Philly developers start cashing in on Trump tax break, as ‘opportunity zone’-funded projects advance

Philadelphia is in store for its first smattering of construction projects funded by investors who want to cash in on a provision in the 2017 tax bill meant to encourage development in low-income communities.

At least five projects across the city — in Brewerytown, Francisville, Germantown, and Kensington — are soon to break ground with the backing of groups that plan to use the developments’ location inside so-called opportunity zones to claim potentially big savings on what they owe the IRS.

Coming more than a year after President Donald Trump signed his tax bill into law, the projects represent a modest start toward what his administration has said could equate to more than $100 billion in investment into disadvantaged communities nationwide.

Under the 2017 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 low-income areas designated as opportunity 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.

Brad A. Molotsky, an attorney at Duane Morris LLP in Philadelphia who has been advising on opportunity-zone deals, said it has taken investors some time to grow comfortable with the rules governing the financing of these projects.

Projects now moving forward under the program are relatively small, self-contained, and in late stages of planning, so investments into them can be deployed within tight deadlines stipulated by the law, Molotsky said.

But more and bigger projects are likely on the horizon, as regulatory questions are resolved and contracts are negotiated that incorporate the program’s complex provisions, said Molotsky, who is working on 22 opportunity-zone deals in multiple cities in various stages of completion.

“There are a lot of people that are continuing to learn,” he said. “I feel like the velocity continues to pick up.”

In Philadelphia, zones that qualify for investment include many of the communities along Market Street in West Philadelphia and Broad Street in North Philadelphia, as well as neighborhoods such as Mantua and Brewerytown. They were selected through a process spelled out in the 2017 legislation that called on states to nominate census tracts with high poverty rates and low median household income.

The selections were based on data in the Census Bureau’s 2010 survey, so some areas that have attracted substantial investment on their own in more recent years also qualify as opportunity zones.

Among the projects soon to break ground in such designated areas is a four-story apartment building with 108 units and ground-floor shops at 2601 Poplar St., near the Brewerytown-Fairmount border, that is being developed by Philadelphia-based North Broad Living LLC.

A former owner had planned a development of for-sale rowhouses there. But after its designation as an opportunity zone, the apartment plan became a better deal for investors, since it would allow them to keep their gains tied up in the project long enough to qualify for maximum tax relief under the 2017 law, said North Broad Living president Daniel Greenberg.

To finance the project, West Conshohocken-based asset manager Sage Financial Group assembled $12 million in capital gains from about 100 investors into a single fund, which closed on the 13,000-square-foot development site last month.

Also in Brewerytown, Philadelphia’s MMPartners LLC is soon to begin work on the $42 million conversion of the F.A. Poth Brewing Co. building at 31st and Jefferson Streets into apartments, led by $10 million in equity from an opportunity-zone fund under Off Road Capital Management in New York.

The fund closed on the project, which will include 128 apartments and 25,000 square feet of lower-level commercial space, last week, MMPartners founder David Waxman said.

The project follows the $5.7 million rehabilitation of a historic dormitory for nurses at Corinthian Avenue and Cambridge Streets in Francisville that Waxman’s group started last year. That project, which is being completed with the help of a $2 million opportunity-zone investment funded mostly by a single family’s capital gains, will have 22 apartments when complete, Waxman said.

In Kensington, meanwhile, developer Civetta Property Group of Philadelphia is tapping $8 million in equity from a fund under Pittsburgh-based PNC Financial Services Group to build a five-story, 56-unit apartment building at 2120 E. York St., north of Frankford Avenue, the Philadelphia Business Journal reported.

And in Germantown, near SEPTA’s Wayne Junction Regional Rail station, developer Mosaic Development Partners has secured opportunity-zone investments for part of its $7.5 million plan to convert a former medical supply factory on Wayne Avenue, north of Berkley Street, into a 39-unit apartment building with retail and coworking space.

The opportunity-zone funding, collected from a consortium of five small, mostly local businesspeople with capital gains to invest, makes up $400,000 of the equity being invested into Golaski Labs, as Mosaic calls the project, said Gregory Reaves, a partner in the Philadelphia-based firm.

An additional $300,000 was raised toward the investment through the online crowdfunding hub Small Change, which bundles relatively small equity contributions into real estate projects with the goal of helping residents of low-income neighborhoods earn financial returns from their communities’ revitalization.

Reaves said Mosaic could not have fully financed Golaski Labs using opportunity-zone investment because the neighborhood’s poverty and distance from already gentrifying areas represents too much of a risk for many investors, even with the program’s tax benefit.

Indeed, the locations of the better-funded Brewerytown, Francisville, and Kensington projects, not far from the already prosperous Fairmount and Fishtown neighborhoods, could fuel existing concerns that the program will disproportionately benefit communities that would have seen investment without the new tax break.

Sage Financial co-president Alan Cohn said his firm might have targeted the Brewerytown project even without the program’s pluses, but it likely would have first sought out opportunities in neighborhoods that already can support higher rents absent the tax incentive.

Another benefit from the program for neighborhoods is its incentive to keep investment in place for long durations, which helps make sure that projects are completed and that the capital behind them remains through hard economic times, he said.

“This is really encouraging long-term investment in areas that need long-term investment,” said Cohn, whose group has also helped manage non-opportunity-zone investments into Philadelphia-based Arts & Crafts Holdings’ redevelopment projects north of eastern Center City.

Reaves said he expects projects already in the path of development to see the lion’s share of opportunity-zone investment as long as there are enough of them to satisfy investor demand. But if there is more money flowing into opportunity-zone funds than can be absorbed by those projects, more impoverished neighborhoods could get more of the boost envisioned by the law’s drafters.

“That," Reaves said, “would be the hope.”