JUNE 28, 2019 15
SPECIAL REPORT
THE HIGHLIGHT
ZONE For better or worse, Opportunity Zones abound in WNY. Here’s where the money is likely to low.
How it works , ,
The WNY breakdown • Great expectations
STORIES BY CRAIG DOUGLAS AND JAMES FINK
SPONSORED BY:
ILLUSTRATION BY LAURIE LAWRENCE AMERICAN CITY BUSINESS JOURNALS & NANCY KNIGHT; PHOTOS BY GETTY IMAGES OKnk/PDF’d
16 BUFFALO BUSINESS FIRST
SPECIAL REPORT: OPPORTUNITY ZONES INTO THE GRE AT O ZONE Thousands of neighborhoods are primed for an investment surge. Will a rising tide lift all boats, or will our poorest, least-educated communities be upended in the name of economic development?
BY CRAIG DOUGLAS Opportunity Zone, and to the degree investments lation will mean for communities in its crosshairs. [email protected] will be exposed to federal taxes, if at all. By defi nition, Opportunity Zones are populated Another wild card: tax offi cials at the local level. by low-income residents. A Business Journals anal- arely has the federal government dabbled in Potential investors have expressed uncertainty over ysis of thousands of these designated areas found social engineering without triggering a polit- whether states or cities will follow Congress with them to be, on average, undereducated and plagued R ical backlash. similar incentives. by high home-vacancy rates relative to national, Yet, somehow, Congress stymied even its most ere has been no shortage of voices from the com- state and county averages. Most are a majority black vocal critics last year with new rules encouraging mercial real estate and wealth management sectors or Hispanic. investment in thousands of America’s most-under- heralding the potential payoff s in store for investors. But there are suburban areas included in Oppor- developed neighborhoods, known forever more as Tops among them is shelter from federal taxes, tunity Zones such as the Boulevard Mall neighbor- Opportunity Zones. but there are plenty of additional perks. Unlike tra- hood in Amherst. e reasons for the muted response are many. For ditional government programs intended to boost Some economists and policymakers caution the starters, the new regulations – included as part of economic development, the Opportunity Zone pro- law’s language is ripe to be gamed or exploited out- the Tax Cuts and Jobs Act of 2017 – were fi nalized gram’s benefi ts do not depend on an investor hitting side the intent of the Opportunity Zone program. in late April. certain employment requirements. Concerns over gentrifi cation and the displacement Initially, the Internal Revenue Service issued Likewise, traditional limits on the types of prop- of poor, minority neighborhoods in the name of hundreds of pages of guidance to explain erties or business investments that qualify are mini- economic development are legitimate, they say, and how and over what time period the program mal. Among those that don’t qualify include country are likely to play out in unexpected ways. is designed to work. Confusion stemmed from the clubs, liquor stores, racetracks and gaming venues. Investors have until year-end to maximize the defi nition of what constitutes an investment in an Less clear is what the Opportunity Zone legis- program’s benefi ts, estimated in the billions.
STATES OF Square miles per OPPORTUNITY Opportunity Zone U.S. governors were required to ■ 0 150 select quali ied census tracts as Opportunity Zones by early 2018. ■ 151 300 Below is a breakdown of where ■ 301 450 zones are clustered, based on ■ 451 600 varied measures. ■ 601 750 ■ 751+ State with the most Opportunity Zones per census tract DISTRICT OF Wyoming CONCENTRATION With 25 Opportunity Zones packed into a 68-square- mile land area, the District State with the most residents of Columbia has by far the per Opportunity Zone program’s greatest concentration Utah of quali ied neighborhoods. At one Opportunity Zone for every 2.8 square miles, D.C.’s closest rival states are New Jersey and State with the most total Rhode Island at a zone for every Opportunity Zones 51.6 square miles and 61.8 square miles, respectively. Alaska ranked California last at one Opportunity Zone per 26,615 square miles.
OPPORTUNITY ZONES VERSUS THE MEDIAN CENSUS TRACT: A POOR COMPARISON Compared to U.S. medians, Opportunity Zones are poorer, less educated and have signi icantly lower home values.
ALL U.S. CENSUS TRACTS OPPORTUNITY ZONES Total tracts Median household income Median home value Home vacancy rate Square miles per O.Z. Population black or Hispanic Age with college degree District of Columbia
SOURCES: U.S. Census Bureau; Urban Institute JUNE 28, 2019 17 PAID ADVERTORIAL New Opportunities to Invest in Buffalo’s Economically Distressed Communities hen Congress added the “Opportunity impact on the qualification, and a compliance QOF investments will potentially impact the overall Zones” (OZ) to the 2017 Tax Cuts and review should be performed every year in con- return on an investment in a QOF. W Jobs Act (TCJA), it was unclear what the nection with annual tax reporting. The rules give term “opportunity” meant for taxpayers. fund managers some safe harbors to stay com- Get Assistance from the Opportunity As time has passed and IRS guidance has filled pliant. Those safe harbors should be employed Zones Program Specialists at Freed Maxick in some of the gray areas of the law, it has become in connection with the fund’s planning for ongo- Whether you are an individual investor or a fund clear that “opportunity” is an appropriate term on a ing compliance. manager or sponsor, you should connect with a pro- number of levels: it will channel new investment into Like individual investors, fund managers should fessional tax advisor who is well versed on the OZ clearly identified economically distressed communi- consider the pros and cons of single asset vs. multi- program rules as well as other federal and state tax ties; it will reward taxpayers with tax deferrals and, ple asset funds. Compliance planning will vary based credit programs. in some cases, reduction of tax on capital gains for on the fund’s investment structure and investors will Freed Maxick is qualified to be that advisor. Our investments they make in those communities; and want some assurance that the fund will be able to familiarity with OZ program rules makes us an advi- it will provide for development and sponsorship of comply with the rules. Multi-asset funds may be sor-of-choice for those considering a QOF investment funds to manage those investments, whether for a more administratively difficult to manage than single or establishing a QOF. We have a history of working group of properties or businesses or for a single prop- asset funds. with the various federal and state tax credit programs erty or business. such as the new markets tax credit, low-income While at first blush, the OZ program looks Investing in a Qualified Opportunity Fund housing tax credit, historic tax credit, and brown- appealing, our guidance is simple: proceed with If you are considering an investment in a QOF, field tax credit. Proper planning and structuring is caution because the rules are still being developed it’s important that you and your tax advisor note that necessary to maximize the return on a QOF invest- and additional regulatory guidance is expected in they are a new investment option, providing a unique ment when other federal and state tax credits can be the coming year. set of tax considerations to be weighed against other employed. tax-advantaged strategies. Like any other investment, For more information about the OZ program, Sponsoring a Qualified Opportunity Fund the appropriate level of due diligence should be per- please visit our website www.freedmaxick.com or The tax law and subsequent guidance send clear formed when considering a QOF investment. Alter- call us at 716.847.2651. messages for those who are attempting to create, natively, you might consider establishing your own sponsor, or manage a Qualified Opportunity Fund QOF to engage in an OZ project. (QOF) and attract investors. • The fund needs to meet the IRS requirements to Timing QOF Investments qualify when it is established. Certain tax benefits provided by the OZ program • The fund needs to stay in compliance with those expire on Dec. 31, 2019 and Dec. 31, 2021. There- requirements over the life of the fund. Any sig- fore, investments in QOFs after these dates will forfeit
nificant asset purchase or sale of property within these tax benefits. In addition, the tax deferral provi- Don Warrant, CPA Mark Stebbins, CPA the fund should be evaluated to determine its sion expires on Dec. 31, 2026. Therefore, timing of Tax Director, Freed Maxick Tax Director, Freed Maxick
OPPORTUNITY ZONES HELPING COMMUNITIES GROW AND THRIVE.
The Tax Cuts and Jobs Act of 2017 (TCJA) created the “Opportunity Zones” (OZ) program to encourage private investment in low-income communities throughout the country designated as Qualified Opportunity Zones (QOZ). Freed Maxick works with fund sponsors, fund investors, real property owners and developers, and businesses that can potentially benefit by participating in this program.
Learn more by contacting a member of the Freed Maxick Opportunity Zones team: Don Warrant [email protected] Mark Stebbins [email protected] 716.847.2651 FREEDMAXICK.COM Dave Barrett [email protected] 18 BUFFALO BUSINESS FIRST
SPECIAL REPORT
FOLLOW THE MONEY: WHAT A PRIMER ON OPPORTUNITY ZONE INVESTING QUALIFIES? The potential bene its to investors are many, from the deferral of taxes owed on investment returns to the ability to completely shelter In 2018, state from taxes any future cash-outs from properties or businesses located in Opportunity Zones. Proponents see the arrangement as a win for governors investors, states and communities seeking to revitalize blighted and underutilized areas. Others have raised concerns that Opportunity selected quali ied Zones are yet another giveaway to the wealthy at the expense of the poor. census tracts as Opportunity Zones in cases where: RThe poverty rate was at least HOW IT WORKS Jane’s $1 million gain is deposited into 20 percent of all “Jane“ sells a long-owned multifamily property a quali ied Opportunity Zone fund. households, or and pockets a $1 million gain. Rather than reinvest The IRS allows investors to create their own RMedian family her money through traditional means, Jane instead Opportunity Zone funds or invest through income did not seeks to shelter her nest egg by reinvesting her quali ied funds established by the likes of a exceed 80 percent initial gain into an Opportunity Zone. traditional money manager or investment of the region’s irm. Jane is now eligible to bene it from the median family Opportunity Zone program. income, or RThe tract was contiguous to another low-income tract and had fewer than 2,000 residents.
GETTING TO 8,764 ZONES Governors were Will the Can it be given considerable community gamed? latitude to bene it? The short answer: designate up to 25 Scenario 1: Invest Scenario 2: Invest What if Jane buys yes. There are many percent of eligible in a property in a business a parking lot? The hypotheticals – online census tracts as law’s “upgrade” Jane’s $1 million gain Jane’s $1 million gain is sales, aggressive Opportunity Zones clause only requires a is reinvested within 31 reinvested within 31 months asset valuations – in their respective matching investment ? months in a real estate in a business with at least 70 ? that could enable states. Of the in the property’s asset. To qualify for the percent of its tangible assets investors to bene it nation’s 73,070 structures, say a program’s full tax bene its, in an Opportunity Zone. The from the law while total census tracts, dilapidated ticket she must eventually match business also quali ies if 50 delivering little value 42,176 quali ied as shed worth $5,000. her investment dollar-for- percent of its employees’ to a community. Will “low income.” As So $5,000 could dollar with upgrades to the hours or wages are in the the IRS have the of May, there were be the extent of the property. This only applies to zone or if 50 percent of resources to enforce 8,764 Opportunity property’s economic structures, not the value of the business’ revenue is the letter of the law? Zones in U.S. states, “redevelopment.” the actual land in question. generated within the zone. as well as two more designated in Puerto Rico.
The initial payo The big payo All the federal tax exposure on Jane’s initial Should Jane’s investment explode in $1 million gain is deferred to 2026. If her value, none of that appreciation will reinvestment in an Opportunity Zone is held be exposed to federal capital-gains for seven years at that point, some 15 percent, taxes. So if in 10 or 20 years that asset or $150,000, of that gain will be completely is worth $20 million and Jane decides sheltered from capital-gains taxes. If her to sell, she will pocket $19 million in reinvestment is held only ive years, her gains, completely free from federal shelter drops to 10 percent, or $100,000, capital-gains taxes. of that original gain.
THE CLOCK IS TICKING The good, Investors have a tight timeline – the bad The latest date The latest date The deadline at All investments in The final dead- e ectively the end of 2019 – to when an inves- when an inves- which investors Opportunity Zones line when and the ugly make a quali ied investment in tor can reinvest tor can reinvest must pay any cap- must be finalized investors can How will an Opportunity Zone and still untaxed gains into untaxed gains into ital-gains tax- by this date to be claim tax bene- Opportunity maximize all the program’s tax an Opportunity an Opportunity es owed on an eligible for the pro- fits from gains Zones help or bene its, at least when it comes to Zone and still be Zone and still be amount initial- gram’s tax-exempt earned from hurt Western New sheltering from the IRS a portion eligible for the pro- eligible for the pro- ly invested in a status on gains the Opportunity York? Hear from of the initial amount invested. All gram’s maximum gram’s next-high- property or busi- earned from the Zone program. the voices at the dates are as of Dec. 31. 15 percent tax est tax shelter – 10 ness located in an property or busi- center of the shelter. percent. Opportunity Zone. ness in question. action. Page , ,
WHAT’S IT ALL COST? The federal government has Estimated cost of the Opportunity Zone program BILLIONS No one knows, but a total cost o ered a 10-year estimate for in lost tax revenue for the federal government over the in the tens, if not hundreds, of lost tax revenue, but a total tab BILLION next 10 years. This does not account for foregone taxes MORE? billions is conceivable. remains a moving target. after 2028. GRAPHICS: Craig Douglas, Laurie Lawrence and Sarah Price; Map: Infogram JUNE 28, 2019 19
Seizing opportunity: Revitalizing downtown Buffalo. Over the last decade, Western New York, and particularly the Greater Buffalo area, has experienced a renaissance in commercial development. One of its pioneers, Nick Sinatra, a proud Buffalo native whose family has owned and operated the iconic Sinatra’s restaurant for nearly 40 years, has been at the forefront of this resurgence in economic activity, building his company’s $550 million portfolio and helping revitalize Buffalo’s downtown. Five Star Bank has served as lender for several of these endeavors, providing capital, local knowledge, and expertise to contribute to the success of these challenging projects. We’re pleased to bring you a conversation between Nick Sinatra, founder of Sinatra & Company Real Estate, and Craig Burton, Commercial Real Estate Executive of Five Star Bank, as they discuss accomplishments, current and future plans and the complexities of urban commercial real estate development within Opportunity Zones.
Craig Burton: Nick Sinatra: Craig Burton: I often think about how real estate is As you know, we really loved working to figure out what the right structure is That’s fantastic. And it’s right in our really the fabric of a community. For with you on Phoenix Brewery, a great from a finance standpoint, and how it focus: downtown redevelopment decades, Buffalo was under served and experience thanks in part to your all works with new regulations for the and financing for projects like this. under managed in terms of quality and understanding of how the tax credits investors, the developer and the lender. Three years ago, we opened a inventory of real estate. I suspect that can work. So now we’re also working We really appreciate Five Star stepping downtown branch at Fountain Plaza, was something you identified as a way together on Harvard Place Apartments. up and working with us on it, because demonstrating our commitment to you can contribute in your hometown and And that one has been smooth sailing. it’s going to be a phenomenal project. be in downtown Buffalo. One thing have a real impact? And I think this could be a template for about financing this project that we Craig Burton: all these deals in the future. really liked was being the first bank Nick Sinatra: Well, let’s talk about Harvard (Place) for to work with a developer to structure Absolutely. Real estate is a vital just a second. Harvard is an interesting Craig Burton: an Opportunity Zone Financing that component of the economic fabric and building. Unlike the Phoenix, it’s in a And when you say stepping up, it does needs a unique approach. Another there’s a community fabric here in Buffalo park-like setting. What’s the history of require an accommodating approach thing we like about Heritage Point that’s hard to replicate in other places. the building? in terms of the structure, which we’ve is the affordable component. This In 2010, after some initial challenges, we become comfortable with. So, we isn’t just a market-rate apartment started gaining momentum downtown. Nick Sinatra: appreciate your confidence in us to community exclusive to high-income We saw that there was going to be a lot of The building was built in 1929 as deliver the type of financing that’s people. The affordable component demand for housing, specifically around the home for wayward women. It is a needed for this project. But let’s back up makes it available to all levels of the Buffalo Niagara medical campus. gorgeous, tudor style building on a a little bit. Perhaps you could talk about income. And then of course came UB 2020, which three-and-a-half-acre site, nestled what Heritage Point is, the RFP process, ultimately brought the medical school in the Cold Springs area near the and the development’s relevance to Nick Sinatra: downtown. medical campus district, in a very up- downtown Buffalo? As do we. So, Heritage Point is very and-coming neighborhood. It was similar to Phoenix in that it has lots of Craig Burton: being used as the Community Action Nick Sinatra: layers, with government oversight and Your Phoenix Brewery project is very organization headquarters for many, Absolutely. It will be a $27 million incentives. The project itself poses close to the medical campus. That was many years. We purchased it, along ground-up development in the new great construction challenges, driving one of the first projects that you worked with the land around it, a few years ago Canalside District, which is going to be construction costs higher. The state with Five Star? for a good price and we got it into the the heartbeat of Buffalo’s entertainment recognizes this and they’ve really old historic tax credit program. We’re district for decades to come. This is the layered in lots of gap financing. There’s Nick Sinatra: just now working on it with Five Star first site that New York State put out an also a Brownfield cleanup component Yeah, it was actually one of the first large and it should be finished by the end RFP for to find a private developer in because some of the fill needs to be developments we did at the time— of the year. that area. With our track record of doing removed to make sure the soil meets I believe it was our largest development. great mixed-use projects and being the Department of Environmental And it was challenging because it was Craig Burton: one of the larger residential landlords in Conservation standards. So, there are originally a brewery that was used as a We look forward to the opportunity to Buffalo, we were awarded the RFP. It’s multiple different layers, multiple LLCs warehouse after prohibition. It needed a finance that next phase. going to be two six-story buildings, truly involved alongside of state agencies. lot of TLC as it was a historic rehabilitation mixed-use, with 64 apartments that It’s going to be a complex deal. A So, we’ve discussed a couple of historic with structural issues. But you know, will be 90% market rate, 10% affordable. project like this takes creativity and a tax credit capital structures that we’ve ultimately, we found a great lender in There will be office space on the second solutions-oriented, customer-friendly worked with you on. Again, it requires Five Star, and the project came out great. floor and a food hall on the first floor, bank like Five Star. specific insight on the part of a bank to which we’re very excited about. The City of Buffalo Preservation Board work with historic investors. It takes Craig Burton: often references the project as a model a little effort and the right expertise, Craig Burton: Those are great points. We feel that for development and adaptive reuse, and we’ve developed that here at Regarding the RFP, are there any key we have developed the expertise historic reuse. Having a lender like Five Five Star Bank. Now, you have a very points that you can illuminate? and have the right environmental Star with a project that challenging special project coming up at Heritage consultants to accommodate a was key because we were able to Point — the first project to be built within Nick Sinatra: Brownfield capital structure as well. communicate directly with lenders who an Opportunity Zone in Buffalo Our expertise in mixed-use and So, again, thank you for mentioning could really understand our situation and or Western New York. residential was critical. Also, our that. And finally, Nick, thank you for be flexible, and work with us on problems internally-mandated design standards your time. It’s been a pleasure talking as opposed to having a larger out of area Nick Sinatra: played a role. And we like to work with with you. Just as it is working with you. bank that just didn’t really care about the Right. I can’t imagine there’s another brick, and that fits the fabric of the customer or the project. Most projects project in the Opportunity Zone program architecture of Buffalo. Lastly is our Nick Sinatra: have a bump in the road, so to have a that’s as shovel-ready as Heritage vision for transit-oriented development I appreciate the time and opportunity. lender who cares is important. Point…right across from a major sports and for activating the space, making We’re looking forward to breaking arena. And that’s the key — that we as it a must-visit destination, especially in more ground with Five Star. Craig Burton: a company have been on the forefront summer, attracting people from all over That’s what we strive for here at of this Opportunity Zone program. That the community. Five Star — to gain an understanding specific structure is unique and we’re all of the project and the capabilities of the going in together with this new structure developer and align them to structure for the first time. the project financing. We’ve elevated There are regulations that have been our understanding of historic tax credit put out by the Treasury Department capital structures, and endeavors like and IRS and we’ve gotten some great the brewery project have inspired us to guidance and counsel from accounting increase our own capabilities. Thank you for recognizing that we can be firms and law firms. But at the end of the depended on and work effectively day, we’re pioneers together on this one on complicated projects. For more information visit: Five-StarBank.com/commercial-lending 20 BUFFALO BUSINESS FIRST
SPECIAL REPORT
DEVELOPERS SEEK EMPIRE STATE NEW OPPORTUNITIES BY THE NUMBERS Tax credits provide incentive for investors New York’s BY JAMES FINK j [email protected] e company will use the tax credits densly populated as a key part of its long-term fi nanc- urban centers and sprawling i n g st rate gy. Development investors locally and from outside the area are giving Western New rural tracts In Genesee County, Batavia has two York a closer look thanks to Opportunity Zones, a fl edgling federal tax credit provide diverse designated Opportunity Zone dis- opportunities program that in many respects is geared toward assisting projects in middle- tricts. One is for the Harvester/Masse for prospective Campus, owned by Mancuso Business developers. market communities. Western New Development Group, and the other York is home to for the City Center building on Route 48 of the state’s 5. ey are among the 544 Oppor- 514 designated tunity Zones in Opportunity Zones. New York state, as selected by Est. population Empire State Development. M Rachael Tabel- Rank: 4th among all ski is director of U.S. states economic devel- opment for Bata- Rachael Tabelski via Development EMPIRE STATE Land (sq. miles) IN THE ZONE Corp. She called Gov. Andrew Cuomo the addition of Opportunity Zone tax designated 514 credits a “potential game changer.” census tracts as e organization is putting together Rank: 27th Opportunity Zones a $5 million Opportunity Zone invest- in 2018. In Western New York there are JOED VIERA ment pool that she said may trigger 48 Opportunity Nick Sinatra will use the federal tax credit program to help build some projects. Pop. per O.Z. Zones, 18 of them in the $21 million Heritage Point apartment complex at Canalside. “ e city is hyper-focused on the Bu alo. best way to move forward,” Tabelski That was certainly the case hoods, business districts and said. Rank: 34th with Marvin Wilmoth, a Miami hamlets that are considered eco- B. Thomas developer working on a proposed nomically and demographically Mancuso, presi- $100 million residential project challenged. dent of Mancuso and artists colony in the Buff alo “We would be crazy not to take Business Devel- Median ■ New York River’s Silo City corridor. advantage of Opportunity Zone opment Group, household census “When you are looking at cap- tax credits,” Jemal said. said as one of income tracts ital sources, Opportunity Zone Sinatra plans to use the tax Batavia’s larg- ■ New York K Opportunity credits give you another avenue,” credits for several other projects est developers, Zones said Wilmoth, managing part- including the $21 million Heri- the Opportunity Tom Mancuso U.S. median: $60,336 ner of Generation Development tage Point twin apartment build- Zone investment Median Group LLC. “It may very well ings and the $120 million Elm- pool could be “a godsend.” home value come into play with Silo City.” wood Crossing, which will be e Harvester complex covers 25 That’s the same for Douglas developed in conjunction with acres and more than 900,000 square K Jemal as he plans a $30 million Ellicott Development. feet, much of it dating to the early U.S. median: $217,600 renovation of the fi ve-story for- Sinatra’s pitch? A big ROI for 1900s. mer Buffalo Police headquar- investors. “From my perspective, it gives Home ters on Franklin Street that will It could take some local proj- us one more economic tool in our vacancy rate include 175 apartments. ects that might have had a long- toolbox,” Mancuso said. “In a small The federal program offers term return in the 8 percent to 10 Upstate community, you need to be investors varying degrees of tax percent range up to 14 percent or creative – very creative – when it U.S. rate: 13% credits – based on the length of more. comes to fi nancing projects.” Black or the deal – and captured the atten- “Just by doing that math, we So what happens now? Hispanic tion of development and invest- are seeing institutional inves- Opportunity Zone investment ment executives. tors that might have otherwise guidelines were issued in late April by “ ere’s certainly a lot of mon- bypassed Buff alo give our proj- the U.S. Treasury Department. Inves- U.S. rate: 30% ey gravitating toward it,” Jemal ects a second look,” Sinatra said. tors and developers are in varying said. After 10 years, investors might stages of due diligence. Age 25+ with Opportunity Zone tax credits not see their capital gains appre- Will there be a massive Opportunity college degree are a driving fi nancial source for ciation taxed by the IRS. Zone-triggered wave of development? Jemal and Buff alo developer Nick “ at moves the needle,” Sina- Not likely. Sinatra as they plan a transforma- tra said. “ ere will be more people looking U.S. rate: 32% tion of Boulevard Mall in Amherst. Interest in Opportunity Zones and checking off boxes. But the deals Town offi cials gerrymandered isn’t limited to Buffalo. The still have to make economic sense,” an Opportunity Zone tract with region’s fi rst zone-driven proj- Mancuso said. “I think people are the mall as the focal point. ect was completed in mid-June waiting to see who is the fi rst to put Opportunity Zones are dic- when Blue Cardinal Capital paid together a fi nancing package using ‘O tated by U.S. Census Bureau data $3.2 million for 38 Niagara Falls Zones’ credits as part of the deal and and are targeted for neighbor- parcels and properties. they’ll take it from there.” JUNE 28, 2019 21 PAID ADVERTORIAL New Developments in Opportunity Zone Investing
he time is right for entrepreneurs and from the sale of a capital asset to an unrelated New York $7 million a year, according to state Tax venture capitalists to benefit from person, capital gain deferral, reduction and Department estimates, said Chris Doyle, Leader of Tinvestments in areas of New York State elimination. To take advantage of these benefits, the Hodgson Russ State and Local Tax Practice. under a new federal tax incentive program taxpayers have to invest an amount equal to all or The state appears to be waiting to see whether intended to spark business development and job part of that gain in a ‘qualified opportunity fund’ in the investments that result from the program align creation in distressed communities. exchange for equity, and taxpayers have to make with the state’s economic development needs, The program included in President Trump’s an election and attach it to your tax return in the Doyle said. signature Tax Cuts and Jobs Act of 2017 created year the gain is recognized,” Gilbride said. Doyle predicted that a repeat of the 2008 Opportunity Zones, now numbering 8,700 across Those who qualify for the program can receive recession, for example, could find that the all 50 states, which are earmarked for community substantial tax benefits in capital gain deferral until “revenue needs of the state trump the economic improvement. 2026 or the date the interest is disposed, capital development needs of the state,” and the state There are 514 zones from Albany to Buffalo and gain reduction depending on the length of time the could change the law to get rid of the deferral and elsewhere in New York. investment is held, and capital gain exclusion on exclusion amounts. Let the buyer beware, he said. The attorneys at Hodgson Russ LLP are uniquely the appreciation of the investment if held for more The April regulations also addressed in qualified to show investors how to take advantage than 10 years. greater detail Qualified Opportunity Zone of the tax incentives from the types of projects to “If you hold your interest in the fund for 10 years Funds, investment vehicles that take the form pursue to how to proceed through the program’s and you dispose of it on or before 2047, you get of partnerships, corporations or limited liability regulations. elimination of capital gain on the appreciation of companies. The Opportunity Zones were created by your investment in the fund. That’s what people are Those using a fund to attract investors should census tracts of low-income areas nominated focused on as the biggest tax benefit,” Gilbride said. understand that the offering needs to comply with by each state and certified by the Secretary Two sets of regulations have been released existing federal and state securities laws, said of the U.S. Treasury. Located in downtown, by the U.S. Treasury Department. The most John Zak, Leader of the Hodgson Russ Securities industrial, suburban and rural areas, the zones recent round, announced in April, clarified for Regulations and Corporate Compliance Practice. stand to benefit from an estimated $40 billion in Opportunity Zone investors several important “Any time you raise funds from third parties you investments in projects such as start-up technology issues such as an investment’s eligibility need to be concerned about whether you can companies, small businesses and real estate requirements, treatment of pre-existing entities, deliver on your promises,” Zak added. “Given development. what qualifies as substantial improvement to a these tax regulations, which are still in flux “The Federal government has estimated that property and treatment of leased property. somewhat, it’s difficult to know whether you can investors stand to benefit from more than $9 “The April regulations in general are extremely answer all the questions of your investors.” billion from the act’s preferential tax treatment for taxpayer friendly,” said Leslie Kellogg, a Hodgson The firm expects several of its practice areas to fiscal years 2018-2022,” said Terry Gilbride, a Russ tax partner who focuses on federal and be engaged for years to come in this business and Hodgson Russ partner specializing in commercial international tax. “They are meant to give investors investment opportunity, Gilbride said. real estate, construction and public-private comfort that they really can deploy this capital and “Just about every project I’m involved in,” he partnerships. take advantage of the benefit of these funds.” said, “people are talking about and considering “The program affords taxpayers, who have gain Meanwhile, the program is expected to cost using Opportunity Zone incentives.”
Helping You With Your Opportunity Zone Investments
Hodgson Russ is prepared to advise on all aspects and facets of Opportunity Zone investments including:
- QOF Forma�on - Zone Property - Tax & Tax Policy - Real Estate - Investment Management - Business Management - En�ty Forma�on - QOF Maintenance and Due Diligence
The Guaranty Building, 140 Pearl Street Suite 100 Buffalo, NY 14202 Albany | Buffalo | New York City | Palm Beach | Saratoga Springs | Toronto 716.856.4000 www.hodgsonruss.com 22 BUFFALO BUSINESS FIRST
SPECIAL REPORT
NIAGARA OPPORTUNITIES 104COUNTY
ABOUND IN WNY 78 In Western New York, the state designated 48 Opportunity Zones. In downtown Bu alo, Opportunity Zone tax credits and deferred bene its 90 are considered essential to fueling big-ticket proposals such as the $100 million residential/artists colony planned for the Silo City area and the $120 million makeover of the former Women & Children’s Hospital property. In Bu alo, Opportunity Zone tax credits could play a role Area of focus WYOMING in expansion plans by M&T Bank, Rich Products Corp. and General ERIE Mills, as well as developments by Ciminelli Real Estate Corp., 20A Ellicott Development Co., Signature Development and Sinatra & Co. “Everyone is chasing Opportunity Zones,” said Jim Krencik of the Genesee County Economic Development Center. With 219 Opportunity Zone investment guidelines rati ied, developers 90 are beginning to get a handle on how to e ectively use the tax deferrals and credits.
ERIE COUNTY Erie County has 23 Opportunity Zones. The largest suburban zone centers around the Boulevard Mall in Amherst and extends to the CATTARAUGUS Maple Road/Youngmann Highway area. Depending on location, zones may include luxury condominiums and townhouses such as those in Bu alo’s Waterfront Village or post-World War II neighborhoods in the CHAUTAUQUA Sheridan-Parkside area in Town of Tonawanda. 16
WHERE’S THE OPPORTUNITY?
Census Tract 165 includes the Elm/Oak corridor, Delaware Avenue 86 GRAPHICS: and the Cobblestone District. The tract houses the Bu alo Niagara Craig Douglas, Convention Center, Hyatt Regency Bu alo, KeyBank Center, M&T 86 Laurie Lawrence, Bank’s corporate headquarters and the Chippewa Street district. Nancy Knight Apartment buildings in the tract include the Market Arcade, The and Sarah Price; Maps4News Marin and The Alexandre.
People per Median household Median home Home vacancy Black or College Location Population Square miles square mile income value rate Hispanic degree Erie County Area of focus: Tract N/A
NIAGARA COUNTY CHAUTAUQUA COUNTY CATTARAUGUS COUNTY WYOMING COUNTY ZONES Niagara County has seven Seven Opportunity Zones Cattaraugus County’s three The county’s lone designated Opportunity Zones, ive in include portions of Dunkirk, Opportunity Zones center Opportunity Zone is in the IN OTHER Niagara Falls that center on the Fredonia, Falconer and around Olean and Little Valley. Village of Warsaw, which saw tourist-friendly area near the Jamestown. The zones Ellicottville – an upscale ski construction begin on its waterfalls and the industrial encompass the National Comedy haven – is not included in the irst nationally branded hotel, COUNTIES neighborhoods. Center and the Lucille Ball Desi Opportunity Zones. Microtel by Wyndham. Excluding the 23 Arnaz Museum in Jamestown. Opportunity Zones in Erie County, Western New York has 25 designated zones. WHERE’S THE OPPORTUNITY? They include the core area of Niagara Falls with employers such as Maid Bounded by Pine Avenue With the Chadakoin River Census Tract 9617 is Simply put, stay within of the Mist Steamboat Co. to the north, John Daly cutting through the middle, bounded by the Southern the boundaries of the to Dresser-Rand Group in Boulevard to the east, the Jamestown Census Tract 305 Tier Expressway to the north and Village of Warsaw. If you went Olean to destinations such Niagara River/Goat Island area includes the National Comedy Alleghany River to the south. to Perry, you went too far. Jim as the National Comedy to the south and the Niagara Center and Northwest Savings Bu alo Street is the western Pierce, executive director of Center in Jamestown. River and Canada to the west, Bank Ice Arena along with much boundary and North Union the Wyoming County Industrial Census Tract 211 is dominated by of the city’s business district. Street is the eastern boundary. Development Agency, said hotels and attractions including The tract is bounded by East The tract includes Siemens Oil county o icials are “still trying to Seneca Niagara Resort & Casino, Second Street, Harrison Street, & Gas plant and the recently get their arms around” what the Aquarium of Niagara, Hyatt Place Foote Avenue, West Third Street, renovated West State Street, the Opportunity Zone designation Hotel and Niagara Reservation Newland Avenue and Forest commercial spine in Olean. can do for Warsaw. “It is the State Park. Avenue. county seat,” Pierce said.
Niagara Area of focus: Chautauqua Area of focus: Cattaraugus Area of focus: Wyoming Area of focus: County Tract 211 County Tract 305 County Tract 9617 County Tract 9705
Population Square miles People per square mile Median household income Median home value Home vacancy rate Black or Hispanic College degree SOURCE: U.S. CENSUS BUREAU, CENSUSREPORTER.ORG JUNE 28, 2019 23 PAID ADVERTORIAL Buffalo receives top grades nationally for its strong Opportunity Zones ou may have heard the buzz around taxpayer for at least five years and an city. Substantial development, office relocations, Opportunity Zones lately and are additional 5% if held for at least seven and new housing have all followed suit. This Y probably wondering what exactly they years, thereby excluding up to 15% of the has been a key economic and job driver in the are. In short, federal Qualified Opportunity original gain from taxation. New Buffalo. Zones are part of a program created by the 3. A permanent exclusion from taxable Economic development officials and local Tax Cuts and Job Act of 2017 to incentivize income of capital gains from the sale government leaders are concentrating on the investment in underserved communities. The or exchange of an investment in an creation of thousands of jobs and attracting program provides material tax benefits for Opportunity Zone Fund if the investment billions in new investments and economic investments made into is held for at least 10 years. This exclusion activity in the region. High potential sectors designated Opportunity only applies to gains accrued after an include advanced manufacturing, health and life Zones. investment in a Qualified Opportunity sciences, tourism, entrepreneurship, workforce You can invest using long- Zone Fund. development and smart growth. or short-term capital gain According to national Opportunity Zone data from any source including Now that you have a brief introduction provider InvestReal, the OZ tract that includes stocks, property, or the sale as to what Opportunity Zones are, there are Canalside and the Medical Campus ranks better Nick Sinatra of a business. These gains undeniable statistics as to why investors are than almost all other zones in the nation on President and Founder must be re-invested within very interested in what Western New York and income growth rate. Their fundamental score, of Sinatra & Company six months of realization. Buffalo have to offer. which measures the fundamental economic Real Estate Opportunity Zones are Buffalo, New York has seen constant and drivers (population growth, income growth, census tracts designated by the federal and significant growth in development over the and income level), ranked better than 96% of state government based on lower income past 10 years. Canalside, the Buffalo Niagara all other Opportunity Zones nationally for the demographics. You can defer and reduce your Medical Campus, Allentown, the Elmwood Canalside OZ tract and better than 94% for capital gains taxes. Then after a 10-year hold Village and Hertel Avenue are all ripe with the tract that includes the original Woman and period, future capital gains on that qualified new development, bustling small business, Children’s Hospital on Bryant. Another powerful investment would be eliminated. The result is the and walking traffic representing the best of the data point was the house value growth score of potential for stronger after-tax investment returns Buffalo renaissance. 90% for both Buffalo-based OZ tracts. This score compared to a traditional real estate investment. The Ralph C. Wilson, Jr. Foundation has gifted estimates the long-term (10+) growth potential The three most prolific incentives of $100 million to remake Centennial (LaSalle) of house values by combining momentum, Opportunity Zone investing are as follows: Park. This includes $50 million investment historical risk and market health measures. in LaSalle Park and $50 million in trails and The statistics above speak for themselves when 1. A deferral on capital gains reinvested in a greenways in Western New York which will thinking about investing in Buffalo, New York. Qualified Opportunity Zone (OZ) project connect current gaps between the waterfront Born and raised in the Queen City, I’ve always until Dec. 31, 2026. and the city. valued how lucky we are to live in such an 2. A step-up in basis on capital gains The recently moved Oishei Children’s architecturally rich and historic community on reinvested in an Opportunity Zone Fund. Hospital to the Buffalo Niagara Medical the waterfront. It’s great to finally see the rest of The basis is increased by 10% if the Campus in our city’s core has helped fuel the the country noticing what we already knew. investment in the OZ fund is held by the rebirth of the historic “Fruit Belt” section of the
BUFFALO, NY
The Opportunity Zones incentive is a new community investment A PRIME tool established by Congress in the Tax Cuts and Jobs Act of 2017 to encourage long-term investments in low-income urban and rural communities nationwide. Opportunity Zones provide a tax OPPORTUNITY incentive for investors to re-invest their unrealized capital gains ZONE CITY into dedicated Opportunity Funds. | UNPRECEDENTED FEDERAL TAX INCENTIVES INCLUDE |
• A 10 Year Deferral of Taxable Income on capital gains reinvested • Up to a 15% Step-Up in Basis on capital gains reinvested in an Opportunity Zone. • A Permanent Exclusion from Taxable Income of capital gains from the sale or exchange of an investment in an Opportunity Zone fund if the investment is held for at least 10 years.
FOR MORE INFORMATION PLEASE CONTACT 716.220.8468 WWW.SINATRAANDCOMPANY.COM
THE THE THE HOUSE VALUE FUNDAMENTAL FUNDAMENTAL GROWTH SCORE SCORE SCORE RANKED BETTER THAN RANKED BETTER THAN RANKED BETTER THAN BETTER100%INCOME THAN GROWTH RATE 96% 94% 90%
CANALSIDE & BUFFALO HERITAGE @CANALSIDE VS ALL ELMWOOD CROSSING VS ALL HERITAGE @CANALSIDE AND ELMWOOD MEDICAL CAMPUS OZ CENSUS TRACTS OTHER OZ'S NATIONALLY * OTHER OZ'S NATIONALLY* CROSSING VS ALL OTHER OZ'S NATIONALLY* RANKINGS*
*Statistics indicate scores for the two Opportunity Zone tracts that Canalside and Buffalo Niagara Medical Campus fall in compared to all other OZ’s nationally. Source:www.investreal.com CURRENT PROJECTS
1200 JEFFERSON/SAY HERITAGE POINT ELMWOOD YES to Education Buffalo @ CANALSIDE 451CROSSING Elmwood Avenue, Buffalo, NY HQ 130 Main Street, Buffalo, NY 14202 14222 1200 Jefferson, Buffalo, NY 14208 PROJECT TYPE: Ground-Up Development PROJECT TYPE: Ground-Up Development PROJECT TYPE: Ground-Up Development ESTIMATED DATE OF COMPLETION: Q4 2020 ESTIMATED DATE OF COMPLETION: Q2 2020 ESTIMATED DATE OF COMPLETION: Q2 2020 STRUCTURAL SIZE: 34,260 sf STRUCTURAL SIZE: 101,508 sf STRUCTURAL SIZE: 81,016 SF RESIDENTIAL UNITS: n/a RESIDENTIAL UNITS: 64 RESIDENTIAL UNITS: 23 COMMERCIAL SF: 34,260 COMMERCIAL SF: 22,736 COMMERCIAL SF: 32,018 24 BUFFALO BUSINESS FIRST
SPECIAL REPORT GREAT EXPECTATIONS There’s little doubt the money will flow to Opportunity Zones. Then it’s anyone’s guess.
THIS IS A POSITIVE FOR WNY NOW FOR A WORD OF CAUTION Call the Opportunity Zone program a gift for the Opportunity Zones have gained momentum. development community and investors who lobbied to Created by the Tax Cuts and Jobs Act of 2017, help provide critical inancial backing for projects. much of 2018 was occupied with Zone selection, This especially holds true in Western New York draft rule writing and education about this where out-of-town investment dollars have been new community development tool. The tough to come by. Does that mean the federal O Zone rule-writing phase is not complete, but program will be a panacea? The short answer is no, but even while that progresses, investors, local it does help. o icials and businesses have engaged with O Zone tax credits clearly play a role in the the incentive. Hundreds of Opportunity redevelopment of Boulevard Mall and the conversion Funds have been created and investment of the former Women & Children’s Hospital of Bu alo is beginning to low. But will the on-the- campus into the $120 million Elmwood Village ground impact of Opportunity Zones be in development. line with the legislative intent to tangibly David Mingoia, executive director of the Amherst bene it disinvested communities? While their Industrial Development Agency, said he expects potential has excited many in policy and developers to tap into O Zone tax credits in the region. investing circles, there are reasons to be Amherst has one Opportunity Zone centered around doubtful. Boulevard Mall.
David MingoiaR Q Brady Meixel and Brett Theodos Amherst Industrial Development Agency Urban Institute, Washington, D.C.
URBAN INSTITUTE PHOTOS BY JOED VIERA JOANNE LAWTON WASHINGTON BUSINESS JOURNAL
There are two aspects to the Opportunity Zone that we are We anticipate the e ects will be concentrated in a minority of seeking to capitalize on: real estate development and company Opportunity Zones. Treasury Secretary Steven Mnuchin estimates investment. Our strongest play is the real estate opportunity kick- WHERE ARE Zones could attract as much as $100 billion in private capital and starting the transformation of Boulevard Mall area into a town OPPORTUNITIES could alter the landscape of the 8,762 designated communities. center/mixed-use environment. There is already activity in this The largest tax bene it in the incentive is linked to asset area that encompasses 900 acres, but it could be better. The STRONGEST? appreciation – the more appreciation, the more capital-gains taxes possibility of enhanced transit/light rail connected the nearby avoided. Real estate investments – which we expect to be the clear SUNY Bu alo campuses is an attractive element and further winner over operating business investments – will produce the best strengthens our positioning as a top Opportunity Zone. return in neighborhoods undergoing rapid change.
With any new legislation there are concerns. Recent postings Given the lack of guardrails around the Opportunity Zone by the federal government alleviated some concerns regarding incentive, special care is needed to ensure this tool doesn’t harm de initions of a “Zone Business,” but it appears that there may be communities, especially low- and moderate-income residents. an opportunity to acquire and hold property. The intent was to In this capacity, unfortunately, the federal government has spur investment and physical development. Regulations should DO YOU HAVE abdicated its responsibility, leaving states and localities to do be promulgated to e ect this intent. The Opportunity Zone ANY CONCERNS? what they can, where they can. Unmitigated, harm could take credits will not make bad deals good, so the lemons we have in many forms, including projects that contaminate air and water our communities will remain until another solution is developed. quality. Perhaps most salient are investments that repurpose a ordable housing as expensive rental or ownership units, out of reach of current residents.
Absolutely. It will accelerate development due to the immediacy Opportunity Zones will achieve positive community-driven of investing funds to capitalize on the capital-gains savings. The outcomes. We don’t want that overlooked. There will be deals bene its of the program diminish signi icantly even one year from WILL THIS BE that revitalize distressed communities, inance burgeoning small now. On the company investment side, it allows entities such as A NET POSITIVE businesses and create new a ordable housing. But the open- Launch NY to raise capital and invest in startups that continue ended nature of the legislation and proposed regulations will our growth in entrepreneurial activity. FOR AFFECTED also result in deals without community input, lacking community COMMUNITIES? bene it or, worse, accelerating gentri ication and displacement. Restrictions on which projects qualify and how they do so are minimal, and only a few “sin” businesses are excluded outright.
The long-term bene it is the attraction of capital from largely A large share of Opportunity Zones are truly disinvested. But for outside the area investors who may not have looked at this communities with declining populations and prices, simply being market but for the Opportunity Zone program. Their investment designated a Zone will likely not be enough. Discretion lies with and subsequent returns will showcase the rising community those investing in Opportunity Zone funds, and they have a lot of we have and spur further investment. Locally, we will see the choices. bene it in accelerated redevelopment of Boulevard Mall and the Opportunity Zones will undoubtedly attract substantial capital Ridge Lea Complex into a diverse o ering of commercial and in aggregate. And investors and other creative community residential spaces. WHAT’S YOUR developers will certainly use this tool to bring bene its to at least some needy communities. But a ordable housing, health LONG TERM centers, community facilities and other community development PREDICTION? projects will not be the typical Opportunity Zone investment, and we expect the bulk of Opportunity Zone capital to go toward the best-o and most-rapidly appreciating Opportunity Zones. How much of the bene it will current residents of disinvested communities realize, particularly those with low and moderate incomes? In its current iteration, left up to states and localities to do the heavy lifting, there are good reasons to be skeptical. We will be tracking the evidence in the years to come.