Will Trump’s ‘Opportunity Zone’ tax break help residents along North Broad — or push them out?
The tax break, a part of the 2017 tax bill, is designed to spur investment in distressed communities. But with few incentives for investment that will directly help low-income residents, some worry that Opportunity Zones could exacerbate displacement.
The stretch of Broad Street from Susquehanna to Allegheny Avenue is just one mile long — approximately a dozen blocks of North Philadelphia asphalt punctuated by gas stations, fast-food drive-thrus, and crumbling homes.
It’s an expanse that Shalimar Thomas, executive director of the nonprofit The North Broad Renaissance, sees as one of the most troubled along Philadelphia’s major artery.
Real estate investors and developers, however, may soon see it as one of the most promising.
The corridor — and the blocks that surround it — is a small piece of the 300 Pennsylvania census tracts that were selected this year to be part of the Opportunity Zones program, a new federal initiative that gives investors lucrative tax breaks for backing real estate projects in low-income communities. Tucked last year into the tax bill that President Trump signed into law, the program — while still being worked out — has already been billed as a way to curtail inequality across America.
In Philadelphia, where the poverty rate hovers around 26 percent, 82 census tracts were designated as part of the program — with at least 19 directly abutting North Broad Street. The area, once known for the opulent mansions that lined the 100-foot-wide corridor, is now home to some of the deepest poverty rates and most violent crime in the city. The per-capita income of residents who live in census tracts near North Broad is estimated to be $15,183, with an unemployment rate of 14 percent. Compare that with the area around Society Hill and Old City, two of the city’s wealthiest neighborhoods, where income levels top $100,000 and unemployment stands at 3.3 percent.
The Opportunity Zone program aims to level the playing field for communities such as those that, like many nationwide, have experienced uneven economic recovery. While investors and developers have flocked to red-hot neighborhoods in Philadelphia and across the nation, other areas — Rust Belt communities, rural swaths, and neighborhoods with large minority populations — are still waiting for prosperity. By giving wealthy investors the chance to reduce their capital gains taxes by investing in opportunity zones, the idea is that economically depressed census tracts will get the cash infusions they need.
Already in Philadelphia, developers, brokers, and officials say, there is unprecedented investment interest in some census tracts.
Ryan McManus, a broker for Agent PHL, a Philadelphia company associated with Berkshire Hathaway HomeServices Fox & Roach, said his firm is now devoting “almost half of [its] time on a daily basis to opportunity zone developments.” Keith Burke, a real estate agent at MPN Realty Inc., said he recently has had bidding wars for North Broad Street parcels — including one far north of Temple University — that previously had minimal interest. Eric Blumenfeld, the developer who in December completed a renovation of the Metropolitan Opera House, recently swapped his plans for a North Broad strip mall with a high-rise tower full of apartments and commercial space.
And Anne Fadullon, director of Planning and Development for the city, said Philadelphia officials are “sitting down and having conversations” with interested developers.
“I would not say the floodgates are opening,” Fadullon said. “... But there is definitely activity. There are a lot of conversations happening around them.”
Local stakeholders and residents from low-income communities say the prospect of development is exciting — and many are already forecasting how their communities could change. Many have envisioned new grocery stores, small businesses, and housing that longtime residents can afford.
“Everyone wants North Broad to be more of a job creator,” Thomas, from the North Broad Renaissance, said. “How can we make sure we attract the right jobs to the area?”
The only problem: There is no guarantee that Opportunity Zone development will directly improve the lives of neighborhood residents.
“There are no rules that say, ‘You have to hire people from the local community.' There are no rules that say, ‘If you build condos, you have to set aside a certain number of low-income units,’ " said Adam Looney, a senior fellow in economic studies at the Washington-based Brookings Institution. “It’s a big experiment, and I don’t think we know what the answer is going to be until we see what’s happening in these neighborhoods."
“The optimistic story is the one in which private capital flows in and builds new businesses, rehabilitates residential real estate, and improves the quality of the neighborhood in a way that creates more economic activity and that provides jobs for the local community, improves the safety of the neighborhood, and improves home values for local residents who own their property,” Looney said. “But there is clearly a potential for displacement. If investors come in and basically flip houses ... or local residents can no longer afford their rents, then it’s not clear that they would be better off.”
While the Opportunity Zone program was made law last year, investors, regulators, and local officials are still trying to figure out how the program will work. In October, the U.S. Treasury Department and the Internal Revenue Service finally released guidelines to better explain the tax-break regulations, but questions still loom. On Wednesday, Trump signed an executive order creating a council with representatives from 13 federal agencies to oversee the program, aimed at streamlining federal programs to benefit the zones, in addition to collecting data to measure the program’s results.
(The October regulations from the Treasury Department, in short, allow investors to roll capital gains from other investments into Opportunity Funds, which developers can tap to build projects in opportunity zones. The taxes on those initial gains can be reduced depending on the amount of time that an investment is held. Separately, any gains from the opportunity zone investment itself can be avoided entirely if the investment is held for at least 10 years.)
The federal government, however, has issued no guidelines thus far regulating the types of development that can occur in zones.
Fadullon said the city can help shape some of that.
“We need to make sure that the investment is good for all of our residents, whether they are new or existing — but particularly if they are existing,” Fadullon said. “So when we are sitting down ... with those developers, we want something in return or something out of this.”
Practically, Fadullon said, that will likely mean that when a developer seeks the city’s or state’s help in getting a project off the ground — whether that means they are buying city-owned land, seeking zoning approval, or asking for some kind of supplemental financing — the city would try to negotiate a “social impact” piece of development in return. For different census tracts, that social impact component will mean different things, Fadullon said, but a developer could be asked to generate “job creation, access to early education, or access to fresh food.”
“Even if we are not involved, we would really like investors to take to heart the mission of this, which is to spur investment in these areas and to lift up these entire areas, including the residents,” Fadullon said. “... But I think the reality is that a relatively large percentage of projects need something from us, so we can have a very intentional conversation about this.”
In Harrisburg, a spokesperson for the Department of Community and Economic Development said in an email that the state is “exploring the effect that possible incentives and/or state policies" may have in enticing developers to build projects that will support longtime residents, “on top of the state programs already in place to help low-income communities.”
As for North Broad, Thomas said she is scheduling a January meeting with existing and potential developers, during which she plans to pitch them on boosting Broad Street jobs. (The North Broad Renaissance, which Thomas leads, is a “special service district" and provides improvement services, including cleaning and job creation.)
“If you decide to invest on North Broad, and that leads to commercial tenants, how do we work with you to help you get the right tenants [from our community] in place?” Thomas said. “The hope is that … this can be a win-win.”
Thomas said a strong example of local job creation is Blumenfeld’s Met Opera House. The developer said this week that the project created roughly 400 jobs — about half of which employed neighborhood residents.
“I think there’s a formula out there where everybody thrives,” Blumenfeld said. “... Honestly my hot button should be about making money, but it’s not. It’s about creating positive change, and the most exhilarating thing that has happened in the last two years was when we were filling those lines around the corner creating jobs.”