Tax incentives available through the state’s Neighborhood Improvement Zone program have spurred more than $1 billion in construction and renovation in downtown Allentown.
Now, attention is turning to another incentive, one focused on distressed areas in Allentown and other areas around the Greater Lehigh Valley.
The federal Opportunity Zone program is a tax incentive enacted under the Tax Cuts and Jobs Act, approved in 2017, to encourage investment in urban areas beyond city centers.
In April, Gov. Tom Wolf recommended a number of census tracts in the Greater Lehigh Valley for designation as qualified opportunity zones and the federal government approved them in June. The zones can be found in Allentown, Bethlehem, Easton, Reading, West Reading, Stroudsburg, Pottstown, Tamaqua, and in Phillipsburg, New Jersey.
The opportunity zone program gives investors breaks on federal capital gains taxes in exchange for investment in funds that support small businesses and housing projects in low-income areas.
Investors can also avoid federal taxable capital gains on investments in those areas if they retain ownership of a project for at least a decade.
To qualify for the tax incentives, investors must invest in a qualified opportunity fund, according to the Allentown Neighborhood Improvement Development Zone Authority, the authority that oversees and manages the Neighborhood Improvement Zone, or NIZ. The opportunity funds are private-sector investment vehicles that invest at least 90 percent of their capital in opportunity zones. The model will allow investors to pool their resources, increasing the scale of investments going to underserved areas.
Downtown Allentown has several census tracts designated as qualified opportunity zones, covering areas between Fifth and 12th streets and Union to Chew streets. They include portions of the downtown, with some distressed sections, as well as a historic district and a retail and residential corridor. While it includes the NIZ, the opportunity zone includes other portions of the city.
“The opportunity zone is a federal tax incentive which is extremely powerful and might be the strongest economic development incentive in decades,” said J.B. Reilly, president and CEO of City Center Investment Corp. of Allentown. “We think that on real estate, it could double the rate of return. The locations of the opportunity zones in Allentown are very well-placed and build off the momentum.”
Reilly said a recent symposium on Allentown’s opportunity zones attracted about 225 people.
Interest is coming from a wide variety of investors, including private equity firms, developers from New York and Philadelphia, and publicly traded real estate investment trusts.
“Allentown has a bunch of development-ready projects,” Reilly said. “To fully take advantage of opportunity zone legislation, the faster you make investments before the end of 2019, you will maximize the capital gains reductions.”
Evan Weiss, director of PEL Analytics, an adviser on the formation of several opportunity funds, spoke at the Allentown symposium, held at the Renaissance Hotel. Weiss’ firm helps distressed cities boost economic development.
He views the incentive program as potentially having a bigger impact than others.
“This is meant to change the underlying structure about how people think about their investments,” Weiss said. “The scale of both potential investments and investors is more impactful than any other similar program.”
Once a zone is defined, the incentives can apply to virtually any real estate deal in it, Weiss said.
Residential projects may be of particular interest to investors, observers said.
“There’s going to be demand for housing downtown,” Reilly said. “You are going to see demand for people to own and rent in neighborhoods around the downtown. We think this is a tremendous opportunity for small investors.”
Bethlehem has five opportunity zone tracts: two on the north, two on the south and one on the west side of the city, said Alicia Miller Karner, director of community and economic development for Bethlehem. They include areas that are seeing some economic development activity and others in need of revitalization.
A project already underway in one of Bethlehem’s zones is Brinker Lofts, which Ondra-Huyett Associates Inc. of Upper Macungie Township is building on Adams Street between Third and Fourth streets. The company is renovating the 19th-century structure into a residential project.
The five-story building will contain 30 market-rate apartments, a courtyard and a café, with construction expected to finish in June 2019, according to Mike Gibson, business development manager for Ondra-Huyett. The building remained a cold storage facility until the 1950s, when Lehigh University took it over for storage and service space, he added.
The opportunity zone program is an incentive unlike any the city has seen before, according to Miller Karner.
“As with any incentive, it’s an accelerator of the project … getting those projects funded faster and getting them under development faster,” Miller Karner said.
In Easton, four opportunity zone tracts cover the main portion of the city, bounded on the north by Route 22, on the east by the Delaware River, and extending into a portion of the South Side and the West Ward to 15th Street.
“It’s a great opportunity for someone to invest and get a real break on their capital gains,” said Mayor Sal Panto. “It really gives the wealthy investors an opportunity to save on their capital gains and do good for the community. It’s a great market right now for investors on a smaller scale.”
Panto said the city council is hoping to leverage the opportunity zone incentives to encourage investors to take part in the $30 million the city is putting toward the $130 million Da Vinci Science Center’s Science City project at the corner of South Third Street and Larry Holmes Drive. Da Vinci, a nonprofit in Allentown, wants to build a massive science center in Easton that would include a nature dome with live animals, a large theater, an event space and other exhibits.
Panto said he is hoping opportunity zone tracts in the West Ward can attract investments in affordable housing projects or recreational opportunities.