David Waxman, co-founder and managing partner of MMPartners, is on the forefront of a growing development trend.
He’s lured investors to four tricky development projects scattered across North and West Philadelphia that might not have come to fruition without the help of the Opportunity Zone tax break President Donald Trump has touted as a remedy for urban poverty and pledged to expand if re-elected next month.
The federal incentive allows investors to skip out on capital gains tax in exchange for making long-term investments in businesses or developments in certain low-income areas — a useful trade-off for Waxman’s company and others like it.
“We‘ve been developing in neighborhoods that became Opportunity Zones long before the legislation,” he said, pointing to projects like the tough-to-finance overhaul of Brewerytown’s massive former F.A. Poth brewery into 133 apartments. “What we have found is you’re forced to be a long-term holder in our business because it takes a long time for neighborhoods to play out.”
Waxman freely admits it’s not a perfect program. Many of the qualifying areas were gentrifying before the federal government recognized them as “opportunities,” indicating that investors didn’t need a tax break to jump in. Plus, the investors that benefit from the program are already wealthy. While Waxman tries to build with an eye to needs in surrounding communities, projects don’t need to offer public good to qualify for the incentive.
“We try to deliver tangible benefits above and beyond restoring a building. Adding affordable units, building a community garden,” the developer said. “But the legislation doesn’t require it. A lot of my peers don’t do that.”
With the election dominating the national news cycle, the City of Philadelphia recently launched an informational website promoting the federal program as “an opportunity to do well by doing good.”
“This is a unified effort to expand access to capital, financing, and support — especially for Black and brown developers, investors, and businesses — so they can increase their capacity and grow,” said Mayor Jim Kenney in a September release.
But some in local real estate circles say there was little need for the marketing. Word is out about one of the Trump’s administration’s only (and certainly its best known) urban development policy, fueled by an aging Baby Boomer demographic and fears of incoming Democratic control in Washington D.C.
Lawyer Brad A. Molotsky, a Duane Morris real estate partner who co-leads the firm’s Opportunity Zone practice, said he fields a new cold call nearly every day from investors looking to sink assets into OZs, a trend that has accelerated as COVID-19 has made the economy — and investors — more jittery.
“For someone to make a call to a lawyer they have never met before with a couple million dollars in capital gains they are considering deploying into an OZ is a bit eyebrow-raising to me,” Molotsky said. “And the pace and number of calls on real and prospective deals that continue to come in over the last three to six months has continued to increase.”
There is no central record of OZ deals — another investor-friendly perk — and the Kenney administration keeps no specific records of investment in the zones, a spokesperson for the city said.
But Molotsky asserted that he had completed 55 OZ deals nationwide over the past three years and was now actively involved in another 60. He said he knew about at least two dozen large projects in Philadelphia that had tapped the incentive program, some finished, others underway or about to break ground. While a few dozen projects may not seem like much, the projects skew large and, If all are completed, would have a combined value in the billions of dollars.
Barriers to social impact
Opportunity Zones began as a bipartisan pitch from U.S. senators Cory Booker and Tim Scott, to bring equitable development to depressed cities. With the help of the Trump administration, the program morphed into a broadly defined and wholly anonymous tax incentive codified by the 2017 Tax Cuts and Jobs Act. Booker declined to discuss the program.
The final product essentially allows individuals to defer taxes on capital gains by instead investing those returns into businesses or development projects in certain, nominally low-income areas. If investors retain a stake in these ventures for long enough, their tax bill is reduced and, after 10 years, completely eliminated. There is no cap on the final benefit, meaning investors could cash out of a more lucrative OZ investment than what they started with, paying nothing in capital gains. Pennsylvania is also one of 38 states that provide similar exemptions for state-level taxes.
Many of the areas ultimately designated as OZs locally were not, in practice, the poorest tracts in Philadelphia. Research from the Federal Reserve found many were gentrifying areas or those on the cusp: Brewerytown, Point Breeze, parts of the River Wards, even University City and part of Center City fell within a patchwork of areas designated as Opportunity Zones.
Nevertheless, the promises at the program’s launch were sweeping. Treasury Secretary Steven Mnuchin said, in 2018, that “all Americans” would benefit from “sustainable development” driven by the incentives.
“I couldn’t be more excited,” he said in 2018. “I think there’s going to be over $100 billion dollars in private capital that will be invested in opportunity zones.”
The tool is far off from that $100 billion goal in investment nationally, and local developers interviewed for this story said it was still far more common to arrange conventional financing. But use of Opportunity Zones is measurably on the uptick from one year ago, when some questioned if anyone would tap into the program. According to a report from Novogradac, a national business services firm, the value of investment funds linked to Opportunity Zones had increased from $790 million last May to $10 billion in April 2020.
In addition to MMPartners’ developments, Alterra Property’s $180 million LVL North project at Broad and Spring Garden streets and an $84 million biomed lab in University City had both tapped into the incentive program. Mosaic Development’s proposed overhaul of the 25,000 square foot Golaski Labs building in Germantown, PHA’s redevelopment of properties along Ridge Avenue, a proposed apartment complex on Fishtown’s waterfront and the nearby overhaul of a one million square foot former power plant were all being actively marketed to OZ investment funds.
The potential for more large projects to tap into the incentives is also high as a cottage industry of brokers forms to link investors and developers, and as the city and local economic development groups actively pitch the incentives.
The Enterprise Center, an economic development agency in West Philadelphia has spun off three OZ funds (The group said it was too early in the “planning process” to discuss its plans). Conrail, a freight rail company that owns massive tracts along the northern Delaware waterfront, near a booming residential market in Fishtown, also established its own OZ fund to attract investors to that site. Other major redevelopment sites, like another abandoned power station further upriver, sit squarely in OZs.
Molotsky said that today he fields calls from many different kinds of investors, but generally attributed part of the wave of OZ interest to fears Democrats could recapture Congress or the White House — possibly making the OZ program less generous and more heavily regulated down the road. Others, nearing retirement age, were leery of Biden’s ambition to phase out other tax shields for intergenerational wealth transfer — eying OZ investments in Philadelphia’s still-humming housing market as an alternative form of estate planning.
“It’s true the program requires capital gains to make it work, and, as such, is subject to criticism that it is mainly for the rich, but that’s not all there is to the program,” Molotsky said. “The fact that many well off individuals are making investments in OZs, does not mean that social impact investing is not occurring in the OZs. In fact, they are. The social impact deals just take a bit more time to put the pieces together.”
Molotsky pointed to OZ projects like the “Healthy Town Tioga Project,” a proposal to develop 41 vacant sites in a five-block area on the fringe of Temple University’s medical campus as an example of the incentive’s transformative potential. Helmed by TPP Capital Management, a Black-owned development firm, the pitch includes transit-oriented “multifamily workforce condos for middle-income service workers,” affordable co-living rental suites for health care and food entrepreneurs, student housing, and senior housing, along with a community health center.
Jessica Calter, a VP at PIDC, the city’s largest economic development agency, said her group was helping the city market the zones — along with other incentives — in hopes that it could encourage more developments to include equitable components.
While the tool does appear to be gaining popularity, the broader impacts on new development remain unclear, she said.
“What we’ve seen at PIDC is it’s very unlikely that Opportunity Zone funds are the types of funds that will make a project go from ‘no’ to ‘yes,’” Calter said. “It’s less that it’s going to turn the needle on a project to make it go, it’s more about projects that are able to look at a variety of resources.”
A study released in June by the Urban Institute, a nonpartisan think tank based in D.C., pointed to some of the reasons why. The researchers found that investors and developers see the incentive as a ‘relatively small boost’ and reported significant structural barriers to impact.
The report determined that while equitable projects were possible, they were often effectively outliers.
“In their present form … it appears that OZs are neither on a trajectory to democratize access to capital nor will they, at scale, incentivize mission-oriented projects that align with community goals and priorities,” the report concludes.
Tyeshia L. Redden, a visiting professor of Africana Studies at Gettysburg College who studies urban development policies, was skeptical that the program could be reformed. She said market-driven tax incentive programs by their nature would never translate into the kind of sustained community investment needed in the city’s poorest neighborhoods.
“Communities continue to be under-resourced and suffer from perpetual underdevelopment; and, at worst, Opportunity Zones set the stage for large-scale gentrification and massive resident displacement,” she said. “Some have nicknamed them ‘opportunistic zones.’”
She said data showed that much of the benefit went to large real estate development projects with only a “fraction” finding its way to existing businesses, particularly Black-owned businesses.
Daniel Aldana Cohen, assistant professor of sociology at the University of Pennsylvania, said the government ought to instead focus on a massive investment in housing, public transit, education and other public services in low-income neighborhoods.
“The fundamental issue is low-income urban neighborhoods in this country have suffered from disinvestment from the public sector, from a lack of quality public services and affordable housing,” he said. “When you look at the cities that have done the best to provide decent services in low-income neighborhoods … what these places have in common is sustained public investment in low-income neighborhoods.”
He said this was hardly a far-fetched idea, pointing to Democratic presidential candidate Joe Biden’s own campaign pledge to spend $2 trillion nationally on infrastructure, housing, and jobs — a far greater investment than realized through all OZ funds to date.
“If you provide those things, you’ll find that the private sector is happy to invest in these areas,” Cohen said. “Public sector investment will result in community development and improvements for people who already live there.”
WHYY is one of over 20 news organizations producing Broke in Philly, a collaborative reporting project on solutions to poverty and the city’s push towards economic justice. Follow us at @BrokeInPhilly.
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