By James Fink, originally published in Buffalo Business First on Mar 22, 2019, 5:02am EDT, Updated Mar 22, 2019, 8:14am EDT.
Are these zones really a development opportunity?
Two months ago, Niagara Falls Mayor Paul Dyster was at the annual meeting of the U.S. Conference of Mayors. Of all the seminars he attended, only one attracted a standing-room-only crowd.
The seminar focused on how municipalities can take advantage of the Opportunity Zone community development program.
“I have been to a lot of these conferences and I’ve never, ever seen any one seminar attract as much attention,” Dyster said.
Developers, lawyers, investors and accountants, as well as public officials, have an interest in the initiative that was introduced last year under the new federal tax code and presumably will take effect by late spring.
“It’s the only thing I have been dealing with for the past few days,” said Patrick Fitzgerald, senior associate at Phillips Lytle LLP.
Opportunity Zone credits focus on economically challenged U.S. Census Bureau tracts. In New York state, there are 514 Opportunity Zones including 44 in Western New York. Buffalo has 18 and Niagara Falls has five.
Capital gains from this year can be deferred until 2026 under program guidelines, but only if the project is within an Opportunity Zone.
The U.S. Treasury Department has not established regulations for the program even though there’s a Dec. 31 deadline for investors looking to capitalize on the highest level of tax credits – a 15 percent tax break on capital gains that takes effect Dec. 31, 2026.
“The tax deferral is a real sweetener,” said Josh Gewolb, partner at Harter Secrest & Emery LLP. “It has excited some of my clients. But I also tell my clients make sure that yours is the right deal for this program.”
Dyster said there is strong interest in projects in Opportunity Zones in Niagara Falls.
“My feeling is the investment market will probably eat this up once everyone gets a better understanding of how they can use the program.” he said.“Five years from now, people may look back and say it was a wise choice to tap into Opportunity Zone credits.”
The program could spur more development projects, especially in areas that need an economic push.
“For a project that may be on the fence in terms of being financially viable, Opportunity Zone credits may be enough to push it over the edge,” Fitzgerald said. “But it won’t make a (financially) bad project good.”
Buffalo developer Howard Zemsky, who is president, chairman and CEO of Empire State Development, said the rush to tap into Opportunity Zone tax credits may not be as active as some may think, at least locally.
He said those looking for tax shelters against capital gains may have already identified and backed projects.
“Opportunity Zones offer a very narrow window,” Zemsky said.
Once the Treasury Department issues the final set of rules and regulations governing the tax credits, Fitzgerald and others said there will be investment groups interested in projects.
“But I doubt we’ll see a floodgate of new projects,” Fitzgerald said.
Some regional projects could benefit from Opportunity Zone tax credits but they’re not the sole answer when it comes to tax breaks, credits and incentives.
“It’s not an easy program to deal with,” said David Mingoia, executive director of the Amherst Industrial Development Agency. “You still have to have a bankable project.”
The town of Amherst will use Opportunity Zones as an incentive for a buyer of Boulevard Mall. And the Erie County Industrial Development Agency is banking on Opportunity Zone tax credits to redevelop 150 acres of former Bethlehem Steel property on Route 5 in Lackawanna.
“It’s a perfect site for investment,” said Erie County Executive Mark Poloncarz, ECIDA director.
Dyster will use Opportunity Zone tax credits to encourage private investors in the North End and Highland Avenue neighborhoods of Niagara Falls.
The Syracuse developer of Hotel Niagara also may tap into the tax credits for the $34 million project.
One Niagara Falls project won’t pursue Opportunity Zone incentives. Buffalo developer Gordon Reger is satisfied with tax breaks from the Niagara County Industrial Development Agency to cover the first phase of his $10.4 million entertainment and hospitality project at the former Occidental Chemical Co. headquarters in Niagara Falls.
Opportunity Zone tax credits may play a significant role in development plans for the DL&W Terminal behind KeyBank Center and for Uniland Development Co.’s mixed-use development at Elmwood and Hertel avenues.
Though there was a rush when brownfield rehabilitation and historic tax credits were introduced years ago, that may not happen for Opportunity Zones.
“Before we decide, we need to get a lot more feedback,” said Michael Montante, Uniland vice president. “We –developers and investors – need another round of clarification. Until then, the jury is out. My sense is you need the right project and the right investor for (Opportunity Zone) tax credits to make sense.”
Paul Ciminelli of Ciminelli Real Estate Corp. agreed.
“Could they be a game changer?” he said. “Only time will tell.”
Investment professionals and advisers want to see the revised Treasury Department rules and regulations and read what they call the fine print.
John Koeppel is corporate and private equity practice leader at Lippes Mathias Wexler Friedman LLP in Buffalo. He said Opportunity Zone tax credits will play a role in gap financing.
“We are always looking for different tools to get deals done,” Koeppel said. “For cities like Buffalo, Opportunity Zone tax credits could be a nice program and might be enough to move some projects forward.”
Investors looking for projects and taking advantage of the tax credits may gravitate to middle-tier cities such as Buffalo, predicted Spencer Levy, CBRE senior economic adviser.
“It works better in a Buffalo than a San Francisco,” Levy said.