatively safe, and where they don't have to pay a $150,000 capital gains tax right away."
He said that's why such investors are interested in the type of apartment complexes he specializes in with his construction partners, Monroe-based BPG. Because of the OZ scheme, he is able to offer investors annual returns of 10 to 12 percent with relatively low risk. He has been able to finance projects much more cheaply than he would with the high-interest recourse loans that he normally has to take out from banks, and he has also been able to do more projects, he said.
Who will be helped?
While the scheme is attracting investors, some observers worry that it won't do much for the really depressed neighborhoods that were supposed to be the focus of the policy. They fear a disproportionate amount of OZ investment will be directed at real estate and not toward higher-risk, job-creating investments in the neediest zones.
By the time the Treasury Department identified all the opportunity zones last summer, there were more than 8,700 nationwide, with Louisiana getting 150 much-haggled-over tracts.
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The zones range widely in terms of their relative distress and potential. Many investment funds have identified their "Top 10," and nationwide they're usually areas that already are prime real estate or adjacent to it. For instance, Long Island City in New York, where Amazon had initially decided to locate a new corporate headquarters, is in a zone, as are parts of San Francisco; San Jose, California; and north Seattle.
An Opportunity Zone Index, created by advisory firm Develop LLC and mapping/demographics specialist Esri, measures metrics like income, retail sales and percentage of people with university degrees to determine the most attractive opportunity zones for investment.
In New Orleans, unsurprisingly, the areas with the top scores are the zones that cover parts of the Central Business District and the Warehouse District, as well as the quickly gentrifying Freret Street corridor.
Most of Baton Rouge's tracts, meanwhile, get low scores, though there are high-rated zones nearby, such as one incorporating the city of Walker in Livingston Parish.
Some economic development officials, like Jerry Bologna, executive director of the Jefferson Parish Economic Development Commission, or JEDCO, still have high hopes that the program can entice investment even into the more blighted areas.
Bologna cites the revival of the former Avondale Shipyard site by new owners Avondale Marine, a partnership between Virginia-based T. Parker Host and Illinois-based Hilco Redevelopment Partners. Though the zone that includes Avondale rates near the bottom of the OZ Index, Host has already begun hiring, and a "grand opening" is planned for the summer. The partners have promised to create 2,000 jobs.
Bologna said the shipyard's new owners can now also attract OZ investors for their project, as it was bought after 2017. The designation will be important as the facility seeks out manufacturers and logistics companies as tenants. "That's why we lobbied the governor to make that an Opportunity Zone tract," Bologna said.
There are several other Jefferson Parish areas that have been hard-pressed to attract investment in the past and rank poorly on the OZ Index, but which JEDCO hopes will benefit from their opportunity designation. They include the area north of the airport in Kenner, where the opening of the new $1 billion terminal this fall is expected to spur interest from businesses.
The Shrewsbury area, around the intersection of Airline Highway and Causeway Boulevard, is also high on JEDCO's list. John Henderson, CEO of the nonprofit ENUF Regional Development Corp., is trying to raise funds to help give residents there a stake in any redevelopment of the area.
"We need sponsors to educate residents, funding partners and technical assistance," said Henderson. He said ENUF's aim is to get equity stakes for locals so they can participate in the economic rejuvenation of their own neighborhoods, rather than be pushed out while others enjoy the fruits of gentrification.
More monitoring needed
But it's not clear whether investment that is completely private-sector-driven will flow to such projects.
A bill pending in the Legislature would help to sweeten the pot by offering an additional 5 percent tax break to investment that goes to the areas most in need. Cities like Birmingham, Alabama, and Baltimore have already done that, said Zach Butterworth, a lobbyist who works for the law firm Adams and Reese.
He expects politicians will push for monitoring and oversight as the OZ program progresses. "Currently, there is not any requirement to do any reporting in terms of jobs or economic development," Butterworth said. "But people should prepare for that and welcome it when it comes."
Lalka notes that the White House asked in December for suggestions about how to measure the effectiveness of the OZ program. Various academic efforts, including a recent Columbia University symposium he attended, have focused on that question.
"The investors and experts gathered at Columbia all agreed that capital alone won't be sufficient for OZs to have the desired results of driving growth and development," Lalka said.
In other words, if the OZ program is not tracked and seen to breathe new life into deprived areas, it could end up being seen as just another giveaway to the rich.
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