Real Estate News

This program is meant to revitalize neighborhoods. For now, it’s development as usual.

“The Shoreline” at Solé Mia in North Miami. The $4 billion project was carved into an opportunity zone.
“The Shoreline” at Solé Mia in North Miami. The $4 billion project was carved into an opportunity zone. cjuste@miamiherald.com

They’re designed to spur development in hard-up neighborhoods.

And in some locations — and by some definitions — the recently created opportunity zones are doing their job in South Florida. But nearly 18 months after their launch, it is too soon to say whether the federally qualified zones will lead to long-term, neighborhood-wide benefits, experts say.

“We’re in the second inning,” said Neisen Kasdin, managing partner at Akerman LLP’s Miami office, whose practice now includes advising on opportunity zone deals. “We’re basically in the stage of the [projects] still being put together.”

Created as part of the federal 2017 Tax Cuts and Jobs Act, the zones are supposed to shelter capital gains from taxes, channeling profits instead into businesses in blighted neighborhoods.

In April of 2018, former Gov. Rick Scott announced 67 such zones designated in Miami-Dade County and 30 in Broward. The zones and their investment potential have been the marquee topic at several fall real estate conferences, including a two-day summit last week hosted by the City of Miami.

But conversations with investors, real estate developers and economic development experts indicate that most of the investment is still going into real estate projects that would have been launched without the new tax shelter.

“The first slate has been business-as-usual projects,” said Brady Meixell research analyst at the Urban Institute, a Washington-based think tank. “They would have happened with or without opportunity zones.”

While certain projects may fit the bill of being “inspiring” examples of revitalization, he said, they remain the exception, both in South Florida and nationwide.

The opportunity zone program “targets where [investment is] happening, but not what is happening,” he said.

Tax Deferral

Opportunity zones originated with Sean Parker, the founder of Napster and now a venture capital investor. Parker and a handful of other venture capitalists believed they could combine their massive fortunes and desire to do good in a single idea.

“Instead of having government hand out pools of taxpayer dollars, you have savvy investors directing money into projects they think will succeed,” Parker told Forbes, describing the birth of opportunity zones.

To qualify for tax benefits, an investment must be in a business located in a designated opportunity zone. The trade-off for tying up the money: a significant reduction of taxes on eventual capital gains that can result in as much as $76 for every $100 invested. Pulling the investment out after only five years drops the return to $9 per $100.

Those figures come courtesy of the Washington, D.C.-based Economic Innovation Group, which Parker chairs and which pushed the creation of the zones. The group calculates that after five years, the after-tax rate of return is 1.9% greater for opportunity-zone investment than the stock market, and 3% greater after 10 years.

When you’re investing millions of dollars, those margins add up.

By one measure, the zones are working. Miami-based law firm Bilzin Sumberg said it is seeing interest from investors usually averse to development deals. Those include high-net-worth individuals with holdings in the hundreds of millions and family offices, which invest on behalf of wealthy families and their estates.

“We’re seeing a lot of folks saying, “This is for my kids, I want to park my money,” said Josh Kaplan, a partner at Bilzin Sumberg.

Typically, these investors are looking for projects that are “ready to go” where they can get the most out of their capital gains investment as quickly as possible., said Kaplan. Condo projects don’t fit the qualifications because they aren’t businesses, according to the Treasury Department, but rental apartments and retail do.

The result up to now: development as usual.

“Solé Mia,” Design District

While the legislation creating opportunity zones is federal, the details about which areas qualify were drawn up by each state. In creating the physical zones, Florida used income data from a US Census survey covering 2011 to 2015.

Some historically poor neighborhoods, like Liberty City or northern Fort Lauderdale, were obvious choices for qualifying zones. But since some Census tracts incorporate both economically challenged neighborhoods and rapidly improving ones — if not ones wholly revitalized — developers have latitude about where they plan their next projects.

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Opportunity zones, in orange, in South Florida. EIG


Officials in Miami-Dade and Broward counties are not keeping lists of opportunity zone-financed projects, they said. But most known projects in these zones are being led by local developers who are creating familiar-looking spaces.

In two prominent cases, major projects were slated before the advent of the zones.

Take Solé Mia, a city within a city being built in North Miami Beach on land remediated from a former municipal dump. The ambitious, multi-year effort fits the IRS’s definition of an opportunity zone-based project that has “spur[red] economic development and job creation” in a distressed community. The Costco adjoining the development has yielded dozens of new jobs, and a University of Miami Health System satellite facility is also planned. Two prominent developer families, the LeFraks of LeFrak and Soffers of Turnberry, are partnering on the project.

But the $4 billion, 184-acre development, billed as a “live, work, play paradise,” was launched in 2015, long before the area was declared an opportunity zone. Rents for one-bedrooms in the first phase start at $1,870, according to its website.

A representative for Richard LeFrak could not be reached for comment.

A project in Miami’s tony Design District also predates the Opportunity Zone regulation. Aventura and New York-based developer BH3 bought the land at North Miami Avenue and Northwest 38th Street in 2017, before opportunity zones were announced and after luxury brands including Hermes, Vuitton and Tom Ford had already opened.

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BH3’s 9-story retail space slated for the Design District. BH3

Greg Freedman, principal and founder of BH3, wrote in an email that the development “was in line prior to its classification as an opportunity zone deal.” Its inclusion in an opportunity zone was happenstance. “The fundamentals, economics, and merits must stand on their own, whereby the tax benefits are purely an added bonus. A bad deal with good tax benefits is still a bad deal.”

BH3’s planned $60 million retail and showroom space, whose properties in the zone were purchased for $15.1 million, is expected to open in 2021.

Skeptics, and speculators

Even when a project is located in an opportunity zone, some developers are still opting for traditional forms of project lending in order to avoid potential compliance conflicts, experts say. That’s partly due to timing; it wasn’t until April of this year that the government clarified a host of ambiguities seeded in the original opportunity zone legislation.

“Every real estate developer in the country is trying to figure out their opportunity-zone strategy,” said Reid Thomas, principal at NES Financial, which is creating software for administering opportunity-zone funds. “Some are deciding it’s not worth the hassle, that they’re not going to bother doing this kind of development.”

A survey of investors and developers released by Bilzin Sumberg this summer found just 7% of respondents said they had invested in an opportunity zone project or zone fund. Approximately 42% of respondents were undecided about investing in an opportunity zone, or an opportunity zone fund. And nearly two in seven said they lacked understanding of the program altogether. The survey drew 72 responses, 41% from real estate developers.

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A Bilzin Sumberg survey from this summer showed mixed interest among respondents in opportunity zones. Bilzin Sumberg

Another reason for the holdup: Some landowners who woke up to find their properties in opportunity zones are now asking exorbitant investment stakes. An undeveloped property at Biscayne Boulevard and Northwest 16th Street that was slotted into a qualifying zone, for instance, was recently marketed for $100 million. Outside the zone, but just up the street, a parcel of nearly comparable size is listed at $15.4 million.

“Unfortunately, opportunity zones have become the ‘special of the day,’ “ wrote BH3’s Freedman in an email. “We would warn any investors looking for an opportunity and developers prior to rushing into development to ensure the company has a substantial and successful history in investment and development through various cycles and with various classifications.”

Hotbed

Miami isn’t the only place where opportunity zones have yet to spur new economic opportunity, said experts.

If the region wants an example of what another type of investment could look like, it should look to New Orleans.

There, a group called Hotbed Entertainment has set up shop in an opportunity zone, aiming to create a mini-entertainment mecca.

Hotbed, which was founded by the original brain-trust behind live-performance sensation Blue Man Group, said it just so happened that everything had lined up.

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A run-through at Hotbed Music Hall in New Orleans, a planned entertainment venue in one of that city’s opportunity zones. Hotbed Music Hall

Jennie Willink, a founding partner at Hotbed, said the intention was always to find large venues at a decent price and transform them into music hall-restaurant entertainment destinations that could help revitalize distressed neighborhoods.

“We want to create an entertainment destination,” she said.

When its principal investor realized that the buildings in New Orleans and target cities Reno and Las Vegas were in opportunity zones, Hotbed restructured to take advantage of them. “I never thought I’d know so much about tax law,” said Willink, a self-described “creative,” in an interview. Hotbed is one of the few opportunity zone enterprises outside of the real estate space.

Believers, and waiters

Stakeholders like Kasdin believe that it is still too early to make any determination about the impact of Opportunity Zone program, noting that the complexities have slowed down the process.

“The development activity — we’re still in the infancy of that,” Kasdin said.’

Once investment does start come through, he said, he believes the zones will work as intended.

“At the end of the day, these neighborhoods will benefit the most when people invest money in them,” he said. “Whether it’s a real estate development, or a capital-intensive project or businesses...You have to start with the assumption that investment in neighborhoods [that have] only seen disinvestment is a good thing.”

Melisse Burstein with Miami-based Gerson Preston accounting group agreed.

“As more people begin talking about it, and as [opportunity zones] get written about more you’re going to see firms coming up with funds for qualified opportunity zones,” Burstein said.

Kaplan, of Bilzin Sumberg, said he expects a flurry of deals to occur at the end of Dec. 31 as investors look to take advantage of the 10-year holding period.

For Meixell of the Urban Institute, the question of whether more developments will materialize — let alone have a revitalizing impact — is the “multibillion-dollar” question that remains unanswered.

“There will be some good projects [with widespread neighborhood benefits], and some bad projects,” he said.

Local government, he said, should intervene if it wants to see better outcomes.

“You will see some opportunity zone projects furthering gentrification and displacement,” he said. “So hopefully localities and states can fill in the void the federal government has left and can get the community voice involved.”

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