Boosters of the “opportunity zone” investment incentive from the Trump tax bill say it injects money into poor communities that need it most. Skeptics say it rewards developers for investing in areas that would have seen activity without the costly enticement.

For Philadelphia, both may be right, according to a study released this month by the city’s branch of the Federal Reserve Bank.

The opportunity zone program, passed as part of the 2017 tax law, empowered city and state officials to nominate census tracts from among the city’s poorest as targets for investment. Investors in those tracts can claim big potential savings on taxes from asset sales.

Among Philadelphia’s qualifying zones, officials selected a higher proportion of gentrifying tracts for the program than any other major city, although the selected tracts showed greater signs of economic distress than qualifying tracts that weren’t chosen, the Fed study found.

“The neighborhood characteristics of Philadelphia’s opportunity zones reflect the state and city officials’ dual emphasis of need and potential for investment,” wrote researchers Lei Ding and Peter Birke.

The Tax Cuts and Jobs Act of 2017 set rules for selecting zones from among census tracts with high poverty rates and low median household incomes. The Treasury Department relied on nominations from state officials, who fielded suggestions from local governments, to make its designations.

Under the legislation, people and companies owing tax on investment income can put off paying those levies for up to seven years by directing the earnings into real estate ventures or other businesses set up in designated zones.

Investors also qualify for reductions of those deferred taxes if they keep their money parked in the ventures long enough, with the biggest breaks going to those who stay invested for the full seven years.

And once 10 years pass, investors can sell their stakes in opportunity zone projects or businesses without being taxed at all on gains from that transaction.

In Pennsylvania, officials strove to select tracts in emerging real estate markets that have seen growth in property values and population, and in areas where development would complement existing public investment, among other criteria.

Among designated zones is the Kensington neighborhood, photographed here from the roof of the old Esperanza Health Center.
HEATHER KHALIFA / Staff Photographer
Among designated zones is the Kensington neighborhood, photographed here from the roof of the old Esperanza Health Center.

Of 319 qualifying tracts across Philadelphia, 82 were ultimately designated as opportunity zones. Many of them are clustered along North Broad Street and along Market Street west of the Schuylkill, as well as in neighborhoods such as Point Breeze, Grays Ferry, Kensington, and Port Richmond.

Demographically, designated tracts have higher percentages of African American residents and lower proportions of whites and Asians than qualifying tracts that were not selected, according to the study. The proportion of Hispanic residents is similar in both categories.

Designated tracts have lower median family incomes ($36,760 vs. $49,967), higher poverty rates (37% vs. 27%), lower average median home values ($122,358 vs. $156,079), and higher vacancy rates (18% vs. 13%) than non-selected but qualifying tracts.

Only 16 percent of residents over age 25 in designated tracts have a bachelor’s degree or higher, while nearly 22 percent of those in the undesignated tracts have degrees.

However, selected zones also have higher concentrations of jobs (544 vs. 371 per 1,000 people) than undesignated ones.

“This pattern is consistent with the city’s criteria of selecting locations in commercial corridors and locations with easy access to anchor institutions and job centers," the authors wrote.

Meanwhile, “gentrifying neighborhoods represent a much larger share of Philadelphia’s opportunity zone designations compared with those of other major cities,” they said.

The study defines gentrifying tracts as ones where the share of college-educated residents increased at a faster clip than in the rest of the city and where rents or property-value increases have outpaced citywide averages.

Across the 29 “major cities" surveyed by the authors, gentrifying census tracts have a 19 percent chance of having been designated as an opportunity zone. Gentrifying tracts in Philadelphia had a 36 percent chance of being selected.

“Selecting gentrifying neighborhoods does not necessarily lead to bad outcomes when properly guided and implemented,” the authors wrote. “Furthermore, the city has also intentionally designated areas with great concentrations of commercial and industrial sites, instead of residential areas, to mitigate the pressure of gentrification on existing residents.”

Still, the authors caution that the program’s usefulness will be undermined if investment is concentrated in already-gentrifying areas at the expense of other designated tracts.

They note that four of the five opportunity zone projects cited in an April story in The Inquirer are in gentrifying neighborhoods.

That trend may be continuing, with the announcements since then of projects in areas where property values have already been increasing, such as the two apartment towers planned on North Broad Street and the residential midrise near Fishtown’s Delaware River waterfront beside the historic Edward Corner warehouse building.

But less prosperous opportunity zone tracts, such as the area around the Wayne Junction train station in North Philadelphia, are seeing new investment, too.

“If investment concentrates in the stronger neighborhoods that were already gentrifying, this targeting strategy could compromise the goal of the program," the Fed study’s authors wrote.

Artist's rendering of office building planned at 4518 Wayne Ave., seen here with existing industrial building at 212 Roberts Ave. at right.
C2 Architecture
Artist's rendering of office building planned at 4518 Wayne Ave., seen here with existing industrial building at 212 Roberts Ave. at right.