A broken tax break?

Opportunity Zone investment in New Hampshire is slow in coming

December 5, 2019

Bob Sanders,

Photo by Jodie Andruskevich

Investors in the under-construction Tru by Hilton in the Manchester Millyard will be getting a huge tax break on their $10 million investment because the Millyard has been determined to be in an “economically distressed community.”

Seabrook, Durham, Raymond, Conway and Waterville Valley are also “distressed” — a term used by federal agencies in determining whether a community can receive status as an Opportunity Zone, where real estate investors can avoid paying capital gains taxes on their investments.

The communities are in some of the 27 census tracts that Gov. Chris Sununu designated in May 2018 as Opportunity Zones, a program created last year as part of President Trump’s Tax Cuts and Jobs Act.

The idea is to attract investment in poorer communities that need them. But the criteria for being labeled “distressed” is so lax that more than half the zip codes in the United States (and more than a third in New Hampshire) qualify.

Each state’s governor may pick a quarter of those census tracts as qualified Opportunity Zones, or QOZs, usually designating those already targeted for economic growth. Indeed, the law even allows 5% of a governor’s census tract selections to not be qualified, as long as they are next to a tract that is.

But Sununu just stuck to 106 low-income communities to come up with state’s 27 tracts. Nationwide, there are 8,700.

“The 27 Opportunity Zones that the state selected represent a broad array of diverse communities across New Hampshire, and will collectively benefit the citizens of New Hampshire,” said Sununu spokesperson Benjamin Vihstadt.

Upscale investments

Under the program, investors can invest their capital gains via an Opportunity Zone fund by simply filing a self-certifying form with the Internal Revenue Service, with few restrictions or oversight and without the public knowing about it. In return, they get a triple tax break. They can defer paying taxes on the original capital gains (earned on an investment outside a zone) for as many as seven years, and earn a 15% reduction in their tax liability. They also don’t have to pay any tax on capital gains related to the QOZ project they invest in, as long as they hang on to it for a decade.

Since projects are likely to appreciate more in up-and-coming areas, investors have thus far tended to bypass the more risky low-income Opportunity Zones.

For instance, in an investigative series, The New York Times reported on a QOZ investment in an upscale apartment building, with a yoga studio and 24-hour valet parking and a spa for residents’ pets, in New Rochelle, N.Y.

Some of the investors taking advantage of the program include convicted billionaire Michael Milken, the inspiration for Gordon “Greed Is Good” Gekko of the movie “Wall Street,” who is investing in an industrial park in Nevada near his Lake Tahoe home.

Such news accounts have caused some Democratic backers of the program, including presidential candidate and New Jersey Sen. Cory Booker, to back legislation requiring greater transparency and oversight. New Hampshire Sen. Maggie Hassan has signed on to Booker’s bill.

“This bipartisan legislation will provide needed oversight and help better measure the impact Opportunity Zone investments are having on job creation, poverty reduction and support for new businesses,” Hassan said in a release.

But Trump and Republicans in Congress defend the program.

“Across the country, our tax cuts have kicked off a race to invest in Opportunity Zones beyond anything anybody in this room even thought,” Trump said in April.

Manchester Mayor Joyce Craig, in green coat, joins developer Peter Flotz (second from right) and other officials at a ceremonial groundbreaking Feb. 26, 2019, for the Tru by Hilton hotel under construction in the Manchester Millyard.

We have no idea how accurate that statement that is, since there is no complete public listing of the investment funds, much less a list of Opportunity Zone investments themselves. (While the IRS is still working on rules for some reporting requirements, that information will be shielded like tax returns and used for enforcement and statistical information.)

Window-shopping

Some industry groups, however, do list about 200 investment funds that disclose their existence. Of those that state a geographic preference, only three mention New Hampshire. One — the $10 million DelCam Opportunity Zone Fund — is a two-person company based in Newton, Mass., that has yet to invest in anything in the Granite State.

“We are a real estate firm out of Boston, but we are looking to diversify into some manufacturing,” said Steve Trotta, a DelCam principal.

Other firms are scoping out New Hampshire, but most are window-shopping, say economic development officials in the state.

How Waterville Valley became an Opportunity Zone

Gov. Chris Sununu says there was no conflict of interest when he designated as an Opportunity Zone the census tract that includes Waterville Valley, where his family’s business is located.

The census tract is among 27 in the state. It also includes Lincoln, Thornton and Livermore.

The investment group led by the Sununu family — which fully took over the Waterville Valley Resort in July — is finishing up with a $7.5 million upgrade in the ski area, primarily focused on more efficient snowmaking.

The family already had a stake in the resort before July. Indeed, Governor Sununu was its CEO from 2010 until he resigned at the end of 2016 before beginning his tenure as governor.

By investing capital gains from other ventures through a qualified Opportunity Zone fund, the resort’s investors could defer paying taxes on those gains for seven years and get a 15% discount on the tax liability. In addition, they could avoid paying taxes on any future capital gains from the resort if they hold on to it for a decade.

The resort, however, is not taking advantage of the tax break “at this time,” said James Sununu, the governor’s brother.

When asked whether they would consider using such funding in the future, he said, “we would consider anything, but we have no plans to use Opportunity Zone funding … at this time.”

There is no way to independently verify that now or in the future, since a list of Opportunity Zone investments is not publicly available under current law.

“There was no conflict of interest,” said Ben Vihstadt, Governor Sununu’s spokesperson in an email reply to NH Business Review. “The tract that includes Waterville is one of the largest geographical census tracts in New Hampshire, and only one of a few in the entire state that has four or more towns. … The tract was specifically chosen for the investment opportunity in the other towns — Thornton and Lincoln — because of their close proximity to the I93 corridor, which serves as the central artery to the North Country.”

Tract selection

To be “economically distressed,” and therefore eligible to be an Opportunity Zone, a census tract either has to have a poverty rate of over 20% or have a median income of less than 80% of the state’s median.

All but nine of the 27 selected Opportunity Zones in New Hampshire fail the poverty test. The rate in all of them is just shy of 17.5%, which is higher than the statewide poverty rate of 9.3%. The Lincoln-Waterville Valley census tract poverty rate is 11.1%.

But Waterville Valley does pass the Opportunity Zone income test. The area’s median income level is just under $52,000, compared to a statewide median of $70,500, but it does have the seventh-highest income level of the 27 Opportunity Zones. As a whole, the median income of all Opportunity Zones in the state is just under $45,000.

The Opportunity Zone selection process was a quick one. Sununu had 90 days to select a quarter of the state’s 106 low-income tracts for designation. The governor tasked the Department of Business and Economic Affairs to “work alongside and advise” the governor to come up with a list, said Lorna Colquhoun, the agency’s spokesperson, who referred to the BEA website to further explain the selection process.

In drawing up the list, the BEA utilized the experience of the Council of Partner Agencies, which includes the New Hampshire Community Development Finance Authority, New Hampshire Business Finance Authority, New Hampshire Housing Finance Authority and the Community College System of New Hampshire. The BEA also sought input from the NH Alliance of Regional Development Corporations and other economic development organizations.

“Because of the short deadline, outreach was limited,” according to the website.

The site does say the state took into account “investability” of a zone, whether it could leverage other public funding, and whether it could be integrated into state and local development priorities.

At the time, Berlin officials suggested that two tracts in the city be designated, one on each side of the Androscoggin River, said Mayor Paul Grenier. It only got one, on the city’s east side, because of development of a greenhouse project that had Opportunity Zone funding lined up. The census tract has a 28.5% poverty rate, the second highest of all of the New Hampshire Opportunity Zones, behind Durham (whose poverty rate is skewed because of the large number of students who do not have an income). The Opportunity Zone’s median income is just short of $31,000.

On the west side, where the city is hoping to develop an ATV park, the poverty rate is 16%, and there is median income of nearly $34,000, indicating that it has a lower income than census tract that includes Waterville Valley. Indeed, there are 57 census tracts in New Hampshire with a lower median income than the Waterville Valley census tract that were not selected as Opportunity Zones.

“We were a bit disappointed that we didn’t get what we wanted on the west side,” said Grenier, but “we are eternally grateful we got the east side.” Grenier declined to comment on the suitability of other communities.

But Executive Councilor Andru Volinksy was not so reticent. Volinsky — the lawyer behind the early lawsuits on school funding and an announced candidate for the Democratic nomination for governor — noted that because of the resort, the town of Waterville Valley was property-rich and much better off than most municipalities at funding its schools because of a low property tax rate.

“Lincoln is also a well-off area,” he said, adding that he found it “remarkable” that the governor “couldn’t find a more deserving part of the state that will get the benefits of that designation.”

“Most of the large funds are interested in investments involving 100 acres,” said Beverly Donovan, the economic development director in Derry. “We don’t have that kind of inventory.”

If they are investing, that doesn’t mean the state would know about it. The state Department of Business and Economic Affairs wasn’t aware of any opportunity zone investment in New Hampshire, including the one in Manchester.

This in spite of the fact that the BEA has held a workshop promoting the new program and tried to start up a state fund — the Granite Opportunity Fund — with little success.

“We have no investments,” said Bill Shanahan, president of Northern New England Housing Investment Fund, the agency tasked with managing the Granite Opportunity Fund. “It has been slow out of the gate.”

“Use of the Opportunity Zone program is highly complex and its applicability to rural development projects has not yet been fully demonstrated,” was the way BEA spokesperson Lorna Colquhoun put it.

That’s partly the way the program is set up. The big tax break is on the back end, and real estate deals are especially attractive. While investors can’t take advantage of the break if they just park

their money in real estate, if 51% of their investment goes to improving it, they can avoid paying capital gains tax on the “whole shebang,” said Brady Meixell, a researcher with the Urban Institute, a Washington D.C.-based think tank.

The program also encourages investment in areas where property values are already rapidly appreciating. And since even more investments in an area accelerate that process, they can drive housing prices up so high they can force out the very people the program is trying to help, Meixell said.

There is also a timing issue involved, since — unless the program is later extended — investors need to invest their capital gains right away to take full advantage of the upfront seven-year tax deferral and discount, meaning just as word of the program spreads, the incentives start to shrink.

‘Fantastic tax break’

That doesn’t mean that there isn’t any investment in poorer communities.

Richard Rosen is using the program to help finance a 20-acre greenhouse in Berlin, a community with a 28.5% poverty rate. Rosen’s Country Opportunity Zone Fund L.P. hopes to raise almost $25 million to build a facility to grow greens throughout the winter. It would be powered by a cogeneration plant that discharges its carbon dioxide inside the greenhouse for the benefit of the plants. Rosen plans to start construction in the spring and finish it by the end of 2020.

Berlin is the kind of community that should get this type of investment, said Rosen.

“It’s a fantastic tax break if you have a capital gains,” said Rosen. “But most of the other O-Zone funds are going for expensive real estate.”

As for the rest of Coos County, the investment funds “don’t want to be in a rural area,” said Lise Howson, executive director of the Coos Economic Development Corp. “It’s new, so we’re hopeful. But we haven’t seen a lot of traction up here as of yet.”

The city of Nashua has two opportunity zones, one next to the Broad Street Parkway that goes into the Nashua Millyard, the other off Main Street. The areas have median per capita incomes of $36,156 and $21,600, respectively.

“We have some interest,” said Tim Cummings, Nashua’s director of economic development, which just launched an Opportunity Zone website, listing two sites ripe for development.

One is a medical office building that has attracted some interest. And Peter Flotz, the Florida-based developer of the aforementioned Tru by Hilton hotel in Manchester, is working with Nashua on another Opportunity Zone project — some 100 units of workforce housing — which is in its preliminary stages.

Flotz’s 100-room hotel in Manchester will be more upscale, though not a luxury hotel, he said. It will be designed for millennials, who, he said, want “smaller rooms that make it more affordable.” Downstairs will be a restaurant and bar, as well as a 24-hour mini-market, a community workspace with cubicles, and an area for tabletop and electronic games.

The Manchester Millyard qualifies as a low-income community if you count the whole census tract that it’s in. The tract runs from the Amoskeag Bridge to just past the Granite Street Bridge and from the Merrimack River to Chestnut Street. The median income is slightly less than $31,000 and has a poverty rate of 27.6%. There are poorer sections in Manchester. A tract on the other side of Chestnut Street has a poverty rate of nearly 35% and an income level of less than $21,000.

Sununu defended choosing the Millyard tract because, “the Manchester Millyard is becoming a global hub for technology and biotech firms … a unique opportunity to not only benefit the residents within the census track, but to also make the entire state a better place to live, work, and raise a family.”

Flotz is currently working on a total of six opportunity zone projects, with others in Charlotte, N.C., and Fort Lauderdale, Fla. The Opportunity Zone “makes people look at something they might not have otherwise looked at, but the cost of funds will be the same as in any other deal,” he said.

But, Flotz said, ”there is a lot less O-Zone money out there than we thought there would be, and most of it wants to be in the big cities.”

There are some higher-income zip codes in the designated New Hampshire Opportunity Zones, but none contacted by NH Business Review has attracted investment as yet.

For instance, Conway has a median income of nearly $61,000 and North Conway $55,000. There is no shortage of commercial development there, but the community is trying to attract manufacturing centers to its 81-acre tech village.

“The developers don’t seem to be knocking on doors, let’s put it that way,” said Jac Cuddy, executive director of Mt. Washington Valley Economic Council.

Bob Sanders can be reached at bsanders@nhbr.com.