Opportunity Zone investigation won’t derail developer investment, experts say

The popular federal program meant to spur investment in low-income areas has faced mounting criticism for serving as a tax break for wealthy developers

Treasury Department watchdog is investigating the Opportunity Zone program (Credit: iStock)
Treasury Department watchdog is investigating the Opportunity Zone program (Credit: iStock)


The Treasury Department’s investigation into the Opportunity Zone program will weed out the bad apples but won’t derail the federal tax incentive initiative, investors and developers say.

Instead, the probe could provide a way for companies with Opportunity Zone funds to promote the social impact of their investments, and could push to strengthen reporting requirements on those investments.

“The more that’s cleaned up the better the program is going to do in the long term,” said Gray Lusk, a founding partner of Sola Partners, which has raised $100 million for affordable housing projects in Opportunity Zones. 

Introduced as part of the Trump administration’s 2017 tax overhaul, Opportunity Zones were meant to spur investment in low-income communities across the U.S. by allowing investors to defer or forgo paying capital gains taxes on developments in designated areas.

The program caught the attention of institutional investors but has also faced mounting criticism for serving as a tax break for wealthy developers and politically-connected insiders looking to build luxury projects in upscale areas.

Treasury’s investigation — launched this week by the deputy inspector general — will only look into whether some census tracts were selected improperly, according to several Opportunity Zone experts. The program itself, whose guidelines the government has updated twice, will remain intact, they say. The government has not provided details on the investigation.

“Even in the worst case scenarios, you are talking about a couple [census] tracts out of about 8,700,” said Steve Glickman, an architect of the Opportunity Zones legislation who now consults businesses on the  program. Another expert, Neisen Kasdin, agreed, saying inquiry is “just looking at bad actors.” Kasdin is managing partner at the law firm Akerman in Miami, whose firm has been involved in several Opportunity Zone deals

Under the microscope

The government investigation was launched at the request of three Democrats: New Jersey Sen. Cory Booker — who co-authored the Opportunity Zones legislation — Congressman Emanuel Cleaver II of Missouri and Congressman Ron Kind of Wisconsin. The group said it wants to know whether certain Opportunity Zone designations benefited firms or individuals with ties to political leaders, following reports by ProPublica and the New York Times.

In one example, a 700-acre industrial development in Nevada — part-owned by billionaire financier Michael Milken — became eligible for a tax break after the Treasury Department overrode its own rules to designate the area as an Opportunity Zone. A report by the Times revealed that Treasury Secretary Steve Mnuchin, who has close ties to Milken, personally intervened to designate the area, a move that troubled Treasury officials.

Other firms with links to the Trump administration have been similarly scrutinized. The family development firm owned by Jared Kushner, a senior adviser to President Trump and his son-in-law, has properties in Opportunity Zones that include $13 million of New Jersey beachfront.

“The whole thing is structured for favoritism and insiders,” said Greg LeRoy, founder of Good Jobs First, a watchdog of state and local economic development subsidies. “You allow one person discretion over big federal tax breaks, it’s a blueprint for mischief.” 

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Painting a broad brush

But proponents argue that these criticisms paint a broad brush over a program that is attracting private investment into long overlooked parts of the country such as Birmingham, Alabama, where a long vacant building in an Opportunity Zone will be turned into 140 units of workforce housing.

“When you look at the facts, it does not support the narrative that some are trying to make,” said Jill Homan, the co-founder of Javelin 19 Investments. The Washington, D.C.-based commercial real estate investment company has a focus on Opportunity Zones.

The new investigation could also lead to tougher reporting mandates in Opportunity Zones.

Sen. Tim Scott of South Carolina and a group of fellow Republican senators introduced a bill in December seeking to enhance reporting requirements to help reduce fraud and abuse regarding Opportunity Zone investments. Scott co-authored the original Opportunity Zones legislation with Booker. Their bill adds penalties for individuals and investment funds that fail to accurately and appropriately file the required returns or statement. Democratic Sen. Ron Wyden of Oregon put forward a separate bill requiring OZ investors to report more information about the impact of their investments.

Opportunity Zones investment has surged in recent months thanks in part to the government’s release of its final set of regulations meant to provide investors and developers.

Close to $2.3 billion was put into Opportunity Zone funds between early December and early January, according to a survey from accounting firm Novogradac, a 51 percent increase over the prior month. In October, the firm found that 103 Opportunity Zone funds had raised just 15 percent of what fund managers expected. It knew of 285 Opportunity Zone funds in the U.S., though many have not shared fundraising metrics.

But others have been far more successful. 

Last year, Bridge Investment Group deployed $950 million from its Opportunity Zone fund into 20 projects across eight states and the District of Columbia. David Coehlo, chief investment officer for the Salt Lake City-based firm’s Opportunity Zone program, said he expects to deploy a similar amount this year, largely because competition has eased as smaller funds are facing challenges raising capital.

“We see no reason to pull back this year from a deal standpoint,” he said. 

On a smaller scale, Los Angeles-focused Sola Partners expects to double its equity deployment in Opportunity Zones this year to $67 million, according to founding partner Gray Lusk. 

Not all investors are as enthusiastic. Cadre, a real estate investment startup that Jared Kushner co-founded and remains an investor in, is planning to scale back its Opportunity Zone investments. 

People familiar with the company said the firm invested more than $200 million across five Opportunity Zone projects in 2019. This year, it plans to only invest in one to three projects, they said, as a December 2021 tax benefit deadline approaches.