Opportunity (Zone) Beckons

New Haven has seen opportunity realized. That opportunity came in the form of outside investors pouring money into a new Wendy’s.

Through zoning reform and investor courtship, city officials hope that future such investments look less like fast food and more like dense, mixed-use developments and public infrastructure improvements.

The investments would come through a new program aimed at luring money to federally-qualified, state-selected Opportunity Zones.

At Tuesday morning’s regular monthly Development Commission meeting on the second floor of City Hall, newly minted City Plan Director Aïcha Woods and Deputy City Economic Development Administrator Steve Fontana gave a rundown on the city’s seven designated Opportunity Zones, which allow for investors to defer federal capital gains taxes by putting money into state-sanctioned areas within distressed municipalities.

As a result of the new program, former Gov. Dannel Malloy designated seven local census tracts as eligible Opportunity Zones.

Those zones are Long Wharf, Trowbridge Square, Newhallville, Dixwell, the Mill River district, Fair Haven North, and Fair Haven South.

“Based on the money that’s looking to get invested,” Fontana said about the program, ​“it’s somewhat agnostic. [Investors are] looking for absolute return. They’re not looking to help us as a city. They’re not looking to help certain neighborhoods. It’s all about what kind of return they can get on their money. To that extent, its less of an economic development thing than an investment advantage.”

The federal Opportunity Zone program is still quite new, having been created by President Donald Trump’s tax overhaul in 2017. New Haven has already seen one developer take advantage of similar federal tax deferral benefits, the New York City-based developers of the Wendy’s on Whalley, which falls within the city’s Dixwell Opportunity Zone. Those developers told the Independent earlier this year that one of the main reasons why they spent $3.1 million buying the rapidly constructed fast food joint was to save on capital gains taxes they would have had to pay following a much larger real estate sale in New York City.

Woods, who took the helm of the City Plan department on Monday, said that one of the city’s key strategies for encouraging Opportunity Zone investments into projects more aligned with the city’s development goals than a Wendy’s is to revise the city’s antiquated zoning code, particularly for commercial corridors like Grand Avenue, Dixwell Avenue, and Whalley Avenue. 

Developers should not have to face as many regulatory hurdles as they do now in order to build dense, residential and commercial complexes in these neighborhoods, she said. The current system is a bit backwards, she added, in that the 1963-written zoning rules that prioritize the automobile over the person allow a fast food developer to fasttrack a Wendy’s on Whalley Avenue but a developer looking to build several dozen apartments has to get a variance.

“That is not allowed as of right,” Woods said about a prospective apartment development at the St. Luke’s Church on Whalley Avenue, ​“whereas the Wendy’s was.”

Fontana and Woods explained that the Opportunity Zone program applies just to federal capital gains taxes, and not to municipal property taxes.

Per the federal legislation, which Fontana said the IRS is still in the process of providing tax guidance on, investors can defer federal capital gains taxes until 2027 if they take the money that they earn from the sale of one of their assets, like a business or a property, and invest that money in a business or a property located within an Opportunity Zone. 

Investors must take their capital gains and invest them in the Opportunity Zone project within 180 days of the sale that led to those gains in order to qualify for the tax break. They must also double the value of the Opportunity Zone business or property within 30 months of investment in order to qualify.

If investors hold onto their investments for seven years, then they earn a 15 percent break on the final, deferred capital gains taxes they owe based on the initial sale. And if they hold onto their investments through 2029, then they do not have to pay any capital gains taxes if they subsequently decide to sell that new business or property.

“This has created a whole pool of people with money to invest who are looking for places to do that to try to maximize the capital gains tax benefits,” Fontana said.

While declining to comment on any specific Opportunity Zone-spurred investments that the city is in the process of courting, Fontana did say that the city has received several interested inquiries from investors looking to put their money into city-planned public infrastructure improvements, mission-specific development projects in areas of high poverty and unemployment, and industrial-commercial properties that may be used for light manufacturing and the warehousing and distribution of goods. 

East Rock Alder Charles Decker asked Woods and Fontana if the Opportunity Zone program has any impact on municipal property taxes, in the way that the city’s tax assessment deferral program does.

Nope, the city officials replied. Thisapplies just to federal taxes.

“It has to be a new investment,” Woods said. And it must double the value of the property or business within two and a half years of being made. There is no minimum investment amount required in order to qualify for the tax breaks.

Development Commission Chair Pedro Soto praised the state and the city for ensuring that New Haven’s Opportunity Zones fall within underdeveloped and relatively impoverished neighborhoods, so that the neediest parts of town are the most attractive to investors.

“The right way is looked to redevelop impacted areas,” he said, ​“the wrong way is to figure out what’s the bare minimum to qualify and select your wealthiest portions that are already getting capital.” Seattle and New York City took that approach, he said, which has led to the most expensive real estate projects in town going up in Opportunity Zones.

As opposed to in Connecticut, he said, ​“where you can really look at transforming neighborhoods that have been left behind.”