Opportunity Zones. Heralded by some as the “second coming” for economic development. Derided by others as a cozy tax shelter for the uber-wealthy.
In any case, opportunity zones were supposed to drive investment into poorer and underdeveloped areas. So, how is the darling of President Trump’s 2017 tax reform working out locally?
In 2018, six of Harrisburg’s census tracts—about half of the city—were dubbed “qualified opportunity zones.” These zones cover much of downtown and Allison Hill, as well as part of Midtown and Uptown.
Almost two years later, no known projects have surfaced in the city. But, say developers, stay tuned. Something still might be brewing.
Opportunity Zones 101
Opportunity zones start with capital gains, the profits made on the sale of such assets as stock and real estate. Investors who put a portion of those gains into specially created “Qualified Opportunity Funds,” used to invest in economic development projects, can defer taxes until that investment is sold, or until Dec. 31, 2026. Investors who hold that investment beyond 2026 pay no taxes on those gains.
So, just what is an “Opportunity Zone?” Governors designated opportunity zones in their states. In each tract, the poverty rate had to be at least 20 percent, median family income could not exceed 80 percent of the state or metro area median, whichever was higher.
Among Pennsylvania’s 300 Qualified Opportunity Zones approved by the U.S. Treasury Department, six are in Harrisburg, with one creeping into Susquehanna Township. As TheBurg reported in 2018, they encompass downtown south of Forster Street, South Harrisburg, South and Central Allison Hill and neighborhoods along the Cameron Street industrial corridor.
The American public, in a sense paying for QOZs through the lost tax revenue, gets few glimpses into qualifying projects. Recipients of the benefit are not required to register, so the Pennsylvania Department of Community and Economic Development had no information on projects underway.
The Harrisburg Regional Chamber & CREDC doesn’t know if any existing projects in Harrisburg are allied with QOZ funding, said Director of Regional Workforce Partnerships Shaun Donovan, but “we do know people are looking for projects. That’s always a positive.”
Some potential investors with national ties have queried about potential sites for warehouses, which “weren’t fits” for the Harrisburg neighborhoods designated as QOZs, Donovan said.
Opportunity zone criteria land right in the wheelhouse of Harristown, the developer of residential and office projects in downtown Harrisburg. QOZ status could make a project “a slightly more attractive investment for outside investors,” said President and CEO Brad Jones.
“It’s another source, perhaps a catalyst of getting a project started,” said Jones. “It’s also creating a little bit of a sense of urgency.”
Harristown is “in discussions with some folks on one of the projects we’re working on” to fold in QOZ funding, Jones said. But “the details are tricky,” he said, especially because the IRS rolled out its rules slowly, in varied versions. Jones hopes the project can be sealed in the first quarter of 2020.
Smaller markets such as Harrisburg may struggle to make projects “pencil out”—a developer phrase for the math that shows a profitable bottom line. It is, said Jones, “obviously going to be harder to make the numbers work because the values of the real estate aren’t as high here as they would be in a tier-one city.”
“Our projects won’t value out as high, rental won’t be as high, but the cost of construction is still the same,” he said. “It makes the projects more difficult to do, but we sort of specialize in these kinds of difficult projects.”
Opportunity zone projects are hitting the ground elsewhere in Pennsylvania—in Scranton, Erie, Coatesville.
In York, a planned, $169 million “Innovation District” meant to promote joint tech developments in energy, defense, 5G infrastructure and cyber security, is “like the poster child” for opportunity zones, said developer John McElligott, CEO of York Exponential Development.
The York project, dubbed York Plan 2.0, expands a robotics manufacturing plant across brownfields along Codorus Creek, avoiding gentrification or displacement and creating “good, walkable jobs in the center of the city,” he said.
McElligott called QOZs a “catalyst to masterplan the whole triangle.” A project that started at 240,000 square feet ballooned up to 768,000 square feet because the QOZ “helped accelerate acceptance for the scope.” He has aligned the project with a message of American competitiveness in manufacturing, for “a strong narrative that ties closely to why the (opportunity zone) legislation was passed.”
“There are investors looking at our project now that probably wouldn’t have before,” he said.
York city officials have jealously guarded the site for years, rejecting proposed projects that didn’t maximize its potential, said McElligott.
“The metrics on real estate are not hard to figure out if you don’t really care about what’s going in there,” he said. “If you care about what’s going in there, you need a different level of patience and grit.”
Wormleysburg-based Integrated Development Partners has “looked at a few projects, but they almost have to pencil out without the opportunity zone,” said Managing Partner Jonathan Bowser. “It becomes an extra layer of incentive. The projects we looked at, none of them were enticing enough to launch without the OZ.”
The typical challenges of city development—parking, high costs of services, high tax rates—also present barriers to taking advantage of QOZs, said Bowser. While the QOZ can attract capital, developers “still make our money on the underlying performance.” Even before QOZ funding is added, viable projects must generate greater return than the developer’s investment.
“We typically like to look at the project without the incentive, because you just don’t know,” Bowser said.
In central Pennsylvania, “there are probably more people shopping for projects than there are projects that are close to being shovel-ready,” Jones said. “This sort of matchmaking game has been somewhat slow to create real opportunity zone success stories so far here.”
But the ever-optimistic Jones said that Harristown is among those probing QOZs for their original intent—opportunity.
“I don’t know if we’re going to be able to make it work or not,” he said, “But we’re going to try.”