While the jury is out on whether the opportunity zones program, which grants developers tax breaks for building in economically disadvantaged areas, is working, the first major project to use the program in Miami is getting close to completion.
Courtesy of the State of Florida
Jeffrey Ardizon, principal of The Estate Cos., and PTM Partners CEO Michael Tillman, worked together on the 360-unit Soleste Grand Central apartment complex in Overtown, the area's first major OZ project, which topped off in August. The project is located at 218 NW Eighth St., steps from Virgin MiamiCentral Station in Downtown Miami.
Tillman said on a Bisnow opportunity zones webinar last week that Soleste Grand Central is a market-rate project for the middle class, which has been priced out of many areas in Miami.
"You have amazing development coming up in north through Brickell and along the downtown Biscayne Corridor," Tillman said. "But all of these folks who are making $75K a year, they're getting pushed out further and further and further south and west."
Three years since the opportunity zone program was created, debates are raging about whether or not it has achieved its goals. President Donald Trump is claiming that it has brought $75B in private investment to distressed communities, promising to expand it should he win a second term. Novogradac, which tracks qualified opportunity fund investing, pegs the investment so far at just $11.6B, NBC News reports.
Studies have shown that while money has flowed to real estate developers and investors, there is little evidence or accountability over whether the program is working as intended.
The panelists said it is early in the game to be assessing whether the OZ program has worked or not. Essentially, they believe the program has the potential to help bring up whole neighborhoods, but doing that takes time. For investors and developers, too, it could take a decade to know how good OZ deals are for them.
"To really get the benefits, you've got to stick around 10 years," said Michael Weiner, land use attorney with Sachs Sax Caplan. "And honestly, that's the minimum amount of time you need to know whether or not you really made the crazy great bet."
Ardizon said the timeline makes underwriting OZ deals "the most difficult part of all."
"How can you talk about a project in 10 years what it looks like?" he said. "Equities investors that require a certain return metrics on your IRR, whatever the terms are — it's hard to know where you're going to be in 10 years."
"The IRS did their job, which was start the program," he continued. "But the second part is, you need these local governments that are within these opportunities zones to work with you [and] incentivize building an area that needs some revitalization. So it's not just with the federal program, it's also with the locals."
Developer Avra Jain, who often restores historic or depressed properties in transitional areas and whose projects include an office building in an OZ in Midtown, said the program hadn't changed her basic investing discipline.
"We didn't buy property knowing it was going to be in an OZ, the government gifted us" by deeming an area an OZ after she already owned property there. Jain said she thinks of the program as a tool for placemaking.
Jain said developers like her — her investments in Miami's MiMo District inspired other developers to come to the neighborhood, which brought up property values and generated $11M in property taxes for the city — are focused on value-add and neighborhood-building, so she looks for price appreciation.
"I created the value... the real benefit here is the tax deferment," she said. "If you've really created value and you sell, when you go to sell the property after 10 years, the capital gains is tax-exempt. I mean, that's crazy. If you do neighborhood building, if you can really create value, that tax exemption exponentially improves returns."
She said the side of the opportunity zone program that deals with businesses, which get tax breaks for locating and hiring in opportunity zones, has just started to be explored. It could help attract businesses to relocate to developers' projects, she added.
Tillman suggested that it will take time to see neighborhoods improve as architects of the program promised. His company looks not only at land designated as opportunity zones and data like gross domestic product per capita but also at details like the number of non-Starbucks-branded coffee shops or bicycle repair stores in the area.
"Things that are indicative that there are people living there and that they're the right kind of people at the forefront that typically, you know, invest in their neighborhoods," he said. "In certain areas, you'll see a very run-down neighborhood, but then there'll be this cute little house with a white picket fence that's landscaped and manicured. And then you'll see another one a few blocks away. And that's indicative that those people are invested in their neighborhood."
In those neighborhoods, Tillman said neighbors can be more supportive of developers asking to rezone their properties to increase density, which supports local businesses.
"You hit it on point," Ardizon said. "You see the benefits not just on the tax side, but for these communities, it's really when you bring in density, you're increasing the tax base. Now the cities and the municipalities have additional funds to fix a lot of the stuff that's going on within these communities, whether it's infrastructure, whether it's improving the roads or a school system."
Ardizon said those who want to pass judgment on the program need to wait years before the results of these investments start to bear fruit.
"It wasn't until the final regs came out in late '19 that [the IRS] really clarified all the components that made the business investment part more transparent and more viable," he said. "Candidly, we got the pandemic not, you know, four months later."
BisNow. September 2020.