By Catherine Reagor, Lorraine Longhi, Jen Fifield and Ronald J. Hansen| October 23rd, 2019
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Downtown Phoenix, Scottsdale, Gilbert and Tempe Town Lake — among the Valley's biggest magnets for jobs, trendy living spaces or just hanging out — will benefit from a tax-break deal created to draw wealthy investors to low-income areas.

The hot spots likely will see even more development now that they are tagged as "opportunity zones."

They're among 85 metro Phoenix areas that got the designation based on federal rules. The opportunity zones include areas where Nike, Amazon, Arizona State University and Phoenix Rising soccer club are launching major developments.

They also include neighborhoods where thousands of apartments and a growing number of hotels are planned or under construction. 

But in some spots, an abundance of self-storage units are being developed, doing little to lift low-income areas.

The opportunity zones, created in President Donald Trump's 2017 Tax Cuts and Jobs Act, provide a tax break aimed at driving investment and fast-track development to areas that need affordable housing, shopping centers that offer local services and more jobs. 

An Arizona Republic analysis of opportunity zones in Maricopa County found that while some of the areas could use help, others are thriving and likely would draw developers without the tax break.

The costs and benefits of the program will be tough to track. Investors and builders aren’t required to publicly disclose whether they take the tax break.

Mark Stapp, a real estate expert and director of the Masters of Real Estate Development program at ASU, questions whether what he calls an "ill-defined" program will benefit the areas that need it most.

“It has a big public cost with the taxes not collected, and no real requirement for public good," Stapp said.

How do the opportunity zones work?

U.S. opportunity zones are poised to save investors billions of dollars in taxes during the next decade.

Investors and developers can get the tax break in a couple ways: Investors can deposit their money in opportunity zone funds that will be used for a project, or developers can directly spend on their own projects. 

To get the tax benefit, investors must quickly reinvest money from capital gains, which is the profit from the sale of real estate or an investment. Putting those profits into an opportunity zone allows people to reduce or even escape paying capital gains taxes. 

U.S. investors typically pay more than 40 percent in taxes on their capital gains.

Marc Schultz, an attorney with Snell & Wilmer, said the idea was to get wealthy individuals to reinvest their capital gains. 

"The government’s intention here was to avoid parking their money and not doing anything with it," said Schultz, who has helped dozens of opportunity funds launch.

Investors must move fast to capitalize on the tax break.

They have 180 days from the time they sell stocks, a business or real estate for a profit to reinvest the capital gains into an opportunity fund. The money then must be invested into a development or business in an opportunity zone within a year.

The development typically must be done within three years of receiving capital to qualify for the tax break.

After 10 years, investors can cash out and not owe any taxes on the profits, including their original stake that came from capital gains on other investments.

Chris Loeffler, CEO of Scottsdale-based Caliber, which has a $500 million fund to invest in opportunity zones, gives this example of how it can work: 

  • An investor nets $10 million in capital gains.
  • By making a standard investment, growing at 8% annually and paying applicable taxes, the investor’s original $10 million would be worth approximately $12 million after 10 years.
  • By investing the same amount in an opportunity zone, earning the same return, and eliminating capital gains taxes, the value would be approximately $18 million after 10 years.

It’s yet unclear how much the tax break will help areas struggling to attract affordable housing, local businesses and jobs.

How Arizona chose opportunity zones 

To qualify as an opportunity zone, areas must have 20 percent of its households below the poverty rate, or have a median family income of less than 80 percent of the region or state's median family income.

In metro Phoenix, where the median family income was an estimated $63,686 as of 2015, that’s about $50,950.

The federal government required states to use U.S. Census data from 2011 to 2015, even though 2016 data was available at the time the zones were proposed. Metro Phoenix was still dealing with the after effects of huge job losses and a foreclosure crisis for most of those five years.

That’s why popular areas with rising home prices and incomes now, such as downtown Scottsdale and downtown Phoenix, qualified, said Shawn Neidorf, vice president of research for the Arizona Commerce Authority. The state agency worked with local governments to submit opportunity zone designations.

In all, about 10.6% of the areas selected as opportunity zones in the Phoenix area would no longer qualify for the program if the latest Census data from 2017 was used. 

Those areas include Old Town Scottsdale, south Scottsdale, the north Phoenix area including Paradise Valley Mall and the northwest Phoenix neighborhood where the ailing Metrocenter mall is located. 

Downtown Scottsdale's income nearly doubled from $45,994 in 2011-2015 to $91,071 in 2013-2017.

That has Scottsdale Mayor Jim Lane questioning why the area was tagged as an opportunity zone. "We are not in the habit of trying to throw accelerant on a successful area," Lane said. 

Representatives from the City Managers Office, planning and economic development deliberated and ultimately chose which zones to submit to the state. Seven zones in Scottsdale qualified for opportunity zone status, but only two, including the downtown zone, were selected.

Cities with large student populations can also drag down an area’s poverty rate, another reason parts of central Tempe and downtown Phoenix qualified.

How areas made the cut

Metro Phoenix’s map of opportunity zones mostly follows freeways, light rail and centers around downtown areas.

In metro Phoenix, nearly half of the area's census tracts, or 456, qualified to be opportunity zones, according to the federal government. Of that, 85 were designated opportunity zones in April.

Statewide, Arizona has 168 opportunity zones.

The program allowed each state governor to nominate 25 percent of the qualifying areas as zones.

Neidorf said to choose the zones, Arizona cities, counties and Native American communities were asked to nominate 25 percent of their qualifying tracts, to keep the process fair and proportional.

"Did everybody get everything they wanted? No," she said. "We didn’t design the statute, but that’s what we had to work with."

She said the goal was to create opportunity zones near employment and transportation hubs that would draw more development.

“We carefully picked areas for zones near light rail and freeways, where workforce housing is needed,” said Christine Mackay, director of economic development for Phoenix. “Downtown Phoenix is one of those areas.”

Five percent of a state’s opportunity zones don’t have to meet the income or poverty requirements. Mesa has one of those zones it requested for a commercial corridor near Phoenix-Mesa Gateway Airport.

Cut out of zones

Some of metro Phoenix's poorest areas qualified as zones but were not chosen, including Guadalupe, Maryvale, Sun City and Tolleson.

Not every community made the cut because Arizona cities had to be home to at least 10,000 people to get a zone, according to the Commerce Authority.

Tolleson, with a population of 7,052 along Interstate 10 in the southwest Valley, reached out to Maricopa County to see whether it could submit recommendations through the county but did not hear back, said Jason Earp, the city’s economic development director.

However, Earp said Tolleson already is a huge employment center, with a large industrial sector, and the benefit of the opportunity zone program is still “up in the air.”

Jeff Kulaga, town manager of Guadalupe, said he'd like to see his East Valley town of just more than 6,000 residents included if another round opens up.

Will it drive the development needed?

Some opportunity zones are seeing investment, while others that really need it haven't yet seen movement. 

Developers have announced some affordable housing projects in Tempe and Phoenix and redevelopment of historic buildings in downtown Mesa.

“Our fund is working on transforming downtown Mesa to a place for people to come together,” said Loeffler, Caliber's chief executive. “We want to create an area like ASU did with downtown Phoenix.”

Peoria, which has two opportunity zones, is still waiting. Rick Buss, the city’s economic development director, said he doesn’t know of any projects that have begun in either.

The Commerce Authority is working with developers to try to track Arizona opportunity zone projects.

The murkiness of the plan and of who takes the tax break will make it tough to track the program's success. As the rules stand, it’s between them and the IRS, unless they voluntarily disclose like Caliber.

Big projects announced in area opportunity zones include Caliber's redevelopment project in downtown Mesa, a soccer stadium near Tempe, workforce housing and an expensive apartment high-rise in downtown Phoenix, a hotel in Avondale and rental homes in Tempe and Glendale.

Other projects underway that could tap the tax break include the massive Southbridge II project in Scottsdale, a Nike shoe factory in Goodyear and an Amazon delivery station in Goodyear.

Here is a rundown of some known projects, by city.

Goodyear: Nike plans to invest at least $184.5 million in improvements to an existing building to create a manufacturing plant in one of Goodyear’s two opportunity zones. The company did not respond to an inquiry about whether it would take the tax break.

Many of the 15 major projects in Goodyear's opportunity zones have expressed interest in taking advantage of the program and considered it when making the investment, said Harry Paxton, the city's economic development program manager.

When it comes to Nike and other large corporations, Paxton said he was sure they would “take advantage of any opportunity they can.”

Amazon does not have plans to pursue any incentives for its project, according to a company spokesperson.

Mesa: On Main Street in Mesa, Caliber is investing nearly $60 million to redevelop eight historic buildings with 100,000 square feet of space in an opportunity zone that will tie to ASU’s expansion in the area.

Mesa has put together a prospectus of projects that are underway for its 11 zones that include several hotels, apartments and mixed-use projects.

William Jabjiniak, Mesa's economic development director, said the city is marketing itself to investors across the U.S. who are looking to develop in opportunity zones.

But Jabjiniak says he doesn't know how much of the development downtown and in the Phoenix-Mesa Gateway corridor will be spurred by the opportunity zone tax break.

"Is it all because of opportunity zones? I don’t think so," he said. "Opportunity zones are really just going to make a good deal better. So much of what we do in this industry is based on momentum, and we're thrilled with what we’re seeing in and around those areas."

Phoenix: In central Phoenix, Defer Gain is partnering with Pacific Oak Capital Advisors to spend $61 million to build the three apartment projects in opportunity zones with rents below the area’s average.

Construction recently began on the first project, the 140-unit Imperial Apartments near 20th and Roosevelt streets. The area’s median family income was $17,450 in 2015. As of 2017, it climbed to $19,250. 

“We are really out to help people in the workforce find a decent place they can afford to live,” said Michael Lafferty, partner at Scottsdale-based Defer Gain. “Opportunity zones are helping.”

Another central Phoenix developer is planning a residential high-rise in an opportunity zone that won’t be billed as affordable housing.

Austin-based Rastegar Property paid $2.3 million in July for a 26,500-square-foot lot in an opportunity zone near Fourth Avenue and Van Buren Street, where it’s planning an apartment high-rise with retail and office space.

It cited the area’s opportunity zone for the deal, but at that purchase price, rents will likely be higher than most workers and students in downtown Phoenix can afford.

The median income for the area was $61,500 in 2017.

Scottsdale: Scottsdale had seven qualified tracts and was permitted to recommend two zones, ultimately deciding on a tract encompassing Old Town Scottsdale and one west of Scottsdale Road between Thomas and McDowell roads, near but not including ASU's Skysong project. 

The two zones selected were determined to have the highest potential to realize the most benefits from a designation, according to Economic Development Director Rob Millar.

The number of existing and possible locations for new businesses in a potential zone were taken into consideration in the selection process, Millar said.

Some residents and the mayor have pushed back against the designation, saying that downtown Scottsdale — where developers are planning projects such as Southbridge II and the Museum Square — was seeing plenty of investment before the opportunity zone designation.

Lane said that he doesn't believe the area qualifies as a blighted area in need of more development incentives.

Because the criteria for choosing the zones was based on median family income, the numbers for downtown Scottsdale, which sees a large number of visitors and transient renters, were likely not representative of the actual income of the area, Lane said.

Salt River Reservation: The tribal community's huge opportunity zone runs along Loop 101 in Scottsdale to Loop 202 in Tempe. 

Soccer team Phoenix Rising FC has a temporary stadium in the zone near the junction of the two freeways but is planning a $250 million stadium nearby that will seat 21,000 fans. 

Earlier this year, Brett Johnson, co-chairman of Phoenix Rising Football Club, said it was working with an opportunity zone fund to finance the project as well as restaurants and other entertainment projects at the site.

1 developer, 3 projects 

In Tempe, a 90-unit apartment complex is going up at 1980 E. Broadway Road. Scottsdale-based Virtua is developing the project, which will include workforce housing at the site of a former garden nursery.

It’s being developed in one of Tempe’s five opportunity zones. The median income for the area was $41,250 in 2017.

In Glendale, Virtua is planning to build 80 condo units at 53rd and Hayward avenues.  

In Avondale, Virtua launched its first opportunity zone project with a 128-room Marriott SpringHill Suites at 99th Avenue near I-10 in May. The hotel is part of a larger 58-acre mixed-use development in Avondale’s opportunity zone, where the median income was $49,638 as of 2017.

Self-storage and apartments dominate

Self-storage projects and apartments are two of the most popular opportunity-zone developments in metro Phoenix, according to national real estate research firm Yardi Matrix.

The Phoenix-area ranks second in the U.S., after Washington D.C., for the most apartments built or under construction in the zones, with almost 54,500. Another 12,000 are planned in the tax-break areas, Yardi Matrix reported.

Nearly 90 percent of the metro Phoenix apartments built in the past few years are luxury complexes that many residents, particularly in lower-income areas, can’t afford.

The Valley also ranks second for the most self-storage space built or under construction in its opportunity zones, with 5.9 million square feet, and another 734,000 square feet planned, according to Yardi Matrix.  

Self-storage units aren’t big job generators but can be lucrative investments.

Past development incentives

Opportunity zones are being compared with past federal government incentives for development in lower-income areas. Those programs, too, appeared to benefit businesses and investors directly, with less clarity about the positive impact on low-income communities.

  • New Markets Tax Credits provide tax credits to investors with projects in low-income areas. Since 2003, the program has funded 4,800 U.S. projects. It’s scheduled to expire at the end of this year.
  • Empowerment Zones offered tax breaks to business employing people in low-income areas. Those zones have been a longstanding part of government efforts to revitalize distressed areas. 

Those efforts, however, show little clear evidence of success at improving the targeted neighborhoods.

The federal government has failed to link the tax credit programs to improvements in communities.

One reason for the middling results could be that the tax incentives were fairly modest and that the incentives targeted business owners rather than community members, according to the Congressional Research Service.

A 2011 Congressional Research analysis was more direct: "Clearly, businesses and investors that received program benefits were made better off." But the wider impact was small or hard to attribute to the government programs, researchers found.

Who is watching the zones? 

Unlike past incentives for development in low-income areas, opportunity zone projects aren't subject to federal oversight beyond investors' tax returns. As long as investors follow the tax rules set by IRS, they get the hefty breaks in federally approved zones. 

Cities and counties can monitor overall development in zones. But that’s all. The developers aren’t required to tell local governments if the projects are using the opportunity-zone tax break. 

Schultz, the attorney with Snell & Wilmer, said, "This is supposed to help distressed communities based on the Census data. This is supposed to drive capital to areas that need that capital. But no one knows what really is the criteria to figure out if this incentive is working as intended."

Neidorf says it’s too early to tell how much development in the zones will come as a result of the tax benefit.

"This will make a good deal great," Neidorf said. "It will not make a bad deal good."

Stapp is concerned the opportunity zones will hurt the economy more than help because of all the revenue lost to uncollected capital gains taxes.

"Many of the opportunity zones are already drawing plenty of investment," he said. "I think it's a tax giveaway that will hurt the economy more than help."

Reach the reporters at [email protected][email protected], [email protected] and [email protected].

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