Projects from federal tax break slowly trickling into NJ communities

Across the state, New Jersey’s cities and towns are slowly starting to see projects put shovels in the ground and open up shop thanks to one of the largest federal tax incentive programs, known as opportunity zones.

A product of the 2017 federal tax cuts, the opportunity zone program is aimed at steering dollars into lower-income and poverty stricken-neighborhoods. Under the incentive program, investors can defer some of the taxes on capital gains – such as the sale of stock or property they own – while other types of income could be entirely exempt from any taxes.

Gains are deferred from taxation until Dec. 31, 2026, but the total amount taxed is reduced depending on how long the dollars are kept in the fund.

As much as $100 billion could flow through these zones over the next decade, suggested Richard Furlong, a senior stakeholder liaison for the Internal Revenue Service.

The dollars are moved into what is called an “opportunity fund,” and any money made off of projects in those zones would be entirely tax exempt.

Opportunity zones were slow to roll out into the public consciousness—the Internal Revenue Service only just unveiled its 544 pages of regulations in December outlining what is expected of developers, investors and businesses for the program.

The original rules for OZ’s spanned just two pages, and hashing out those guidelines in 2018 and 2019 was up to the IRS, according to Furlong.

“They were buried so deeply in there, there were only a couple of pages of language,” Furlong said at an opportunity zone conference Wednesday at the New Jersey Housing and Mortgage Finance Agency’s Trenton office.

Myth versus reality

“It’s still emerging,” Tim Sullivan, head of the New Jersey Economic Development Authority, which manages New Jersey’s tax incentive programs to lure business into the state, told reporters prior to the conference. “[O]ne of the reasons we’re having this conversation is to try and dispel some of the myths and make sure that the marketplace understands how these transactions could work.”

The EDA has been particularly intent on attracting local, community-oriented development. State officials have little power to require that investments go toward any type of project, and so the focus has been to incentivize those projects, be it a grocery store, affordable housing or local recreation.

“It’s premature to discuss the specifics of what’s happening with zones,” Leslie Anderson, president and chief executive officer of the New Jersey Redevelopment Authority, told reporters. “These opportunity zones will not return a gain” at first, “but they’re going to be impactful in the communities that we’ve designated.”

Nonetheless, federal agencies have begun scrutinizing the program in order to ensure that businesses are not abusing the incentive and simply using it as a tax shelter.

State and federal officials touted one particular project – the Newark Arts Commons – which finalized construction in January and received nearly half of its financing from an opportunity fund.

Attracting capital

The $22.3 million project entails turning the historic St. Michael’s Hospital building in Newark into a mixed-use space with affordable housing, and office space for local arts nonprofits.

The Ellavoz Shared Values Opportunity Fund injected $10.9 million into the project, nearly $4 million of loans from the Community Asset Preservation Corp., a subsidiary of community developer financier New Jersey Community Capital, and the rest from a patchwork of other loans and financial contributions.

That financing model – where opportunity zone investments, private money and tax incentives – could ultimately be an ideal way of paying for new projects in opportunity zones, suggested Marie Mascherin, the chief operating officer at NJCC.

“We see ourselves providing … multiple services” for local development projects, especially those in opportunity zones, Mascherin told NJBIZ. “We can work with investors and attract capital, help them structure the fund, help them do the economic modeling.”

The fund received an outpouring of financing – far more than was needed – said Richard Brown, Ellavoz’s chief impact officer – so they have to put the money into another project in the future, to be announced.

“We’re doing it project to project, because if we raise the money in a large amount, then we’re chasing projects instead of thinking about where it goes effectively,” he told NJBIZ.

Nationwide there are 8,700 opportunity zones, among the poorest communities, 169 of which are in New Jersey spanning 75 municipalities in all 21 counties.