With a strong economy in Massachusetts and creative leadership in mid-size urban centers throughout the state, federally designated Opportunity Zones present an enormous chance to realize important public policy goals for stimulating the development of much-needed multifamily housing in underserved markets in the commonwealth.
Opportunity Zones are specific geographic areas deemed as economically distressed by virtue of poverty rates and median incomes. As part of the tax reform bill approved by Congress in December 2017, qualified investments to spur development in these zones are incentivized with favorable tax treatment on capital gains over time.
Of the 138 census tracts in 79 Massachusetts communities that have been designated as Opportunity Zones, almost half are collected in the Gateway Cities that anchor important regional economies: Barnstable (1), Brockton (4), Chelsea (2), Chicopee (1), Everett (1), Fall River (3), Fitchburg (2), Haverhill (2), Holyoke (2), Lawrence (4), Leominster (2), Lowell (5), Lynn (4), Malden (2), Methuen (2), New Bedford (4), Peabody (2), Pittsfield (2), Quincy (2), Revere (2), Salem (2), Springfield (6), Taunton (1), Westfield (1) and Worcester (6).
Attleboro is the only one of 26 Gateway Cities without a zone, while Boston has 13 eligible tracts.
Zones Carry Powerful Potential
For investors seeking to delay or eliminate capital gains taxes, the preferential tax treatment offered in an Opportunity Zone incentive is attractive on its own. But in Massachusetts, which is blessed with many proactive public, private and non-profit players in the affordable housing field, Opportunity Zones carry even more powerful potential.
That’s because zone incentives can improve the financial structure of developments to the point where funds from affordable and workforce financing programs can be deployed with an even greater impact toward the creation of truly mixed-income multifamily housing.
For the housing development community, the advent of Opportunity Zones triggers three key considerations:
Economic Viability: Many of the designated zones are located in areas where the achievable economic rents do not support today’s new construction costs. In those instances, it is likely that investments in these zones will also require other elements of public commitment, such as Low-Income Housing Tax Credits, middle-income (workforce) housing funds and Historic Tax Credits.
Timing: It should be emphasized that the otherwise taxable gain needs to be invested within six months of realization. Therefore, more often than not, investors will need fast-tracked or shovel-ready projects to invest in – not projects just beginning a potentially arduous design or permitting process.
Investment Opportunities: Multifamily developers and property managers can become involved in Opportunity Zone investments in two practical ways. First, they can directly invest their own capital gains in their own projects and deals. Second, they can invest through a fund, like an investment bank generated fund, in which they pool their gain with the gains of others in order to invest in a variety of projects in a variety of locations through various developers and/or sponsors.
Invest for Value Growth
Certainly, the delay of capital gains to 2026 is an attractive element of an Opportunity Zone investment. But, for multifamily housing developers, the most important focus should be on investing such gains in developments that have the best potential for value growth, enabling the delayed gain to enjoy substantial tax-free returns. This is where the most attractive aspects of Opportunity Zone investment will occur – projects in under-served census tracts that have the best potential to realize long-term tax-free gains.
That’s potentially very good news for Opportunity Zone communities in Massachusetts seeking to create more jobs and the housing that the workers for those jobs can afford.
Although Opportunity Zones represent a welcome and exciting incentive from the federal government, one should expert veteran developers to proceed with caution.
An Opportunity Zone is not a magic wand that causes age-old real estate fundamentals to instantly disappear. Allowing the attractive nature of the new program to cloud a clear-eyed analysis of the underlying fundamentals will impact the long-term success of projects and growth of the investment.
Larry Curtis is president and managing partner of WinnDevelopment, the development arm of WinnCompanies.
