How busy Troy got an Opportunity Zone to kick-start development
The Top of Troy high-rise along its namesake city’s vaunted retail and office corridor is somewhat deceiving.
Sometimes called the PNC Center with the bank’s name emblazoned on the top, it is an homage to capitalism and wealth: 363 feet towering high above the upper middle-class Oakland County city, no building for miles close to rivaling its height.
It is two miles from perhaps the most luxurious shopping mall in the state, Somerset Collection, one of the most storied offices in Oakland County, the Bank of America Building, and surrounded by other Class A office space like Columbia Center and Liberty Center in some of the most desirable ZIP codes for law, tech, accounting, real estate and other companies.
But the tower, developed in the 1970s by Bloomfield Hills-based Kojaian Management Co. and still owned by C. Michael Kojaian’s company, also sits in a federally designated Opportunity Zone, which gives investors in Qualified Opportunity Funds appealing breaks on their capital gains taxes.
Designed as a way to prop up areas that have been starved of investment, the zones have taken criticism for ultimately not helping those who need it most, lack of transparency and political and economic influence manipulating which areas were designated as Qualified Opportunity Zones.
Locally, the program received pointed criticism because some areas of Detroit that had been real estate investment hot spots were designated as Opportunity Zones even though investors had been targeting those areas for years before the tax breaks became law.
But sure enough, one square mile of Troy — bounded by Maple and Big Beaver to the south and north and Crooks and Livernois to the west and east — meets the federal qualifications to be deemed one.
“There are less than 1,000 people living there, but the household income levels meet the criteria,” said Glenn Lapin, Troy’s economic development specialist.
“There was an effort across the country to have a variety of geographic areas, different conditions, different surroundings, some urban, some rural, some suburban,” Lapin said. “That’s how it got in, right or wrong.”
But was the Opportunity Zone designation actually needed to kick-start developments in an area that is generally viewed as a safe bet for new buildings? That’s anyone’s guess.
Bob Waun, the owner/broker of Pontiac-based Dirt Realty LLC who is active in downtown real estate in the county seat, said Troy’s singular Opportunity Zone is emblematic of the “gerrymandering” that took place when designating the zones.
“There were 8,300 zones across the country, and if they had narrowed it to, say, 1,000, it would have been a more impactful tax act because it would have intensified them instead of diluted them,” Waun said.
“We have identified a number of others that otherwise look like wealthy communities that got Opportunity Zones. They were gerrymandered through political manipulation of the rulebook or boundaries. Nobody thought Troy needed Opportunity Zones to attract opportunity or investment,” Waun said.
How they work
Opportunity Zones are designated according to U.S. Census tracts where the poverty rate is at least 20 percent and/or the median household income is less than 80 percent of that in the surrounding areas.
The Michigan State Housing Development Authority says they are for “low-income communities nationwide that have been cut off from capital and experienced a lack of business growth.”
MSHDA says there are 1,152 tracts that are eligible for the designation, but only 25 percent (288) were allowed to be declared Opportunity Zones.
They work as follows: Investors place their capital gains in so-called Opportunity Funds, which then invest in Opportunity Zones. They can invest in things like real estate and business development.
The upside for investors is that they can defer and lower capital gains taxes.
Under the law, in general terms, capital gains must be invested in Opportunity Funds within 180 days after the gain is realized. Due to the COVID-19 pandemic this year, the Internal Revenue Service extended the investment window for gains that would have expired between April and December such that investors can contribute to the fund as late as Dec. 31.
Generally, patience is rewarded with lower taxes. If the gains are contributed to a fund by Dec. 31, 2021, and stay within the fund for five years, the investor only has to pay federal capital gains taxes on 90 percent of the tax due on the capital gains from the initial investment. In addition, capital gains tax on the initial investment is deferred until Dec. 31, 2026.
There’s an extra carrot for investors if they leave the money in the fund 10 years or longer: They don’t have to pay any capital gains tax on the appreciation of the Opportunity Fund or depreciation recapture, in addition to getting the 10.9 percent discount rate on the tax due on the original investment and the deferral of the tax on the initial investment until Dec. 31, 2026. If they pull that money out before then, they pay normal capital gains tax on the fund’s appreciation.
Job attraction
The median household income for this Census tract is $64,844 and 11.92 percent of the people live in poverty, according to a report from Enterprise Community Partners, which Lapin said spelled out why the 1976 Census tract was an Opportunity Zone.
The most recent Area Median Income figures, dated April 1, 2020, say that the AMI in Oakland County is $55,000 for one person, $62,800 for a two-person household, $70,700 for a three-person household and $78,500 for a four-person household.
“Based upon the location and nature of the majority of the buildings in that Census tract, I assume it was selected in an attempt to attract new jobs, which is certainly one of the desired outcomes of the Opportunity Zone incentive,” said Gordon Goldie, partner in the Housing and Community Development Solutions in Auburn Hills for Plante Moran PLLC.
Making way for development
Property owners in the area say Opportunity Zones help.
Dennis Bostick, who bought the Huntington Bank building in July 2018 for $9 million after the Opportunity Zones were enacted into law through the Tax Cuts and Jobs Act of 2017, said some of his new development would not have taken place if not for the Opportunity Zone tax breaks.
That includes a six-story Hyatt Regency hotel, restaurant, and six-floor, approximately 500-space parking deck, not to mention the renovations for the Huntington Bank property at 801-803 W. Big Beaver Road.
“All new elevators, completely renovated the lobby. There has been quite a few million spent already on things that probably would not have happened without the Opportunity Zones,” he said.
He also said, however, he understands concerns about the Troy designation.
“There is a fair argument,” he said. “We are fortunate that we are on the very north end of that. They had to draw a line somewhere.”
David Steuer, president of Steuer & Associates Corp., an affiliate of the ownership group of the entity that owns property in the area, also said Opportunity Zones have helped grease the skids for new investment.
“They are a great opportunity to improve employment in the area and will create more employment and investment,” he said.
Posted By: Crain’s Detroit Business on March 14, 2021. For more information, please click here to read the source article.
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