On September 27, 2019, Francis Suarez, the Mayor of Miami, sponsored an OZ Expo conference for the City of Miami. Prior to the conference, one of our clients hosted a lunch for the dignitaries who attended the conference that included Secretary of HUD Dr. Ben Carson, Mayor Francis Suarez, the Acting Administrator of the of SBA for the United States, Chris Pilkerton, as well as national and local representatives of the SBA, representatives from HUD, representatives from the Opportunity Zone Division of the Federal Government including Scott Turner, Executive Director, White House Opportunity and Revitalization Council, representatives of the local community including Ken Russell who is the Chairman of the City of Miami Commission, Ken Russell and the Chairman of the Omni Community Redeployment Authority, Daniel J. Kowalski, Counselor to the Secretary, U.S. Department of the Treasury, who specializes in OZ matters, Ms. Denise Cleveland-Leggett, Southeast Regional Administrator for HUD, and Dr. John Fleming, Assistant Secretary of Commerce for Economic Development.
Some of the attendees spoke about the tremendous viability of the Opportunity Zone program, with the City of Miami being featured as a key area for development in accordance with the public/private initiative that would benefit all parties concerned.
Mayor Suarez commented about the tremendous expansion in the City of Miami of the Opportunity Zone projects. He pledged his support for government incentives, job training, permit expediting and potential property tax relief, to encourage development in the City of Miami and in particular, those areas that are in the process of being gentrified and in need of OZ capital to spur development.
The Mayor of Miami noted up to 21,000 residential units have been earmarked for completion in the near future, and that the local governments need to network with private developers in order to foster this development.
Mayor Suarez spoke about the substantial increase in the City of Miami’s tax base, and the fact that the taxes actually were lowered for the next fiscal year based upon operating efficiencies as well as the fact that there is a significant increase in the real property tax base as a result of the substantial development taking place in the City.
Secretary Carson then gave a very detailed talk on the state of the OZ industry and to what extent it has influenced HUD in the development of residential housing throughout United States, that included the following:
- It is estimated that $43 billion has been committed to the OZ industry to date, of which an estimated 60 percent of those funds have been earmarked for housing projects.
- 17 different federal agencies are involved in the Opportunity Zone program and that in HUD and in other government agencies are collaborating in order to make the OZ program viable to ensure that the government agencies are actively involved and encouraging the program to prosper.
- HUD has granted new incentives for OZ projects, with special underwriters assigned in order to reduce the processing time and grant application points to reduce the actual costs of obtaining HUD financing. The goal is to leverage both federal and private funds in order to substantially encourage development of affordable housing in Opportunity Zone areas. It was noted that all OZ rehabilitation projects would be eligible for the OZ benefits as well.
- On September 17th, the National Opportunity Zone Academy was established with funding by the Rockefeller Foundation.
Housing problems are human problems. The goal is to enable residents to live in a place where they gain independence and become self-sufficient. This would not only include providing affordable housing, but also job training and job placement in order to encourage government and private enterprise to encourage the OZ residents to not only live in the OZ community but become actively employed there as well.
The acting head of the SBA, Mr. Chris Pilkerton, discussed one of the projects that was being funded by the SBA. This involved a restaurant called “Cheeseburger Baby” and the fact that business got severely affected by Hurricane Irma. The owner went out into the community to provide food to those in need during the Hurricane’s aftermath. The SBA helped support this business to get back on its feet and thrive. The SBA has a significant vision for the OZ program for small businesses that will support the ecosystem. He indicated that the SBA has different groups to advise and provide capital to OZ businesses.
Commissioner Russell indicated that “we have a blank slate” with blighted land in the City of Miami that is ripe for development. He noted that the various government agencies are providing assistance in order to expedite the development of housing since there is a housing crisis in the community. Opportunity Zone serves as an overlay to the overall system. The goal is to kick start this program with CRA tax dollars.
Willy Walker of Walker and Dunlap, a large investment bank in the real estate industry, discussed the significance of the OZ program to finance multi-family projects. He indicated that a substantial portion of their funds raised in the last year were allocated to housing. He noted that homeownership has been dropping in general, and at a much higher rate among the lower income population. Therefore, rent and mortgage subsidies are required to provide affordable housing.
Separate from the general business climate and the significant public support for the OZ program, I had a chance to speak with Daniel J. Kowalski, Counselor for the Department of Treasury and an expert in the OZ program. We discussed two particular issues:
- Timing of Disposition of Funds in an OZ Fund Program would require that the OZ, whether the 30-month rule for disposing of invested funds for the Project to be completed. In fact, in many situations where a property is in a process of obtaining zoning and permitting approvals, it is virtually impossible for the project to be completed within 30 months of the initial OZ funding. The April 2019, the second set of Regulations provide extensions for extraordinary circumstances related to zoning and permitting, which would, therefore, provide a further time extension with respect to the expenditure of funds and the completion of the project itself. Mr. Kowalski seemed to agree with this approach and indicated that the same would be further clarified when the final Regulations are published.
- Concerning the “substantial completion test” and the matching of expenditures for a building that had a prior use, the issue raised was whether the construction of additional improvements at a project or the expansion of amenities would count towards the substantial improvement requirement. For purpose of example, if a multifamily project had a purchase price of $10,000,000; $5,000,000 allocated to land and $5,000,000 to the building, then, at least $5,000,000 would have to be spent on improvements to the building. The issue is whether additional amenities or the expansion of the number of units to be rented or used in the business at the same property would count towards the 100% improvement test. Mr. Kowalski indicated that under the strict reading of the Regulations, those items would not be included, but he agreed that it was a seriously being considered by the Treasury and would be addressed when final Regulations are issued. Mr. Kowalski indicated that he expected final Regulations to be issued by the end of this year given the fact that there is a significant reliance by investors who want to fund their investment by year end.
The U.S. Department of Housing and Urban Development introduced a new website this week that is to serve as a hub of information regarding the Opportunity Zones initiative. It is apparent that various government agencies are taking a much more active role in the OZ industry in trying to established a public/private partnership to enhance the development opportunities in their respective communities, as well as support from the Department of Treasury in an effort to make the final Regulations proactive to the industry.