Six years ago, the Greenpoint waterfront by the mouth of the Newtown Creek was vacant. A rusty, overgrown fence separated the lot from Commercial Street, and the cracked, uneven sidewalk became a gravel path in random places. It doesn’t look like that anymore.
Now, Brookfield Property Partners, the real estate developers behind Hudson Yards, have partnered with Park Tower Group to install a new vision for the property: 11 residential towers, one of which opened in August 2018 and the rest of which are under construction, that would bring “top-tier architecture and interior design inspired by the neighborhood’s history, amenities, and incredible views” to the neighborhood.
The development is just one of the many projects across the country made even more lucrative by the Opportunity Zone initiative, a set of tax incentives passed as part of the 2017 Trump tax cut. Almost two years later, the impact of the bill is beginning to play out across the country.
In Brooklyn, the question has been: who stood to benefit? Those who were already in those neighborhoods? Or those who might decide to move there as development boomed?
Developers will naturally gravitate towards market-rate offerings over more affordable housing, and this program doesn’t change that according to Mark A. Willis, a Senior Policy Fellow at the NYU Furman Center.
“Opportunity zone tax credits are a powerful incentive to invest in market-rate development sited in census tracts with strong or strengthening housing markets,”Willis said in an email. But, he added, the program is “unlikely to significantly increase the supply of subsidized housing affordable” for low-and moderate-income residents.
(map courtesy of Empire State Development)
In New York State, almost a quarter – 125 out of 514 – of all the approved Opportunity Zones are in Brooklyn, and 63 percent of them are in one of the five boroughs. The tracts did not necessarily have to be in poor neighborhoods; being contiguous sufficed, according to a spokesperson for Empire State Development, which helped make the designations in the state.
There are two ways for investors to benefit from Opportunity Zones: building on vacant land; or substantially improving an existing property.
Take, for example, the Brookfield project in Greenpoint. According to Andrew Brent, a spokesperson for Brookfield Properties, they are submitting two of the 11 developments to receive Opportunity Zone tax breaks. Brookfield spent over $250 million on the various parcels of land and tens of millions more on development rights, records for the sale of the landshow, and stand to make hundreds of millions in capital gains as the property rises in value from an empty lot to a massive residential development.
According to StreetEasy, the online real estate marketplace, the median asking rent in Greenpoint in the beginning of 2011 was under $2,000 per month, in August it was $3,300 per month. If each unit is rented out at the median neighborhood price, $3,300 per month for 5,500 units, Brookfield would make $18 million per month in revenue.
Amenities include “spacious indoor and outdoor lounges, a yoga terrace, gaming room, fitness center, bar with a terrace, a children’s playroom, and co-working space,” and a “waterfront esplanade,” Ric Clark, Senior Managing Partner and Chairman of Brookfield Property Group and Brookfield Property Partners, said in a press release.
The designation of the buildings as Opportunity Zone assets means Brookfield will pay no capital gains taxes on them so long as it holds the property for over 10 years. Normally, the value added to the property by building there would be subject to a 20% capital gains tax rate. Brent said in a statement that some of the units would be “income-targeted” but it will not include any subsidized housing.
Benjamin Solotaire, a spokesperson for Councilman Stephen Levin, who represents the area, said “the Councilman and his constituents are concerned about development around the waterfront, specifically that it could drive up prices, impact infrastructure, create sewage issues, impact street safety, and exacerbate school crowding.” Levin will host a meeting on December 7th to discuss the zoning of the area.
Brookfield is hardly the only developer managing Opportunity Zone assets in Brooklyn.
There is the building at 560-570 Lefferts Ave., which is owned by Treetop Development. Treetop bought the building in February 2017 for $25 million, records show. The building is in an Opportunity Zone, and Treetop manages other Opportunity Zone assets, but this property will not see benefits from the program.
According to the initiative, in order to designate the Lefferts Avenue property as an Opportunity Zone asset, Treetop would have to make $25 million worth of improvements. Treetop has made $1.8 million worth of renovations, fixing the elevators in the six story building and refurbishing the lobby. Those renovations entitled it to increase the buildings total rent roll by $16,000 per month, according to a document advertising the sale of the building.
But in order to reap Opportunity Zone tax benefits, Treetop would need to make an investment that would entitle it to raise the monthly rent roll by half a million dollars, even under New York’s new more stringent rent laws.
Willis said in an interview that if a developer like Treetop were to make these improvements, qualifying for capital gains tax relief, the improvements would have to be justified by their economic return. That would mean passing the costs of renovations along to residents, raising rents.
LaShaun Ellis, a member of the Movement To Protect the People, is worried about developments in the area pricing out longtime residents. The movement is an advocacy group with a history of opposing big development. “Studies show that development in low to moderate income areas can change the landscape of the neighborhood and increase prices,” Ellis said. “What ends up happening is that residents are priced out.”
Ellis is also worried about infrastructure overload. She said the city is “at capacity for a lot of our water treatment facilities, they keep building and building, but what are we gonna do about all those toilets?”
While the program is still relatively new, Willis believes the benefit to investors is relatively marginal. “The OZ (Opportunity Zone) tax benefit cannot turn an investment with a negative return into one with a positive return,” he said.
Investors, he added, won’t “invest in a neighborhood where property values are going to go down, leading to a loss of equity,” they will naturally seek neighborhoods where property will increase in value and investments in properties will pay off.
Wilson Blum, a graduate student at the Cornell Baker program in real estate, who has worked in the industry since 2012, has a different viewBlum wrote one of the few academic papers, published in the Cornell Real Estate Review, about Opportunity Zone designation and affordable housing, looking specifically at New Orleans.
“If your end goal is affordable housing you have to engage with the private sector to make that more attractive,”he said, adding that private investment funds have “room to maneuver” and that the “framework that is willing to engage with developers, that will be the most impactful.”
Willis said the program was “more likely to help low income residents and communities if it included investment-specific guardrails.”
Opportunity Zones, and the tax benefits that come with them, stem from a bet between Peter Thiel and Sean Parker. According to a story in Forbes, Parker, of Napster and Facebook fame, thought he could he could devise a way to get investors to put their money in poorer neighborhoods. Thiel, a billionaire venture capitalist, bet him a million dollars that he couldn’t get it done.
Parker and his think tank, the Economic Innovation Group, devised a plan to encourage investment by changing the tax code, and rewarding investors with a delay in paying capital gains taxes – taxes on profits from investments going up in value – if they directed those profits to poorer neighborhoods, in what would be called opportunity zones, where they might not otherwise put their money. The plan also includes a rule that if an asset that is qualified for the program is held for over ten years, capital gains tax on the asset would be waived entirely.
Corey Johnson, the speaker of the City Council who is exploring a bid for mayor in 2021, said in a statement that the “challenges of equity, infrastructure, small businesses, higher rents pushing out existing residents – those challenges will be amplified” by accelerated development in opportunity zones.
But Johnson also thinks that a robust, well thought-out and regulated private-public relationship might redeem the program and produce a win-win scenario. He proposed regulations in an op-ed in the Gotham Gazette, including one dictating transparency among Opportunity Zone investors, and one instituting a requirement that an Opportunity Zone investment also be receiving government aid, because government aid typically goes to those who need it most.
While the realities of this legislation will become clear over decades, the environment and the type of behavior it encourages is already clear. According to Johnson, “the opportunity zones program may work elsewhere around the country, but it is simply not designed for huge, successful, quickly-developing cities like New York.”