Where Opportunity Zones stand, heading into 2019

When Trump’s tax overhaul became law a year ago, the real estate industry’s attention was focused on caps to the mortgage-interest deduction, plus state and local tax deductions—which the industry predicted would put the housing market in peril. (It didn’t.)

After the dust settled in the spring, the industry realized a hidden gem had been tucked away in the law: Opportunity Zones. The brainchild of Silicon Valley financier Sean Parker, Opportunity Zones allow investors to obtain massive tax advantages if they invest capital gains—money made on the sale of assets like a home, a business, or a piece of art—into “distressed” areas of the country where the post-financial crisis recovery passed by.

While the provision theoretically allows investors to put money into any type of project so long as it’s in a designated zone—a business, infrastructure, whatever—most observers believe it is especially attractive to real estate developers, partly because the largest tax benefits go to those who stay invested in the zone for at least 10 years. Advocates for the program believe this could be a game-changing community development tool.

Given the horizon for these investments is quite far off, where do things currently stand? Many firms looking to jump into Opportunity Zones were waiting on the Department of Treasury to release a set of guidelines that should clear up questions left open by the Tax Cuts and Jobs Act, which was intentionally written to be open-ended, supposedly to allow municipalities to tailor the program to their specific needs.

While the Treasury guidance was mostly inside baseball for financial professionals, it seemed to open the flood gates for activity around Opportunity Zones, as firms announced their intention to jump into the space en masse. The firms interested tend to be private equity firms, which have experience in raising money for long-term financial projects—many of which already specialize in real estate development.

If the pitches arriving in my inbox are any indication, firms have been awfully busy making slide decks to pitch their Opportunity Zone projects to investors. Some ahead-of-the-curve outfits have already raised money, for example, private equity firm Virtua Partners, which is close to breaking ground on three Opportunity Zone projects in Arizona.

Others were taking a wait-and-see approach but are now getting organized, such as Anthony Scaramucci, the short-lived communications chief for President Trump. His SkyBridge Capital firm hopes to raise money to invest in hotels in Oakland, industrial real estate, and a mixed-use multifamily/retail development in Washington, D.C.

Jared Kushner, the president’s son-in-law, has also been linked to Opportunity Zones through a real estate technology firm he holds a passive stake in called Cadre, although he holds no operational role at the company. The firm came under fire in an Associated Press story for targeting Opportunity Zones where the potential for gentrification is already high.

Which brings us the primary criticism of the program. While its stated intent is to help people who currently live in the designated zones, a huge influx of capital could lead to the displacement of the very people the program says it wants to help. And given that some investors could be more interested in the tax breaks than in their social impact, experts believe there will likely be a hoarding effect to how the capital is dispersed. That means the money won’t get spread out equally; it will get dumped into areas that are already attractive for investors.

The most egregious example of this potential is that Amazon’s impending HQ2 in the Long Island City neighborhood of New York City—a designated Opportunity Zone. While it’s not clear exactly how the company might benefit, it’s certain it will try.

But because these projects will take years to build and more years for their impact to play out, we won’t know how Opportunity Zones affected people one way or the other for potentially another decade. Right now, investors and developers are still just getting organized.