New Development Projects: The Reports of Demise Were Greatly Exaggerated

Of course, numerous details remain to be outlined in the anticipated regulations, but the IRS has indicated, informally, that its goal is to keep the program simple in order to achieve significant investment in the Opportunity Zones.

In addition to retail developers, the affordable housing industry had immediate reasons to be concerned by the Jobs Act. It is estimated that 90% of all affordable housing projects utilize lower income housing tax credits for equity financing, often by syndicating the credits to corporate tax-paying investors. The loss in market value of tax credits could have the same, or greater, negative impact on housing developments as on retail developments.

Importantly, the Jobs Act did not make any changes to the Lower Income Housing Tax Credit (LIHTC) program and certain other federal programs (except for collateral effects from the change in the tax rates). As a result, in a mixed-use development, developers can continue to utilize the LIHTC program, but can supplement it by the sale of equity to taxpayers attracted to Opportunity Zones. Whether LIHTC investors or other tax credit investors and Opportunity Zone investors will be overlapping is yet to be determined. If not, the industry will likely develop methods to sell equity of different classes or tranches in order to attract investors of both groups.

The Spending Bill Brings Further Change

The affordable housing industry also received a boost from the 2018 Consolidated Appropriations Act (P.L. 115-141) (the Spending Bill). The Spending Bill creates an additional income test by which tenants could qualify for affordable housing. Under the previous law, the developer had to elect one of two income tests in order to qualify as an “affordable” project. The first option required 20% of the tenants to have income equal to 50% or less of the area's median gross income; the second option required 40% of the tenants to have income equal to 60% or less of such amount. Under the new law, a third option available to owners permits them to average the income of tenants. Thus, the income of any tenant which is greater than 60% can be averaged with lower incomes to achieve the maximum levels of 60%.

Additionally, the Spending Bill increases the annual amounts of credits which will be allocated to states for the tax credits. The bill calls for an increase of 12.5% per year through 2021. This results in an increase of 50% over the amount of credits now authorized.

Private Activity Bonds Go Unaltered

In addition, despite speculation otherwise, Congress left private activity bonds (PABs) untouched. Had private activity bonds been eliminated, one of the most widely used sources of funding for redevelopment projects would have been removed. Despite the fact that the House version of the bill provided for such elimination, the final statute left such bonds intact.

While PABs require complex structuring, they have been used in revitalization programs for cities long overlooked by investors and in need of development of new buildings or rehabilitation of existing buildings. Even with strict statutory oversight and annual caps on available funding, PABs have been used for numerous inner-city mixed-use projects.

One feature of deals utilizing PABs is that states and municipalities can have significant involvement in the planning and financing of all aspects of a development. As a result, when the goals of developers and local agencies coincide, PABs can be the tool by which the parties achieve both public and private aims of what can be very significant developments.

One example is the Hahne & Co. Building in downtown Newark. In the Hahne project, PABs were used in the capital stack to completely rehabilitate an empty building into a cornerstone of Newark's revitalization program. The building now includes retail, affordable housing and cultural space.

Another example is provided by New Jersey in the American Dream Project. As many readers will know, the American Dream Project was stalled for more than 15 years. Recently, the New Jersey Sports and Exposition Authority was able to kick-start development by virtue of a bond offering in excess of $1 billion. Both the state, municipality and developer believe they are bringing to fruition a long talked-about project which will truly be transformative.

Conclusion

Given the likelihood that the Opportunity Zones will overlap with redevelopment areas, the possible combination of Opportunity Zones, PABs and other state and municipal incentives can create activity in the retail real estate sector by lowering investment costs at a much needed time. Combining these programs will be complex and challenging, but for large-scale transformative projects such as the Hahne & Co. Building in Newark, they may be a necessity.

In light of restrictions contained in the Jobs Act which limit the use of Historic Rehabilitation Tax Credits and limits on deductions of state income and real estate taxes, investors could be drawn to the industries discussed above in order to obtain some of the tax shelter still available. The combination of Opportunity Zones, LIHTCs and other state and municipal credits, grants and other incentives may be able to permit more transformative projects to go forward. The two projects mentioned above may provide useful maps which will only be clarified when the Opportunity Zones program is brought to fruition.

As with any new statutes, the effectiveness of Opportunity Zones in spurring investment may not be determined for some time. Once Treasury issues regulations, a clearer picture will emerge. For the time being, the changes described above, either alone or in various combinations, make retail development and affordable housing appear to retain continued viability.

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Michael R. Leighton is a member of Sills, Cummis and Gross, P.C.