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The 2017 tax law created more than 8,700 “opportunity zones” around the country, where investors receive tax breaks in exchange for putting money in designated, low-income areas. It’s an approach that, according to its supporters, will spur economic development. But critics say it may not do much for the residents it was designed to help. Hari Sreenivasan reports from Tempe, Arizona.
In 2017, President Trump signed the biggest overhaul to the tax code in 30 years. Tucked inside the bill's 186 pages was a tax incentive its proponents claim is designed to help low-income communities. They're called opportunity zones.
But as I learned on a recent trip to Arizona, whether or not these areas with special tax breaks for investors will truly help distressed communities is still uncertain.
This former plant nursery in Tempe, Arizona, just outside Phoenix, has been vacant for more than six years. But this week, a developer broke ground on something new.
So what's this place going to look like?
This is going to be a four story, modern-style, contemporary apartment building; 90 units.
Quinn Palomino is the co-founder and CEO of Virtua Partners, a private equity and real estate developer based in Scottsdale, Arizona. She says the first residents will be moving into this $20 million complex next year.
Here you have an opportunity to build entry level housing, and you have investors who are looking at an opportunity to invest their, their funds.
For Virtua and its investors, this isn't just any ordinary residential development. It's among the first projects in the country to use a federal tax incentive created in the 2017 tax overhaul.
President Donald Trump:
With Opportunity Zones, we are drawing investment into neglected and underserved communities of America so that all Americans, regardless of zip code, have access to the American Dream.
According to its supporters, the influx of private investment will spur economic development, including job creation, in disadvantaged communities around the country.
Last June, the US Treasury Department certified more than 8,700 census tracts as opportunity zones. For the most part, the tracts are low-income. To qualify, the poverty rate has to be above 20 percent, or the median family income has to be below 80 percent of the state's median income.
In Tempe, there are five opportunity zones including the 320 acres, within which Virtua's apartment complex will be built. The poverty rate here is nearly 40 percent.
There weren't enough dollars in the community to redevelop these areas. So it's a solution where investors could put money into this. Without the opportunity zones, a lot of investors wouldn't know about this project, or wouldn't invest a dollar here.
By investing in an opportunity zone – either by funding or expanding a business or developing real estate – investors receive a significant incentive.
For example, let's say you have a $10,000 profit from selling stock. Depending on your income, you might pay 20 percent in federal taxes. Instead, you can defer those taxes and invest that money in an opportunity zone. Depending on how long you hold the investment, the taxable total of your $10,000 decreases by up to 15 percent.
On top of that, after 10 years, any new profit that comes from that opportunity zone investment is totally tax free. In Tempe, Virtua's planned apartment complex is meeting a real need according to Maria Laughner, the city's economic development manager. To help explain why, she took me six stories up to the roof of an office building under construction.
I can see in downtown Tempe it's a lot of dense residential as well.
Yes. There's a great need for housing so we're having more, more multifamily going up.
Tempe, a city of nearly 200,000, estimates that it will need 21,000 units of affordable housing by 2040 to meet demand.
We don't want to be, it's just an area where everyone is building luxury homes, we have other issues that are very important for our community and housing is the big one. So what we're trying to do is work with partners to make that happen. So far so good.
Virtua's apartment complex will be priced at market rate. But the company says it will voluntarily set aside at least at least nine of the 90 units for those earning around the median income, a category known as workforce housing.
But there is no requirement within the legislation for a real estate developer to provide a benefit beyond simply creating a "substantial improvement;" meaning an increase in the value of the property over a 30 month period.
That means cities like Tempe can't force developers to build projects in opportunity zones that deliver specific benefits, like affordable housing.
They're not really getting anything from us so it's hard for us, you know, on private property it's hard for a city to impose itself.
So I think more than anything it's come out of, I hate to say it sounds so cheesy but the goodness of their heart that they want to do something that is aligned with the vision of the city.
But short of the goodness of their heart how do you make sure that somebody doesn't take advantage of this and leave Tempe a little bit worse off?
Well we also do have zoning codes in place. If someone wanted to build something that wasn't in the zoning code they would have to go through a relatively lengthy process.
But existing tools like zoning codes don't alleviate the fears of some critics that opportunity zone investments could push out the very communities they are designed to help.
When you're bringing that size of capital into low income communities it could rapidly increase that timeline of gentrification, displacement of people in this community.
Victor Vidales is the leader of a community group in neighboring South Phoenix. He also lives and works in opportunity zones.
The tools are there for municipalities to combat some of those potential fears that low income communities have. But do they have the will when they understand those developments bring jobs, they bring dollars, they bring tax base that helps the cities.
How do you make sure that social impact is almost a requirement in this? Because right now the legislation doesn't require an investor to make those kinds of commitments.
Many of us in business have a heart. We have wanted to give back to the community here is an opportunity for us to work together to do that. And we need to develop metrics. We need to require those in this industry to identify how many jobs are you creating, how many units are you providing that are entry level.
Palomino is not alone in calling for more regulatory guidance on measuring the impact of opportunity zone investments.
Sen. Tim Scott (R-SC):
I've been on a national opportunity tour…
Republican Senator Tim Scott of South Carolina is one of the architects of the opportunity zone incentive. In February, he attended the groundbreaking for Virtua's first project to use the tax break, a hotel being built just west of Phoenix.
In May, he co-sponsored a bill requiring that data on opportunity zone investments be collected and reported to Congress. In a statement to NewsHour Weekend, he said, in part, "I'm pleased to see initiatives being taken across the administration and in Congress to ensure that folks in distressed neighborhoods benefit from opportunity zones."
Meanwhile, Virtua is moving ahead. It has raised $100 million to invest in opportunity zones and has a pipeline of nearly 100 projects.
You're now seeing a huge population of investors that maybe they wouldn't have sold the stock and they would have kept those dollars on the sidelines. Now they're looking at investing here.
But incentivizing these investments is not free. Congress's Joint Committee on Taxation estimates that the opportunity zone incentive will cost $1.6 billion in lost federal tax revenue over ten years.
This is a public cost. These are public dollars. It's a public investment. There should be some nexus with public benefit and there's no way to ensure that there is.
Mark Stapp is the Director of the Real Estate Development program at Arizona State University, and a long time developer himself. He says the influx of capital could distort the market, and points to existing incentives as being more targeted to deliver benefits like affordable housing.
Where is the definable measurable public outcome that should go with making this public investment which is the tax incentive? Will there be a lot of money that pours into it? Absolutely. Will all of that capital be properly deployed and provide the public benefit that equals the public cost? I don't think so.
Some opportunity zones have also been criticized for not being economically distressed. Almost 200 of the zones qualified simply by being next to low income areas.
In Tempe, the future site of Virtua's apartment complex also has a lot of positives for a developer. In addition to its location in an opportunity zone. It's close to public transportation, it's about two miles from Arizona State's sprawling campus, and Tempe is a fast-growing city with a housing shortage. In fact, Quinn Palomino concedes that Virtua would have built this project even if it was not in an opportunity zone.
If you would have invested in this place anyway that's the market at work. Why should a tax payer in Kansas subsidize an investment that's happening here that might have happened anyway?
Might have happened anyway this project and I – we would have done this one. But how do you scale that, Har?. I mean how how can you take what's happening here and take it across the country. This is 90 units and I understand that's a small project that's not going to solve the country's problems. But if we could take this model and take it across the country. Then we can.
Investors like Virtua and residents of opportunity zones across the country will have until 2027 to see how this model takes hold.
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Hari Sreenivasan joined the PBS NewsHour in 2009. He is the Anchor of PBS NewsHour Weekend and a Senior Correspondent for the nightly program.
Sam Weber has covered everything from living on minimum wage to consumer finance as a shooter/producer for PBS NewsHour Weekend. Prior joining NH Weekend, he previously worked for Need to Know on PBS and in public radio. He’s an avid cyclist and Chicago Bulls fan.
Connie Kargbo has been working in the media field since 2007 producing content for television, radio, and the web. As a field producer at PBS NewsHour Weekend, she is involved in all aspects of the news production process from pitching story ideas to organizing field shoots to scripting feature pieces. Before joining the weekend edition of PBS Newshour, Connie was a Peace Corps volunteer in Thailand where she trained Thai English teachers.
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