Big Philly landlord to cash in on some holdings, as ‘opportunity zone’ designation boosts values

Drafters of the “qualified opportunity zone” provision of President Donald Trump’s 2017 tax law wanted to give investors an incentive to buy property in the nation’s poorest neighborhoods.

For Mark Nicoletti, it’s an incentive to sell some.

Nicoletti has put on the market nearly a quarter of the roughly two million square feet of commercial property owned in the city by his family’s Philadelphia Suburban Development Corp., more than half of it in areas designated as opportunity zones.

The opportunity zone incentive, which enables investors in selected areas to earn potentially big savings on their taxes, has boosted some of his property values to the point where selling made sense, he said.

He anticipates earning about $100 million from the sales of the 44 properties, which he will use to build houses, offices, and shopping promenades on land that PSDC has been acquiring in affluent suburban enclaves such as Malvern in Chester County and Warrington in Bucks County.

“It’s amazing in such a short period of time how the qualified opportunity zones are affecting the value of real estate," Nicoletti said. “It was the QOZs that made the decision to sell so much easier.”

The opportunity zone program, passed as part of the Tax Cuts and Jobs Act of 2017, empowered city and state officials to nominate census tracts from among the city’s poorest as targets for investment.

Under the legislation, people and companies owing tax on investment income can put off paying those levies for up to seven years by directing the earnings into real estate ventures or other businesses set up in designated zones.

Investors also qualify for reductions of those deferred taxes if they keep their money parked in the ventures long enough, with the biggest breaks going to those who stay invested for the full seven years.

And once 10 years pass, investors can sell their stakes in opportunity zone projects or businesses without being taxed at all on gains from that transaction.

The aim of the provision was to attract investment into the nation’s poorest areas in hopes of encouraging economic growth in those communities.

It may also be raising some property values, since investors are willing to pay more upfront if their ultimate return is supplemented by not having to pay taxes on their gain when it comes time to sell, said Ken Mallin of MPN Realty Inc., one of the brokers hired by Nicoletti to market his holdings.

As an example, Mallin mentioned 545 N. Broad St., a former Goodyear garage property that sold in September to developers planning an apartment building for $6 million — more than four times its price when it last traded hands in 2005.

“If you’re not going to pay any tax, then your returns can be incrementally higher, which means you might pay — and probably would pay — more for a property,” he said.

While some existing landowners appear to be profiting from the program, it’s unclear whether the deals are doing much to foster community revitalization, researchers at the Massachusetts Institute of Technology, the University of Connecticut, and Maastricht University in the Netherlands wrote in a May 2019 study.

Their research was based on a stipulation of the opportunity zone rules that requires investors to spend at least as much on construction or renovation at a property as they spent to buy the site. That threshold is difficult to meet with newer or recently rehabbed buildings that don’t need much new investment.

With this in mind, the authors conducted a nationwide survey of property sold in tracts that had been designated as opportunity zones, comparing prices paid for aged structures or vacant land with those paid for recently renovated buildings.

If the designated tracts were broadly benefiting from the program, they reasoned, prices should go up for all property in the tracts, even those that don’t lend themselves to opportunity zone investment.

But that didn’t happen. Price appreciation, they found, was concentrated among the candidates for opportunity zone projects.

“Our findings call into question the capacity of the program to create long-term value in low-income communities,” the study’s authors wrote. “Rather, the program may instead be offering higher prices to existing OZ landowners."

Nicoletti’s father, Robert, began buying property in 1962 when he founded PSDC, which is based in King of Prussia. Its Philadelphia holdings, largely consisting of low-rise commercial buildings tenanted by retail chains, nonprofits, and government agencies, now sprawl throughout the city.

About 500,000 square feet of that development, spread over 26 properties, is being marketed by MPN’s Mallin and by Michael Hinchman, with the commercial brokerage Marcus & Millichap Inc.

Properties range from an office building on Broad Street near Oregon Avenue that’s partially occupied by the Philadelphia Performing Arts charter school, to a retail property with a mobile-phone shop and foot-massage salon on Washington Avenue near the Italian Market, to a mental-health outpatient center at 55th and Chestnut Streets in West Philadelphia.

Although half of those buildings are in opportunity zones, they may be more immediately attractive as sources of rental income than as opportunity zone projects, due to the amount of additional investment that would be required to qualify for the program. But Nicoletti said many sit on vast parking lots that can be split off into development sites.

Also up for sale are 18 vacant parcels covering some 14 acres, an area twice the size of Rittenhouse Square, 56% of which sits in opportunity zone tracts, according to calculations based on data from MPN and Marcus & Millichap.

Among the sites highlighted as opportunity zone development candidates is a two-acre assemblage of retail buildings beside the Allegheny station on SEPTA’s Market-Frankford Line. Tenants include a Walgreens pharmacy and a Dunkin’ Donuts shop.

Marcus & Millichap’s marketing brochure features a site plan that demonstrates how those properties could instead support a complex of midrise office and residential buildings.

The “assemblage represents additional value that has yet to be fully harnessed — an incoming investor can control almost an entire city block with unparalleled access to the Allegheny SEPTA Station,” wrote the brokerage.

Nicoletti said PSDC would reinvest proceeds from the Philadelphia property sales to expand on the 500,000 square feet of real estate it has developed in the suburbs, so far mostly in Montgomery County’s Lansdale borough, including a Marriott hotel, homes, and offices.

The additional development will rise at sites including two large tracts in Malvern bought from the big real estate firms Trammell Crow Co. and Liberty Property Trust, which was recently acquired by a competitor. PSDC’s Warrington project is planned on land it owns near the Shops at Valley Square retail center.

“This is a generational, strategic plan to diversify,“ Nicoletti said. “The QOZs pushed the value to a point that we made a decision to sell.”