A big new federal tax break: Baltimore developers see hope for projects in Opportunity Zones

Beneath an overpass near M&T Bank Stadium, a banner on a more than century-old former whiskey distillery proclaims “Future Home of Hammerjacks.”

Kevin Butler and Andy Hotchkiss have been working for several years to resurrect the popular 1980s concert hall amid a stretch of industrial buildings and vacant lots on Russell Street that the city wants to transform into an entertainment district.

The partners expect the slow-moving project could get a boost from a new economic development tool, an incentive tucked into President Donald Trump’s federal tax reform passed in December. The future Hammerjacks falls into one of more than 8,700 newly designated “opportunity zones” across the United States, making it eligible for a program designed to direct investment capital into struggling communities by offering a huge new tax break.

Anyone who uses profits from another investment to invest in real estate or businesses in the designated zones could defer and reduce their capital gains tax -- and any profits from the opportunity zone investment would be tax free as long as it is held for 10 years.

Government and economic development officials believe the new program will flood impoverished neighborhoods with investment. Critics, however, worry it’s a massive tax giveaway benefiting real estate developers who will bypass many poor areas and focus instead on existing projects in opportunity zones nearby.

FAQ: How will the federal 'opportunity zones' tax incentives work in Maryland? »

Baltimore selected its opportunity zones based on anchor projects where the city really wants to attract further investment, said William Cole IV, president of the Baltimore Development Corp., the city’s quasi-public economic development agency.

Opportunity zones exist downtown and for Poppleton, Port Covington and Perkins Homes, areas already scheduled for redevelopment. There’s also a zone in Park Heights that includes Pimlico Race Track, which city and state officials want to see redeveloped to keep the Preakness. Other zones are in impoverished areas of East, West and South Baltimore.

Butler and Hotchkiss expect the opportunity zone to make their Hammerjacks project, and properties they hope to redevelop nearby, more attractive to investors.

“It allows people to invest in real estate in depressed areas where people typically wouldn’t ever look,” Hotchkiss said. “It’s going to shine more of a light on the area.”

The idea was appealing enough that it drew support from Republicans and Democrats in Congress and officials in both urban and rural areas. Its proponents included Republican Rep. Paul Ryan, the speaker of the House, and Sen. Cory Booker, a New Jersey Democrat.

Each state picked its zones, which can include up to 25 percent of low-income census tracts, as well as adjacent tracts. The U.S. Treasury Department approved them in April, including 149 zones in Maryland.

Map: Where are Maryland's Opportunity Zones? »

The agency proposed rules Oct. 19 for how the program will work. They call for the creation of “opportunity funds,” through which individuals, corporations and real estate investment trusts can plow capital gains into projects and businesses in the designated zones.

The incentives are generous. Investors can defer taxes on prior profits as late as 2026, with a reduction of up to 15 percent on the eventual tax bill. And for opportunity fund investments held at least 10 years, investors would pay no capital gains taxes at all.

The program will “get private capital off of the sidelines,” said John Lettieri, president of the Economic Innovation Group, a Washington think tank that has pushed for the tax break.

He noted that investors last year were holding onto $6 trillion in stock and mutual fund profits. This program could unlock some of that money, Lettieri said.

“You don’t need a large percentage of that to equate or exceed the largest economic development program in this country’s history,” he said.

U.S. Treasury officials estimate the program will result in an infusion of $100 billion of private capital in regions with an average poverty rate of more than 32 percent.

Critics, though, believe the costs will outweigh the benefits.

“We think it’s a predictable train wreck and will be much more costly than projected,” said Greg LeRoy, executive director of Good Jobs First, a national policy group that promotes corporate and government accountability. It will become “a big windfall for high worth individuals, people sitting on a lot of capital.”

Scott Klinger, a senior analyst with the group, questions the inclusion of areas that stand to receive public subsidies or already have active development. Baltimore’s zones, he argued, create opportunities only for “already wealthy developers… This is not creating opportunities for distressed communities.”

Some worry the influx of capital into poor communities could result in their gentrification, pushing out the people the program is meant to help.

There is a disconnect between the size of the potential tax cuts, which are uncapped, and social benefits, which are unclear and hard to measure, argued Steven M. Rosenthal, a senior fellow with the Urban Institute’s Tax Policy Center in a blog post.

Opportunity zone advocates stress the benefits. They note the zones are designed to be flexible, to work for housing development as well as start-ups and to apply across industries. There’s no cap on how much can be invested or how much tax can be avoided.

The zones will likely work better in some areas than others, Lettieri said. He believes they’ll succeed if states and cities prepare for development, view zones as one tool among many and don’t expect them to solve all problems.

PNC Bank, which said it may be the first financial institution in Maryland to establish an opportunity fund, is eyeing two Baltimore projects, a mixed-use real estate development and an affordable housing project, said Laura Gamble, PNC’s regional president for Greater Maryland. The bank will be an investor, rather than a lender, she said. She did not identify the projects because they had not yet closed.

“We’re looking to get social impact out of it, but there’s some economic impact as well,” Gamble said. “We look at it as another vehicle for us in our community development strategy.”

State officials believe the economic development tool should be paired with existing programs for the zones it chose, which include waterfront land slated for housing and commercial development in Cambridge; the site of a former mall in Montgomery County in the running for a second Amazon headquarters; and areas around Fort Meade in Anne Arundel County, Aberdeen Proving Ground in Harford County and the Indian Head naval facility in Southern Maryland.

“If there’s active investments being made by multiple parties, there’s a higher likelihood there’s going to be success in those areas,” said Frank Dickson, director of the state Department of Housing and Community Development. “Having more dollars enables you to have a bigger impact.”

In Baltimore, city officials nominated tracts where large-scale projects and businesses could transform neighborhoods and create jobs. They ruled out places that might be viewed as the neediest but offer little chance of near-term redevelopment.

The state ultimately backed the city’s choices, neighborhoods with anchors such as business incubators, bio-parks, universities, port terminals and planned projects like Port Covington.

Not all of the massive mixed-use Port Covington project planned for South Baltimore is included in the opportunity zone. Land Under Armour purchased for a future campus and around the Sagamore Spirits distillery isn’t covered, but the opportunity zone does reach much of the rest of the site, including where officials recently announced a goal of establishing a “Cyber Town USA” in the project’s phase one buildings. The zone also includes The Baltimore Sun’s printing plant and offices, for which it has a long-term lease.

The Port Covington project’s developers believe it is the nation’s only shovel-ready, build-to-suit site of its size and scale within an opportunity zone.

“That’s tremendously attractive to investors, and a great selling point for Baltimore,” said Marc Weller, partner of Port Covington developer Weller Development Co., in an email. “For Port Covintgon and the six adjacent South Baltimore communities, the Opportunity Zone program provides an incredible opportunity to drive capital into a geographic region that has not seen much investment for decades.”

The managers of an 88-acre urban renewal project near the Johns Hopkins medical campus in East Baltimore see the zone as a way to attract a much-needed grocery store to the Eager Park neighborhood, along with more market rate and affordable housing, shops and offices.

Already more than 400 apartments and single-family homes have been built or renovated in the project, with another 400 in the pipeline, toward a goal of 1,500 homes. There’s also a hotel, biotech lab space, a new elementary/middle school and an early childhood learning center.

“We think we’re very well positioned,” said Cheryl Washington, president and CEO of East Baltimore Development Inc., the city’s manager of the project, headed by developer Forest City New East Baltimore Partnership. “We have created a market that was not here before.”

For their part, Butler and Hotchkiss see great potential in the area between the football stadium and Horseshoe Casino Baltimore, which the city targeted for entertainment and where Horseshoe’s operator and other developers have begun buying up vacant properties.

The partners envision new businesses opening along Russell and Warner streets and people flocking to eat, shop, gamble, go to bars and attend concerts. A Topgolf entertainment complex on a Warner Street vacant lot is planned for 2020.

Butler, president and CEO of Hammerjacks Entertainment Group who secured the now closed club’s trademark in 2011, noted that the area may be especially attractive as an opportunity zone because it boasts projects that are ready to go.

“People are now seeking out opportunity zone properties,” Butler said. “And when you go to finance these projects… banks look at that as a better risk for them.”

Construction on the $16 million Hammerjacks — featuring a two-story sports bar with a live concert venue and outdoor beer garden — is expected to start within weeks and be completed within a year.

“Kevin and I have been doing what opportunity zones are intended for,” Hotchkiss said, “putting ourselves on the line with our money and our property to revitalize an area that wants to be bigger and wants to be better and has a great future.”

lorraine.mirabella@baltsun.com

twitter.com/lmirabella

Copyright © 2018, The Baltimore Sun, a Baltimore Sun Media Group publication | Place an Ad
32°