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Copyright © 2019 Albuquerque Journal
Mayor Alan Webber knows an opportunity when he sees one.
A former entrepreneur who made millions as co-founder of the business trade magazine Fast Company, Webber sees opportunity all over town with the five census tracts that have been designated “opportunity zones” by the U.S. Department of the Treasury.
“Anything you can do to change the dynamic so people would find it more opportune to do housing and mixed-use development, that would be beneficial to the city,” he said. “We have five of these areas, and they are not just in one part of town. If we can attract people who want to put housing and mixed-use development in these census tracts that are going to result in jobs, that is going to benefit the whole city.”
Opportunity zones are the latest thing, and cities across the country are just beginning to capitalize on projects within these zones that rely on capital gains investors to stimulate development.
There has been some criticism of the program nationally, however, as a tax break for the wealthiest Americans or big banks and real estate companies, as well as for projects out of character with the idea of rebuilding low-income neighborhoods.
Created in 2017 as part of the Trump administration’s federal tax cut bill, opportunity zones are intended to entice long-term investment in low-income and underdeveloped areas to stimulate business, create new housing and generate jobs.
The federal opportunity zone program provides tax incentives for companies or individuals interested in reinvesting their unrealized capital gains into Qualified Opportunity Funds, or QOF. Capital gains used in this manner are not taxed until after 2026 or when the asset is disposed of, according to the Tax Policy Center.
Investors who stay invested for at least five years can earn 10% on their original investment – 15% if they stay invested for seven years, according to the center. Investors pay no taxes on any capital gains produced through their investment if they stay in for 10 years.
New Mexico state government, with 63 opportunity zones statewide, is also promoting the zones. They are now part of a state strategy to diversify the economy, according to a recent news release that announced the state was offering an incentive program that provides a $1 million bonus to opportunity zone investments that meet certain benchmarks.
“As far as we know, New Mexico is the only state to offer this kind of Opportunity Zone Bonus Program,” said Alicia Keyes, the economic development cabinet secretary. “The window here is small and we want New Mexico to be on the world’s radar. We want investors taking a break from Wall Street and bringing their money to New Mexico.”
Zones are census tracts
Opportunity zones are defined by census tracts. Socioeconomic data, such as income, poverty rates, home values, rents and unemployment, factor into determining whether a census tract qualifies. Governors in each state signed off on them, but the zones were approved by the federal Department of the Treasury in June last year.
Seven census tracts in Santa Fe and six more in Santa Fe County were proposed by local officials to then-Gov. Susana Martinez, who was limited as to the number of tracts she could forward to the treasury department. She selected five tracts in the city and none in the county.
The tracts cover each of the city’s four council districts and each has Cerrillos Road as a border. One is on the southwest corner of the city north of Interstate 25 and east of N.M. 599. A little farther up Cerrillos Road is another tract in the Airport Road/Jaguar Driver area. That tract touches on another, around Siler Road and Agua Fria, which is already experiencing revitalization as an arts district around Meow Wolf’s House of Eternal Return.
Then there are also tracts on both sides of St. Michael’s Drive between Cerrillos and St. Francis Drive, one of them including the ripe-for-development, city-owned Midtown Campus.
“That is the beauty queen,” Rich Brown, an economic development specialist with the city charged with promoting the city’s opportunity zones, said of the campus. “When you have an area of that size in an opportunity zone, you’ll have a lot of people wanting to invest.”
The city is looking for new tenants for the 64-acre property that was the former site of the Santa Fe University of Art and Design, and the College of Santa Fe. It recently put out a “request for expressions of interest” seeking development ideas for the site.
“Once a development idea is set for approval, there might be developers with expressions who already have opportunity zone funds,” Brown said.
He said there has been interest in four of Santa Fe’s five opportunity zones. The one on the far south side, census tract 13.04, suffers from a lack of infrastructure, he said.
Two recent projects attempting to take advantage of opportunity zones and QOFs have been in the news lately.
The Santa Fe City Council last month approved a measure that allows for a couple of properties on South Pacheco Street near the intersection with St. Michael’s to construct buildings up to 52 feet tall. Branch Realty has been advertising one of the properties, the Pollon Plaza building, as an investment property with a sale price of $4.35 million. On its website, it notes that the property is in an opportunity zone and includes a flyer that explains how QOFs work.
The City Council has endorsed issuing $18 million in industrial revenue bonds as financing for a high-pressure food processing facility to open on Sixth Street. The fact that the plant site is located in an opportunity zone is mentioned in a city news release from last month.
Brown was asked about other projects that could take advantage of being located in opportunity zones. The recently announced proposed expansion of Meow Wolf’s fabrication site at the former Caterpillar plant at 2600 Camino Entrada, to create a headquarters for the arts corporation, which is quickly expanding nationwide, falls within one of the zones.
“They are building office space there. That hits a sweet spot because it creates jobs,” he said.
Brown added that the Arts+Creativity Center, a 65-unit live-work rental space on Siler Road, would also be eligible for QOF funding.
Just last week, it was announced that the K-Mart on St. Michael’s Drive would be closing, creating another opportunity within an opportunity zone. Brown couldn’t say exactly what might happen there, though.
“There would have to be a developer who would re-imagine that space,” he said.
The city has long promoted a vision for St. Mike’s corridor that includes turning the K-Mart site into something of a scenic boulevard featuring housing and neighborhood-scale retail, despite the area’s current landscape dominated by car dealerships, gas stations, branch banks and strip malls.
Brown said Santa Fe hopes to leverage its opportunity zones to address housing, one of its biggest needs.
“We want to focus on housing; that’s where our focus is,” he said. “Our city is looking at a strategy for affordable housing, and we find it a great way to connect to shovel-ready housing projects. If we can get some momentum, whether it’s with housing or something else, we could start seeing some real activity.”
Getting the ball rolling
Mayor Webber also talked about building momentum, but somebody has to get the ball rolling.
Right now, investors are looking to see who is getting in the game, he said. Once somebody does, that could stimulate some real activity.
“Nobody eats at a truck stop where there are no trucks stopped,” he said. “Responding to market demand and getting people to be the first movers will encourage more people to do it.”
A recent New York Times article was critical of the federal opportunity zone program, calling it “a once-in-a-generation bonanza for elite investors.” That’s because only capital gains can be invested in QOFs, and only a small percentage of people, mainly wealthy people, have capital gains to invest.
The Times article also said that some projects have used the opportunity zone initiative to build upscale hotels in trendy warehouse districts, high-end apartment complexes or storage facilities that employ few people and have caused real estate prices to increase.
The pool of potential QOF investors is small, as only 7% of Americans report taxable capital gains, and that close to two-thirds of them have annual incomes of $1 million or more, according to IRS data, the Times reported.
Webber read the article, but has stayed focused on the benefit to the city.
“If it will help us get more housing, and get us more mixed-use development and more in-fill projects that create jobs, that’s a good thing,” he said.
Kelly Egolf, who heads Verde Juice Company in Santa Fe and is the driving force behind the proposed high-pressure food processing plant, also read the Times story. She said that it may be true that the program benefits people with capital gains to invest, “but what often happens is people tend to sit on that money. Opportunity funds were created so that they could reinvest in projects in targeted neighborhoods.”
The investors in her project include local philanthropists putting in money through the Santa Fe Community Foundation, among them Bud and Valerie Hamilton, David and Jordan Smith, and Jessica’s Love Foundation, established in the name of a Sandy Hook shooting victim.
Investors Bob and Ellen Vladem, known for their support of the new state contemporary art museum planned downtown, see the plant “as a means of creating positive change,” said a city news release.
Egolf pointed out that the opportunity zone where she hopes to open the food processing plant under the name New Mexico Fresh Foods is in census tract 12.02, one of the most impoverished neighborhoods in the city. The tract does include a public housing project, but also is home to long-term successful businesses along Cerrillos Road and along or near the Second Street corridor, such as Second Street Brewery, Iconic Coffee and the Chocolate Maven restaurant.
Egolf said the fact that the building that New Mexico Fresh Foods plans to occupy was in an opportunity zone wasn’t the motivation for locating it there, but “when we learned that it was in an opportunity zone, that was the cherry on top.”
Egolf, the spouse of House Speaker Brian Egolf, said New Mexico Fresh Foods was initially seeking to locate in a large warehouse. There aren’t many vacant warehouses in Santa Fe, so the search was expanded to Albuquerque.
“I already had a pool of committed investors to make it move forward, but we had to find a city,” she said, adding that she worked with City of Santa Fe officials to find the building at 1549 Sixth St. “I’m incredibly excited that we were able to invest in Santa Fe. We got very lucky to find a property that meets our needs and is in an opportunity zone.”
Egolf said when they found the building, opportunity came knocking.
“Once we made the decision to locate it there, people started calling me to see if they could invest in our project,” she said. “In our case, our investors created a QOF themselves.”
Generally, investors don’t invest in the QOF, they invest in the project, she said.
“If they just invest in funds, they may never find a project. The opportunity fund itself isn’t necessarily the investment that gives them the tax break, it’s the project,” she said. “It’s a tool that can be used to invest. There are already lots of tools to encourage people to invest; opportunity funds are just one more.”
The mayor is hopeful that businesses like New Mexico Fresh Foods can help build momentum that will create opportunities for business development, housing and jobs. Webber agreed with Egolf that opportunity zones, as well as city-issued industrial revenue bonds, which come with tax breaks and lower interest, and land use incentives offered in places like the Midtown zone along the St. Mike’s corridor, are tools that “provide people thinking about investing to push the button and make something happen.”