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New York Nixes Opportunity Zone Breaks: Investor Impact?

[Updated: Apr 19, 2021 ] Apr 19, 2021 by Marc Rapport
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The New York State Assembly is pulling the plug on the state's participation in the Opportunity Zone Program, ending the state and city tax breaks that accompanied the federal incentives offered for projects in the 514 census tracts so designated in the Empire State.

The “decoupling” is part of the new state budget and means that capital gains invested in qualified opportunity funds (QOFs) in those OZs will still be liable for state and local taxes. The much larger federal breaks stay in place.

The Opportunity Zone Program was created with bipartisan backing as part of the Tax Cuts and Jobs Act of 2017. It designated approximately 8,700 census tracts around the United States as opportunity zones eligible for tax incentives for developers, businesses, and investors.

Investment in the zones is made through QOFs, and it’s not clear how much has been invested so far, since final IRS guidance for the program wasn’t issued until late 2019, and a reporting and impact regimen has yet to emerge.

One stakeholder, the San Francisco-based Novogradac consultancy, says 659 of the 927 QOFs it was tracking at year-end reported raising $15.16 billion in equity so far. The White House Council of Economic Advisors put the total figure at $75 billion and claimed QOFs had created 500,000 new jobs -- and that was just before the Republican National Convention last summer.

Meanwhile, moves are afoot in Congress to extend the program itself while adding transparency and reporting around the economic impact in the zones themselves and the cost to federal, state, and local tax coffers.

New York is more than just New York City

Nationally, Novogradac says, commercial and particularly housing projects -- especially multifamily -- have dominated the project types so far, with significant investment in office, industrial, and renewable energy investments also reported.

And, the state of New York was No. 2 in the list for made and planned investments, at $857.9 million at year’s end, the consultancy said in a year-end report.

“Most of that, by the way, is in New York City,” said John Sciaretti, a Novagradac partner based in Dover, Ohio, who leads the Opportunity Zones Working Group his company sponsors.

Of New York lawmakers’ move to remove state and local incentives, Sciaretti says:

I think it will have an effect. My view of this is that it’s sad, because there are a lot of areas in New York that aren’t in New York City -- and some in the city -- that are poor and can certainly use this kind of investment. People are going to invest in New York City anyway, but maybe not so much in these other areas.

You can go your own way, and several states have

States are going their own way with the Opportunity Zone Program. The Novagradac report notes that California, at $1.7 billion, had by far the most investment in QOFs, followed by New York’s $857.9 million, and Ohio at $647 million.

California has never been a participant on a state level, New York is pulling out, and Ohio is doubling down, offering its own additional 10% incentive.

“They embrace the policy,” Sciaretti says of lawmakers in his home state. “I don’t see any indication that what happened in New York is going to be contagious.”

Mike Krueger, a partner with Newmeyer Dillion in Walnut Creek, California, whose practice includes working with high net-worth individuals on OZ investments, adds, “I think there will be some impact on OZ investing in New York, but I think it impacts the larger funds more than the developers.”

Krueger notes that North Carolina, Mississippi, and California have never aligned with the program so far; Pennsylvania, Massachusetts, Hawaii, and Arkansas only partially aligned; and nine states don’t have state income tax at all, making the point moot there.

Plus, he said:

The California projects I’m working on continue to gain nationwide investors, including investors from the state of Washington, a no-income tax state. The larger opportunity zone funds that promise a specific IRR have had to adjust their projections factoring in California state taxes. Clearly, the deals are still penciling out for investors in states like California, and they will continue to do so in New York.

'Stopping baby Godzilla before you have to fight big Godzilla'

Some state lawmakers who backed the ban made no bones about how they felt about the OZ program, labeling it a Trump-era giveaway to the wealthy that would further drain state and city coffers while rewarding development in areas that were gentrifying or already there.

“The opportunity zone program is a scandalous giveaway to wealthy developers who didn’t need the money to do the development, and I’m glad the state pulled ourselves out of wasting state dollars for this effort,” Sen. Michael Gianaris (D-Queens) told the New York Daily News.

The newspaper said the state’s nonpartisan Citizens Budget Commission estimated in 2019 that the program was costing the state and city up to $63 million and $31 million a year, respectively.

John Kaehny, executive director of good-government group Reinvent Albany, also told the Big Apple newspaper: “This is a big deal. This is a stopping baby Godzilla before you have to fight big Godzilla-type of thing, because it was projected to be billions of dollars a year in state and city tax abatements, and now the revenue will be kept by the state and city,”

The Millionacres bottom line: awareness, bipartisanship, and some changes

Opportunity zone backers say that raising awareness among lawmakers and their constituency will be a key to placating criticism and blunting the perception of the Opportunity Zone Program as a one-way gift to the wealthy.

Moves like the state of New York’s are not helpful to that end. “I think it’s a huge mistake,” said Blake Christian. Christian is a Park City, Utah-based partner with HCVT, a Top 30 accounting firm in Los Angeles, whose practice includes a focus on tax-advantaged real estate investing strategies.

He said he’s working with a lot of developers ready to go on their projects and others just forming QOFs to fund theirs and that a widespread move to quelch any incentives “could have pretty disastrous results.”

That said, Christian and others note that the Opportunity Zone Program enjoys bipartisan support. The Biden administration also seems likely to raise the bar for proving the program’s worth as an economic development tool that benefits communities as well as investors but not to seek to end it.

And its loudest advocates may be economic development officials and advocates from cities and counties large and small who have their feet on the ground and the ear of lawmakers, and they may ultimately prove to be an effective counterpoint to those in their number who see the program as nothing more than largesse for the loaded.

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