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Race Is on to Win Federal ‘Opportunity Zone’ Tax Incentives

Officials in communities across the state are studying how to jumpstart redevelopment with federal program’s tax breaks

Construction in Camden

While the fate of the state’s biggest economic-development tax incentive programs remains the subject of an ongoing debate in Trenton, the federal government’s new “opportunity zone” tax-break initiative is up and running. Local officials in dozens of communities across New Jersey are now trying to figure out exactly how the federal program could help jumpstart redevelopment.

Parts of 75 different communities in New Jersey have been designated as opportunity zones under the federal program, which was created in 2017, and a recent study found some of them have the best potential for economic growth of any in the entire country.

Developers who choose to build in opportunity zones can now get their investors generous federal tax breaks for participating in the program. That gives local officials an additional tool for attracting investors to real-estate projects in zones that public officials have identified as in need of or ideal for redevelopment; many of these zones overlap with areas that can also qualify for state and local economic-development tax incentives.

The opportunity-zone program offers investors a chance to defer and reduce their federal capital-gains liability from the sale of some other profitable investment. The best tax breaks can be won by sticking with an opportunity-zone project for at least 10 years and causing it to increase in value. The investments occur through special funds set up to coordinate ventures launched in the key opportunity-zone communities.

The key for local officials in New Jersey’s many opportunity zones is to identify how the new program can be used to benefit communities, both big and small. This is according to experts who spoke during a discussion of the new program that drew a big crowd Friday at New Jersey Future’s annual conference on redevelopment issues.

Local officials were encouraged to market their communities aggressively to developers.

Areas in 75 NJ communities qualify

There are 8,000 designated opportunity zones across the country, and to qualify, a census tract — typically a section of a town or a small municipality — generally must have had a poverty rate of 20 percent or a median family income of up to 80 percent of the area median when the program was created.

In New Jersey, parts of 75 different communities have been qualified under the program. They include sections of some of New Jersey’s biggest cities, like Camden, Jersey City, Newark and Paterson, but also swaths of smaller communities throughout the state like Bound Brook, Bridgeton, Plainfield, and Willingboro.

MAP WITH INFORMATION ON OPPORTUNITY ZONES IN NEW JERSEY

Because the big cities are in the program, some have raised concerns that it will encourage unwanted gentrification since it offers the biggest tax breaks to those who cash out an investment that has appreciated in value after 10 years. Another concern is that long-term investments in smaller opportunity-zone communities may not be immediate profit drivers, so they may not draw much interest from investors, at least initially. And someone has to have generated capital gains from a profitable investment in the first place to participate in the program, meaning a wide section of the population won’t be able to directly benefit from the program at all because studies show many people are not active investors.

Still, some of the real-estate and finance experts who participated in the redevelopment conference in New Brunswick on Friday highlighted the federal program’s potential to become another good tool that local officials in communities big and small in New Jersey can use to help draw developers’ interest.

One such project is already underway in downtown Newark, said Jeff Monge, the managing partner of New York-based Monge Capital. It’s considered to be one of the first completed opportunity-zone transactions in the country, he said.

Officials encouraged to be choosy about developers

“We actually created our own opportunity-zone fund entity and we acquired a property downtown,” Monge said. “Ultimately, at the end of the day, the play for us is to have our offices down there.”

“I believe in Newark and the appreciation of its downtown,” Monge said.

In addition to working hard to attract investors and developers to the opportunity zones, local officials were also encouraged to be selective in which developers they choose for projects. Many properties in the opportunity zones are often abandoned, neglected and in need of significant remediation.

“This is probably not something that a first-time developer should be (doing) starting off,” said Eduardo Rodriguez, director of the Elizabeth City Department of Planning and Community Development.

Phil Murphy
Gov. Phil Murphy addresses the New Jersey’s Future conference in New Brunswick on Friday.

Gov. Phil Murphy, a first-term Democrat, also highlighted the redevelopment potential of the federal tax breaks while addressing the same conference earlier Friday. He cast them in the context of a broader overhaul of the state’s own economic-development programs that the governor has been pitching for the last several months.

Murphy laid out his own vision for the state’s incentive programs last fall since those enacted when former Gov. Chris Christie was in office are coming up for renewal at the end of June. The Christie-era programs were scrutinized in a recent audit released by the state comptroller and have also been the subject of legislative hearings including one that was held on Friday in the State House.

Among the changes Murphy is seeking is to make the state incentives more targeted to generate specific development activity like historic preservation and brownfield redevelopment. He also wants to cap the size of the programs in response to concerns raised about the Christie-era programs, which are generally open-ended.

While the rulemaking for the federal opportunity-zone program has been a drawn-out process, Murphy touted its potential to complement some of his own proposals. They include a new tax-incentive initiative he’s calling NJ Aspire, which is designed to encourage investments in commercial, residential, and mixed-use development in cities, downtowns and suburban neighborhoods served by mass transit.

“This could be wholly transformational for these communities,” Murphy said.

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