A federal stimulus program designed to encourage investment in economically disadvantaged neighborhoods is likely to deliver tax savings to investors in multifamily developments, particularly in Massachusetts’ working-class cities and suburbs. 

However, the Opportunity Zone program isn’t expected to generate significant job growth in Massachusetts’ Gateway Cities, real estate executives and developers say, setting back the one-time manufacturing centers’ attempts to emerge from the shadows of Boston’s high-wage job boom. Upfront financing hurdles remain significant, with commercial rents continuing to reflect the Hub’s status as the preferred business address. 

“In most of the Opportunity Zone sites within the commonwealth, you could hand out free land and building permits and there wouldn’t be project viability,” said Larry Curtis, president of Boston-based WinnDevelopment. “The hardest [property] category will probably be commercial development, because the economic rents may not be sufficient.” 

Capital Gains Tax Lowered 

Enacted as part of the 2017 federal tax cut package, the program enables buy-and-hold investors in a qualified opportunity zone fund to defer capital gains until the end of 2026. Investors also can cut their capital gains tax bill by 10 percent on properties held longer than five years, and 15 percent on properties held longer than seven. 

Funds can invest in single or multiple properties located in designated Opportunity Zone census tracts, including 138 tracts in 79 Massachusetts communities. 

Given the timelines for the tax breaks, projects that are under construction or fully permitted stand to reap the most benefit, said April Anderson Lamoureux, president of Anderson Strategic Advisors and a former Massachusetts assistant secretary for economic development. The bigger test will be the next cycle of development. 

Trinity Financial was the lead developer for the Enterprise Center, a Main Street block formerly occupied by the Brockton Enterprise newspaper.

“Will [Opportunity Zones] be enough of an incentive to trigger projects that have not been conceived? The answer is yes, but developers have to be prepared to get entitlements quickly,” she said. 

Nonprofit MassINC has spotlighted the potential for Gateway Cities to attract job-creating projects near MBTA commuter rail stations. The Boston-based think tank has analyzed the potential of Opportunity Zones to spread economic growth to languishing regions while easing Greater Boston’s transportation crisis. 

According to MassINC research, Gateway Cities have commercial development opportunities to generate 230,000 jobs within a half-mile radius of existing or planned commuter rail stops. And an October MassINC report found that 25 of the state’s Opportunity Zones are located within a half-mile of a commuter rail station. 

But communities that are serious about attracting corporate growth should have fast-track permitting in place, Lamoureux said. 

“There are places in eastern Massachusetts that could be considered as an office [growth] market and it’s not unusual to see users coming in with site searches for 200,000 square feet,” she said. “[Communities] can’t wait until the next corporation calls and says they’re looking for a site. They have to get those sites ready now.” 

David Bitner, national head of capital markets research at Cushman & Wakefield, said investors should set a goal of breaking ground within 30 months of acquiring a property. 

“They’ve raised the capital and allocated it to the fund for a project, and they want to be able to take that capital from investors at once,” Bitner said. “If you’re talking about something that takes five years to build, it gets difficult on its face.” 

Housing Developers Stand to Benefit 

IRS guidance issued in November that clarified many questions about tax treatment for Opportunity Zones has encouraged a wave of investment. Approximately 90 funds are raising $17 billion to deploy nationwide in all categories of commercial and multifamily real estate, according to Cushman & Wakefield research. 

As many Boston suburbs continue to resist multifamily projects, developers are gravitating toward lower-cost cities such as Brockton, Revere and Worcester to build workforce and market-rate housing. 

“Markets like that had been going through a little bit of a renaissance on their own with the entry-level workforce housing,” said Christopher Sower, a senior vice president in Colliers’ multifamily practice. “The Opportunity Zones drive it further.” 

The program’s benefits fit into WinnDevelopment’s longtime strategy to build affordable and workforce housing. Curtis estimates 40 percent of the company’s projects over the past four decades have been built in neighborhoods that are now included in Opportunity Zone tracts. 

“Given the tax advantages of the zones, the program takes some projects that are marginally viable and pushes them over the edge,” Curtis said. 

WinnDevelopment is in predevelopment for undisclosed multifamily projects in Lowell, Worcester and Boston, all located within Opportunity Zone census tracts. All will require additional public incentives, such as historic tax credits, to finance upfront, Curtis said. WinnDevelopment also is fundraising for an Opportunity Zone fund to invest in a multifamily development portfolio along the Northeast corridor, with an estimated target of $200 million, he said. 

Steve Adams

Tricky Tax Accounting Considerations 

Lingering questions about tax treatments – and delays in final IRS rules because of the federal government shutdown – point to potential pitfalls. Investors in opportunity zone funds should hire experienced attorneys and accountants, given lingering questions about fund structure, said Jeff Black, an executive vice president at Colliers. But if assembled correctly, Opportunity Zone funds could emerge as a significant new estate planning tool for high net worth families, Black said. 

“To me, the biggest beneficiary of this is going to be the family offices who have the wherewithal to structure them properly,” Black said. “My takeaway to the investor is to do a joint venture with a developer-partner or bring someone in-house with experience in real estate to make sure they don’t make mistakes in the actual deal or chase silly deals. It’s a really good generational estate planning tool if you paper these correctly.”