A Trump tax cut meant to help poor areas could pay off for Kevin Plank and Goldman Sachs thanks to misaligned maps
By Jeff Ernsthausen and Justin Elliott
Jun 19, 2019 at 4:00 AM
Under Interstate 395 into downtown Baltimore lies what might be the most valuable parking lot in America.
The little sliver of land will allow Under Armour founder and CEO Kevin Plank, one of Maryland’s richest men, and the New York investment bank Goldman Sachs to claim what could amount to millions in tax breaks for Port Covington, their nearby development project.
Port Covington, an ambitious development featuring offices, a hotel, apartments and shopping, is not in a census tract that is poor.
But the census tract became eligible to be picked as an opportunity zone because of misaligned maps. Tiny differences between the maps used to delineate opportunity zones and empowerment zones — a Clinton administration incentive for economically distressed communities — showed an overlap between them at that sliver of a parking lot, which the U.S. Treasury Department decided made the tract eligible.
Maryland Gov. Larry Hogan chose the area for the program after his aides met with lobbyists for the project.
“This is a classic example of a windfall benefit,” said Robert Stoker, a George Washington University professor who has studied economic development in Baltimore for decades. “A major investment was already planned and now is in a zone where they are going to qualify for all kinds of beneficial tax treatment.”
Opportunity zones, distressed areas in Maryland and across the U.S. where investors can get tax breaks, aim to match record amounts of capital with overlooked communities. While the federal tax reform incentive has broad support, some worry it's a tax give away that will leave poor areas behind.
In a statement, Marc Weller, a developer who is Plank’s partner in the project, defended the opportunity zone designation. Plank declined to comment for this story, letting Weller speaking for the project.
“Port Covington being part of an opportunity zone will attract more investors, foster more economic growth in a neglected area of the City, and directly benefit all of the surrounding communities for decades to come,” Weller said.
Supporters say the Port Covington development could help several nearby struggling South Baltimore neighborhoods.
“The success of that project is really going to go a long way to providing benefits for the whole city of Baltimore,” said an official in Hogan administration.
A spokesperson for the state’s Department of Housing and Community Development, which was involved in the selection process, said that “due to the time limits of the federal tax incentive, the state of Maryland did purposefully select census tracts where projects were beginning to increase the odds of attracting additional private sector investment to Maryland's opportunity zones in the near term.”
The birth of a new tax break
Trump signed the Tax Cuts and Jobs Act, his signature legislative achievement in December 2017. Much criticized as a giveaway to the rich, the law includes one provision backers promised would help the poor even as it benefited the rich: opportunity zones.
The bipartisan tax break was pushed by New Jersey Sen. Cory Booker, a 2020 presidential hopeful and main Democratic architect of the program, and embraced by Republicans. Supporters argued it would unleash economic development in otherwise overlooked communities.
“To revitalize these areas, we’ve lowered the capital gains tax for long-term investment in opportunity zones all the way down to a very big, fat, beautiful number of zero,” Trump declared recently.
Here’s how the program works. Say you purchased Google stock years ago and are sitting on $1 billion in gains. If you sell, you’d send the IRS about $240 million. To avoid paying that much, you can sell the shares and put the $1 billion into an opportunity zone. That comes with three generous breaks.
The first is that you defer that $240 million in capital gains tax, allowing you to invest more money up front. You then can hold the investment for several years and get a significant reduction in those taxes. What’s more, any additional gains from the new investment are tax-free after 10 years.
It’s impossible to predict how much the tax break will be worth to individual investors because it depends on several variables, not least whether the underlying project gains in value.
Investors can put money into a range of projects in opportunity zones, but so far most of the publicly announced deals are in real estate.
Critics argue that the program is flawed, pointing out that there’s no guarantee that the capital investment will help community residents, that the selection process was vulnerable to outside influence, and that it could be a giveaway for projects that were going to happen anyway.
Under the new law, census tracts across the country deemed “low-income communities” would be eligible to be named opportunity zones. After the Treasury Department determined which census tracts in each state qualified, then governors could select one quarter of them for the tax benefit.
That prerogative turned out to be useful to Kevin Plank.
In 2012, Plank-connected entities quietly began buying up property on a largely vacant and isolated peninsula south of Interstate 95 in Baltimore. He spent more than $100 million acquiring property on the peninsula, including The Baltimore Sun’s printing plant, which dates to 1988 and now also houses its newsroom and business offices. The Sun has a long-term lease on the property.
Under Armour CEO Kevin Plank said Monday he wants to create a new neighborhood on the more than 120 acres that he has assembed in Port Covington, anchored by a central Under Armour headquarters and enlivened by shopping, restaurants, a whiskey distillery — even horse stables.
As Under Armour’s stock plummeted in 2017 amid slowing sales, progress on the Port Covington project lagged. That September, Goldman Sachs Urban Investment Group said it would put $233 million into the project.
Meeting with the governor’s office
In the weeks after the 2017 federal tax overhaul passed, Plank’s team spotted an opportunity.
Nick Manis, a veteran Annapolis lobbyist, reached out to Hogan’s chief of staff about Port Covington, according to emails obtained by ProPublica through a public records request. The developers and their lobbyists had given at least $24,000 to Hogan’s campaigns in recent years. A meeting was set for early February.
But the developers had a problem. The Friday before the meeting, the governor’s deputy chief of staff wrote in an email that “Port Covington does not qualify” for the coveted tax breaks.
The Port Covington tract, which includes a corner of South Baltimore north of the largely empty peninsula, was too wealthy. A second provision of the law allows tracts to qualify if they’re adjacent to a low-income area. But Port Covington failed that test, too. Its median income — nearly 160% of Maryland’s — exceeded the income cap for that provision.
On Feb. 5, the Port Covington development team met with Hogan aides. The agenda included opportunity zones, as well as transit and infrastructure issues. They also asked that Port Covington be made an opportunity zone.
Bank error in your favor
Three days after that meeting, Plank and the Port Covington developers got bad news. The Treasury Department released a list of census tracts across the country sufficiently poor to be in the program. Port Covington was not included.
Three weeks later, however, things turned around. The Treasury Department revised the list, saying it left out some tracts in error. The revised list defined 168 new areas nationwide as “low-income communities.”
This time, Port Covington made the cut.
The tract qualified under yet another provision of the law. Some tracts made the cut if they had fewer than 2,000 residents and were “within” an empowerment zone.
Port Covington wasn’t actually in an empowerment zone but next to one.
So how did it qualify?
The area met the definition of “within” because the digital map files Treasury used showed that Port Covington overlapped with the neighboring tract in the Carroll-Camden Industrial Area that was a designated empowerment zone, Treasury officials told ProPublica.
That overlap: the sliver of parking lot beneath I-395.
There are no regulations or guidance on how to interpret the law’s use of “within,” said a spokesman for the Treasury Department’s Community Development Financial Institutions Fund, which compiled the maps. The agency made what it called a “technical decision” that any partial overlap with an Empowerment Zone would count as being “within” that zone — no matter how small the area, or if anyone lived there.
Or, even if the overlap was real.
No part of the Port Covington tract actually overlapped with the empowerment zone.
Treasury’s decision ignored a well-known problem in geographic analysis known as misalignment, mapping experts said.
Misalignment happens when the lines on digital maps made by two sources differ slightly about where things like roads and buildings lie, according to Henry Luan, a professor of geography at the University of Oregon.
For example, if a tract ends at a highway, one file might show the border on the near side of the highway while another — when zoomed all the way in — might show it on the far side. Laid on top of each other, the two files depict minuscule differences that don’t mean anything in the real world.
Except in this case, it had big real-world consequences for Port Covington. The mapping error allowed the entire tract to qualify as an opportunity zone.
“That area of overlap is a complete artifact of” the map files Treasury used, said David Van Riper, director of spatial analysis at the Minnesota Population Center. “It’s not an actual overlap.”
Sometime in the mid-2000s, the Census Bureau used GPS devices to make its map files more accurately represent the country’s roads. One of the maps used by Treasury appeared to be based on the older, less accurate Census maps, Van Riper said.
“Only a minimal overlap, but you make the whole Census tract benefit from the policy?” Luan said. “That doesn’t make sense to me.”
Port Covington is one of just a handful of tracts in the country that ProPublica identified that qualified through similar flaws in Treasury’s process. Nothing indicates the Port Covington developers had any influence on Treasury’s decision.
Taking the break
As the Port Covington developers were lobbying the governor, Baltimore officials were working out which parts of the city would benefit most from opportunity zones. They petitioned the governor to pick 41 low-income city neighborhoods to get the tax break, all of them fitting the program’s income requirements.
Gov. Larry Hogan is proposing spending $56.5 million to support development and business creation in state "Opportunity Zones," through such initiatives as providing state tax credits, job training programs, small business loans and affordable housing.
The city’s list remained largely intact when the governor made his selections in April. Hogan made just four changes, three of which qualified without the benefit of the mapping error. But the fourth didn’t: Port Covington.
The development team cheered the revision. The very thing that made Port Covington a poor candidate to be an opportunity zone — that it wasn’t a low-income area — could make it exceptionally attractive to investors.
To get the maximum benefit, investments need to be made in 2019, though investments made through 2026 can take advantage of growth tax-free. Only Phase One of the Port Covington project — between Plank’s Sagamore Distillery and The Sun plant — is expected to be underway by then.
A Goldman Sachs spokesman said it is “likely” that the firm will take advantage of the opportunity zone benefits in Port Covington, adding that it has “made no firm decisions about how each component will be financed.”
Margaret Anadu, the head of Goldman’s Urban Investment Group and the lead on the Port Covington investment, recently said that opportunity zone neighborhoods are the same ones that suffered redlining, where banks wouldn’t lend, for decades.
“We simply have to reverse that,” she said. “And the only way to reverse that is to start to bring that private capital back into these neighborhoods.”
The Port Covington tract is just 4% black. For it to be included in the program, another community somewhere in Maryland had to be excluded. The ones the city suggested that were excluded by the governor are 68% black and have a poverty rate three times higher than Port Covington’s.