What impact will Opportunity Zone investments have in the Tremont neighborhood?

by Bruce Checefsky

(Plain Press, November 2019)        The Tax Cuts and Jobs Act of 2017, with the goal of creating long-term investments in regions of low-income rural and urban communities nationwide, established Opportunity Zones. The Opportunity Zone tax break allows investors to defer for up to seven years any capital gains taxes on the money they invest in opportunity zones. After 10 years, the investor can cash out — by selling the opportunity-zone real estate, for example — and not owe any taxes on the profits.

A total of 64 census tracts in Cuyahoga County are eligible for Opportunity Zone investments. Among those, 48 are located within the City of Cleveland. Ten of the census tracks are part of the W.25th – MetroHealth Corridor Opportunity Zone, with half of those ten tracks located in the Tremont neighborhood.

In a letter to former Ohio Governor John Kasich from March 2, 2018, Cleveland Mayor Frank Jackson outlined his criteria for nominating some neighborhoods for the federal program and not others.

“Our tracts are grouped into development areas, mixing tracts with historically strong development profiles, active emerging development areas, and significant development potential that can be stimulated by Opportunity Zone designation,” wrote Mayor Jackson.

Several of the poorest neighborhoods in Cleveland including East Cleveland and Glennville did not receive any funding. Neighborhoods generally have to show an upswing in the economy to be considered an Opportunity Zone designation. The program is meant to leverage anchor institutions in developing an economically sustainable model for the future which makes Tremont an ideal candidate given its close proximity to MetroHealth and West 25^th Street.

If an investor puts capital gains in a qualified opportunity fund, they will not owe taxes until 2026 at which point they pay taxes on 85% of the original investment, and if they sell the opportunity fund in 2028, they would pay no taxes on the gain. Investors can defer and even eliminate their capital gains tax burden earning millions of tax-free dollars in exchange.

The Greater Cleveland Partnership (GCP), operating under the designation Opportunity CLE, with partners including the City of Cleveland, Cuyahoga County, Greater Cleveland Partnership, Cleveland Development Advisers, and the Fund for Our Economic Future and the Cuyahoga Land Bank has created an investment prospectus, digital portal and Web site for investors and developers interested in Opportunity Zone investment and projects. (https://www.opportunitycle.com)

The Greater Cleveland Partnership (GCP) was created in March 2004 by the consolidation of Cleveland Tomorrow, the Greater Cleveland Growth Association, the Greater Cleveland Roundtable and their primary affiliates— the Northeast Ohio Technology Coalition (NorTech), COSE and the Commission on Economic Inclusion. The 81-member Board includes Rudy Bentlage, Executive Director-Market Executive, JP Morgan Chase Bank; Akram Boutros, M.D. President & CEO, The MetroHealth System; Paul J. Dolan, Chairman and CEO, Cleveland Indians Baseball Co. LP; Dee Haslam, Owner, The Cleveland Browns; R. Steven Kestner, Chairman, BakerHostetler LLP; Joe Lopez, President and CEO, Artessa Building Group LLC; Beth Mooney, Chairman and CEO, KeyCorp; John Morikis, Chairman, President and CEO, The Sherwin-Williams Company; and other elite Cleveland businesses.

In a press release issued last March 2018, GCP announced that it had worked closely with the City of Cleveland, Cuyahoga County, and other partners to identify potential census tracts.

Cory Riordan, Executive Director of Tremont West Development Corporation, felt the selection of Tremont as an Opportunity Zone by GCP and Mayor Jackson was spot on target.

“All of Tremont is an opportunity zone. If you look at the demographics, regardless of what’s happening on the ground in Tremont, it’s still a low-moderate income area in comparisons to the rest of the country,” said Riordan. “Although low-moderate income was part of the equation when establishing Opportunity Zones, the neighborhood also had to be investment ready. Tremont is ready.”

Riordan expressed his concern that certain boundaries need to be established when it comes to Opportunity Zone funding, with the creation of affordable housing near the top of the list.  A lot of new projects are coming online that will be funded through the Opportunity Zone program that have considerable affordable housing as part of the project, according to him.

Opportunity Zone funding comes through banks setting up investment funds and financiers putting together large funds to disperse in real estate projects. The goal is to invest in distressed neighborhoods with the intention of making a profit for investors. Whether those investments change the social and economic fabric of the neighborhood is too early to tell.

“Tremont hasn’t necessarily changed because of Opportunity Zone funding, but it’s knocking on the door,” added Riordan. “It doesn’t mean that any upcoming projects wouldn’t have happened without Opportunity Zone funding. There are a number of additional apartments building slated on the Near West Side using those funds including the MetroHealth Neighborhood Transformation Initiative. I’m cautiously optimist. It’s good to have the ability to complete projects but challenging to control the outcomes.”

More investment in struggling communities is meant to create jobs and safer streets. But critics of this program say that it will force out longtime residents and businesses. Also, there is the chance investments may fuel a bubble in commercial real estate.

“Everything has a positive and a negative side. The positives of Opportunity Zone development are going to be more quicker and, potentially, on the flip side, the negatives that we’re trying to address will become more glaring,” said Riordan.

The New York Times recently called opportunity-zone funding an investment plan with little economic and social benefits to the neighborhood.

“The provision created a tax break for investment in so-called “opportunity zones,” which would supposedly help create jobs in low-income areas,” wrote Paul Krugman, NYT Opinion columnist and 2008 Nobel Memorial Prize in Economic Sciences. “In reality, the tax break have been used to support high-end hotels and apartment buildings, warehouses that employ hardly any people and so on.”

A few smaller real estate development firms in the region don’t feel a need to use Opportunity Zone funding to develop real estate. They prefer to use their own network of private individual investors over government-initiated programs with too much political oversight. Primo Management on Professor Avenue in Tremont is among them.

“If the carrot to get real estate investment to invest in the neighborhood is Opportunity Zones, and they help the people by helping themselves, maybe that’s the incentive you have to have,” said Adam Waldbuam, Owner, Primo Management.

But, he also cautions that the process can be a slippery slope, with local Community Development Corporations driving the conversation with real estate developers and deciding what’s best for the neighborhood.

“Long term homeowners or new homeowners, together with the local block club members need to get involved and take control of their block clubs. They can and do a lot of good work. Lincoln Heights is a good example of a neighborhood that wants to be in control of their block club. Why shouldn’t they?” he asked.