A 400,000-square-foot building is under construction in Chicago’s Pullman neighborhood. The industrial space will open in April, but it doesn’t have a tenant yet because it was built on speculation.
“It’s a $35 million project. When we started it a couple of years ago, we were looking at different financing tools and different ways to structure this,” said David Doig, president of Chicago Neighborhood Initiatives, the development group spearheading this project and development in Pullman on the city’s Far South Side.
Doig said financial resources were exhausted for the industrial building. Allstate, the insurance company, funded the entire $35 million through what’s called an Opportunity Zone.
Opportunity Zones stem from President Donald Trump’s major tax cuts law from 2017. The federal program encourages rich investors to fund development in low-income communities through tax incentives. The program has potential, but there are downsides. For one, the impact of Opportunity Zones is hard to track because there is no oversight, at the local, state or federal level.
Opportunity Zones allow investors or for-profit companies to defer or reduce taxes on their capital gains. If an investor has $2 million in capital gains, for example, instead of paying taxes on it, the money can go into an Opportunity Zone investment. The first incentive means the tax can be paid several years from now. The second incentive is if the investor holds the investment for five or seven years, up to 15 percent of the taxes are wiped away. The money goes to an investment in an economically distressed area — like Pullman.
The state of Illinois determined the 133 Chicago census tracts that qualify for Opportunity Zone money. And observers say the areas selected are places actually in need of investment — not the same controversy as wealthy areas qualifying for a tax subsidy, like the former Sears Tower, which is located within one of Chicago’s Tax Increment Financing, or TIF, districts. WBEZ found a handful of Opportunity Zone projects in Chicago. Again, there’s no official record keeping because there’s no requirement to do so.
Brett Theodos studies opportunity zones for the Urban Institute, a Washington, D.C.-based think tank. He said the general perception of Opportunity Zones is, “to date, underperforming the promise of how much capital would flow through this incentive. That’s true nationwide, not just Chicago.”
Theodos has testified before Congress about changing the law to build in accountability. He also sees another weakness.
“It is pretty agnostic about what type of investment it’s incentivizing. So I’m encouraging localities, states, philanthropies, impact investors and others to co-invest in projects that are more clearly going to produce a community benefit,” Theodos said, which he also outlined in a report a year ago. This week, Theodos and other Urban Institute researchers released an assessment tool for investors, community groups, policymakers and others to use, if they want to measure the impact of an Opportunity Zone project.
The Chicago Housing Authority is an example of a co-investor. The public housing agency is using Opportunity Zone money from PNC Bank for a commercial building at Ogden Commons in North Lawndale. Tenants will include offices for Sinai Health System and Cinespace, as well as, restaurants.
“Quite likely this would not have been done without the incentive provided by the Opportunity Zone because of the large influx of capital needed in these depressed areas. The Opportunity Zones was a but for instrument — but for the Opportunity Zone, we would not see $12.5 million invested at Washtenaw and Ogden,” said Michael Gurgone, chief investment officer for CHA.
David Doig in Pullman said his sense is there’s more supply of Opportunity Zone funds than there are actual deals to be financed. Billions of dollars around the country that need a home for investment, he said.
“There’s just that — they’re a tool. Are they the end all, be all, are they going to solve all of our problems? No,” Doig said.