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Low-income areas seek boost from new federal tax incentive

New York is no stranger to programs that promise to spark economic development in struggling neighborhoods. Despite decades of attention, progress remains elusive.

Now, the federal government is offering a new tax incentive meant to encourage investment in low-income communities.

And officials here are optimistic the Opportunity Zone program can bring sustained growth to economically challenged neighborhoods in metro Buffalo, Niagara Falls, Dunkirk, Olean and elsewhere.

The program sets up targeted opportunity zones in high-poverty census tracts. Those who invest in the zones, whether on their own or through pooled funds, will receive capital gains tax benefits.

The state selected 514 opportunity zones across New York with input from local officials. The 43 zones in five Western New York counties are centered on urban cores.

They include some of the area's key redevelopment sites: former industrial properties in Lackawanna and the Town of Tonawanda, the streets in and around the Buffalo Niagara Medical Campus and the neighborhood that includes and surrounds the Boulevard Mall in Amherst.

"It's actually a really promising way of targeting reinvestment in certain areas," Amherst Supervisor Brian J. Kulpa said.

Experts question whether the opportunity zones will succeed where other stimulus programs showed mixed results. And they caution the new program could accelerate gentrification in the zones.

But advocates say the program could pull in new money to the communities and build on earlier investments by developers, entrepreneurs and government.

"It's not a silver bullet, by any stretch of the imagination, to make a project go," said Dennis M. Penman, owner of Penman Development Partners. "But it certainly can enhance and make feasible things that wouldn't be possible without it."

Here are some answers to questions about the Opportunity Zones program.

What is it?

The program was included in the federal tax reform bill that passed last December. It offers tax incentives to investors to encourage development and revitalization efforts in low-income communities.

Which communities qualify as opportunity zones?

The U.S. Treasury Department established guidelines for the program. Census tracts with an individual poverty rate of at least 20 percent or with a median family income that is 80 percent or less of the area median are eligible. States can include some tracts that don't qualify on their own but are contiguous to a qualifying tract. In New York, more than 2,000 census tracts qualified, but program rules limited each state to just 25 percent of the total eligible number.

How were the zones selected in New York?

Empire State Development worked with the regional economic development councils and officials on the local level to whittle the list down to the 514 zones recommended to the Treasury Department. The state focused on neighborhoods that already have received public grants and tax breaks, to build on previous economic development efforts there, said Pravina Raghavan, executive vice president for ESD's Division of Small Business & Technology Development. "The first half was selecting the 514. The second half is now getting investment to come into those areas," Raghavan said. "And I think that's probably why you see more of a clustering to urban areas than rural."

What are the incentives to spur investment?

The program allows investors and corporations to defer taxes they owe on capital gains. Investors can reinvest their capital gains into an opportunity zone and pay a lower tax rate on the money they invested. If they hold onto the investment for 10 years, they don't owe taxes on any of the gains. People, companies or municipalities create opportunity funds as vehicles to invest in the zones, including many who haven't previously invested in these spaces.

"It should incentivize new money to come into areas that need capital the most and it might incentivize large enough allocations of capital to have transformational effect," said Jeff Belt, president of Olean's SolEpoxy Inc. and co-chair of this area's Regional Economic Development Council.

What's the potential for the program?

The Economic Innovation Group estimates that people and corporations are sitting on $6 trillion in capital gains that could be reinvested in the approved census tracts. "If only a fraction of that $6 trillion flows into opportunity zones, this new provision will quickly become the largest federal community development initiative in memory," the group wrote in an analysis.

Where are this area's zones?

There are 43 zones in the five counties covered by the Western New York Regional Economic Development Council. They stretch from Niagara Falls to Wellsville in Allegany County. There are 23 in Erie County. Most of those are in Buffalo – primarily in South Buffalo, on the West Side and downtown stretching to the near East Side. The zones also include industrial sections of Lackawanna and the Tonawandas and a section of Amherst along Niagara Falls Boulevard. Overall, the zones are predominantly located in cities and inner-ring suburbs.

Belt said the state wanted zones that included brownfield properties, aging former industrial sites such as the Huntley Generating Station in the Town of Tonawanda, neighborhoods that hope to capture spillover benefits from the Medical Campus and areas around Metro Rail stations.

How would it work?

Affordable housing, real estate, infrastructure and transit all are investment options, CityLab reported.

Amherst's zone has aging retail centers as well as residential neighborhoods. Kulpa said he'd like to see a mix of high-density uses, including multifamily residential, research and development tied to the University at Buffalo and multimodal transportation.

James F. Dentinger, president of McGuire Development, said developers will look for projects that build off anchor institutions in the zones such as a hospital, a church or a school.

How much interest is the program generating?

Kulpa said he's already talked about the program with a representative from a developer of student housing. "Other developers have started to ask, 'What does this mean? What could this mean?' Our job now is to get our act in gear and make sure we have a good, strong rollout," he said.

The Opportunity Zone program won't make or break a project, developers said. "It does help you get over the goal line for the capital requirement of the project, which is probably becoming more and more difficult as interest rates are lagging and construction costs are increasing," Dentinger said.

Will opportunity zones succeed?

It's too soon to say, of course. The federal government and New York state have introduced a series of programs meant to revive distressed communities. Some offer tax breaks or tax credits, such as the New Markets Tax Credit that drove historic rehabilitation projects in Buffalo and across the country. But the Brookings Institution says it's difficult to quantify the success of that program. Others featured outright grants to companies and institutions, such as the Buffalo Billion, with uncertain results so far.

"From the developers' side of things, in the front end when they come out, we think they're all going to be successful," Penman said. "Developers are eternal optimists."

What are the risks?

Experts say the program could inadvertently force out the very people the opportunity zones were meant to help. The tax breaks could encourage the expansion of businesses or the purchase and rehabilitation of housing stock in low-income neighborhoods. But investors seeking the best return on their investments, to maximize their tax benefits, may focus on already-gentrifying communities, warned Adam Looney, a Brookings senior fellow in economic studies.

It's also a concern if the program provides tax breaks for projects that don’t need them, such as Amazon's HQ2. “Which is why zone selection matters so much. If we get places that really need the investment, it’s more likely those benefits are going to accrue to low- and moderate-income people," Brett Theodos, a principal research associate for the Urban Institute, told CityLab.

What's next?

New York recently received word that the Treasury Department has approved its list of zones. The state now awaits detailed department regulations on how the program will function. The state wants to ensure, for example, that investors are protected from fraud. Empire State Development is putting together a prospectus to market its opportunity zones to prospective investors, including those outside New York, Raghavan said.

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