The new federal Opportunity Zones program created as part of the Tax Cuts and Jobs Act is meant to spur economic development and job creation in low-income areas.
But the head of a Chicago private equity real estate firm said at this point, the program is more likely to help areas on the edges of gentrifying communities than it is to help low-income neighborhoods like Englewood, Austin or East Garfield Park.
“When we look at the market, we’re looking at only five percent to 10 percent of the qualified opportunity zones that are viable for investment, meaning that we could actually have confidence in making money by investing today,” said Michael Episcope, principal and co-founder of Origin Investments.
So, what neighborhoods or areas in Chicago does he consider “viable”?
Well, the Michael Reese hospital site in Bronzeville, for one. Episcope said that location is “ripe for development” through the program.
There are 135 federally designated opportunity zones in Chicago in parts of the city that mostly missed the city’s post-recession comeback, according to Crain’s Chicago Business.
Investors who put their money into them can get various tax incentives, which Episcope explained Monday on the Morning Shift.
He said investors have been champing at the bit since the program was launched earlier this year. In fact, Origin Investments recently crowdfunded $105 million for a fund that would go toward supporting projects in the zones — in less than 24 hours.
What are ‘opportunity zones’ and why are investors interested?
Michael Episcope: “These are called qualified opportunity zones and these are economically depressed communities that have been identified by states — they kind of circle these census tracts — and then they are certified at the national level. And for individuals who invest in these qualified opportunity zones, they receive certain preferential tax treatments…This is part of the Tax Cuts and Jobs Act, and they’re trying to promote jobs and economic activity in certain areas. And this is, by the way, across all 50 states. There’s more than 8,700 qualified opportunity zones. And the way it works, if you have a gain on any investment, it doesn’t matter whether it’s a stock, whether it’s real estate, whether it’s art, cryptocurrency, doesn’t matter, you can take that gain and invest in a qualified opportunity zone fund, and so long as you invest those gains, when you harvest them within 180 days, you get essentially two tax benefits. The first is a tax deferral….and on top of that, as long as you invest prior to 2020, you get a 15 percent discount.”
Why the program may not benefit Chicago’s most economically distressed neighborhoods
Episcope: “Out of the 8,700 opportunity zones out there, when we quantified, it looks like five percent to maybe 10 percent are economically viable today, and that’s something that’s really important. While the law itself is meant to spur economic activity in what we call these distressed communities, the investment still has to be viable. We can’t run in to areas in Chicago like Englewood and Chatham and start building because a project like that just won’t work.”
Tony Sarabia: “Why not?”
Episcope: “Because if we’re building, say, a $50 million multi-family, we need rents that are $2,000 per unit, but the neighborhood can only afford $800 per unit, that’s just not economically viable, and the entire benefit is on the back end. So while it helps raise capital for the opportunity zone fund, it doesn’t change the fundamentals of real estate or help us go into some of these neighborhoods. Where it does though help is in areas that are already in transition, that are moving, that are transitioning, but it will help nudge them a little faster, so maybe an area that was going to take 10 years to transition will find money a little bit quicker.”
Sarabia: “So does this mean that areas like Englewood and farther west in the city, say, Austin, or West Garfield Park, are out of luck with this whole program?”
Episcope: “Well, in some way, I don’t personally believe that the money is going to find itself into the communities like the Englewoods and the Austins and places like that. It’s going to find itself on the periphery and neighborhoods that are already sitting sort of next to gentrifying neighborhoods. The hope is though that it does eventually find its way into those neighborhoods, but today, when we look at the market, we’re looking at only five percent to ten percent of the qualified opportunity zones that are viable for investment, meaning that we could actually have confidence in making money by investing today.”
Sarabia: “So what areas in Chicago do you think are viable?”
Why Michael Reese is more viable than Englewood or Austin
Episcope: “Well, you can actually go online, and you can look at an interactive map just by Googling ‘qualified opportunity zones.’ The IRS has a map on there. And there are some interesting projects in Chicago, and I think one of them that is of real interest is the Michael Reese hospital redevelopment. And when you look at that from a demographic standpoint, you have an amazing piece of real estate sitting right on Chicago’s lakefront that is ripe for development. The city is behind it. You have neighborhoods to both the north and the south filling in and a massive TIF subsidy as well, and that happens to be a qualified opportunity zone as well, so that project is likely to get off the ground and attract a lot of investor capital.”
This interview has been edited for brevity and clarity. Click the “play” button to listen to the entire conversation.