Commercial banks should finally embrace zones of opportunity


A render of the Tampa Bay Rays plans for a new baseball stadium in Tampa’s historic Ybor City (Image credit: iStock, WJCT)

Banks may soon be prompted to invest huge sums of money in Opportunity areas, the Trump administration’s controversial tax abatement program that has seen lukewarm investment levels to date.

The federal government plans to extend credit to commercial banks for lending to low-income communities as part of a broader reform of a 1970s law called the Community Reinvestment Act. This is the first direct regulatory incentive for banks to lend in areas of opportunity and could be a game-changer for the program, some experts say.

“CRA is a great motivator for interactivities in banks,” said Steve Glickman, one of the architects of the Opportunity Zone initiative, which grants tax deferrals and massive tax breaks to those who invest in projects in designated low-income neighborhoods across the country. “They’re going to have an institutional interest in all of this. “

Glickman, who founded and runs consultancy firm Opportunity Zone Develop LLC, said CRA reform and the recent finalization of program rules should prompt banks to direct investor money to qualifying projects. The banks’ own asset management departments could also begin to deploy more money to areas of opportunity, he said.

For banks, ready in areas of opportunity would allow them to fulfill the elements of a government mandate that they lend in poor communities.

Although many bankers and developers believe that the combination of reforms expected from ARC and finalized Opportunity zone regulations could lead to substantial investments in poor communities, financial watchdogs are wary of what types of projects are eligible.

What is ARC and why it matters

The CRA was designed in 1977 under President Jimmy Carter and was designed to encourage banks to lend in low-income communities and prevent redline, or the practice of not lending to minority communities.

A bad CRA rating can prevent a bank from opening new branches or completing a merger. It also prompts regulators to take a closer look if a bank has a bad credit rating.

But some bankers argue the law is outdated, especially in the age of digital banking and the lack of physical branches. Under a more banker-friendly Trump administration, two regulators, the Office of the Comptroller of the Currency and the FDIC, are now looking to revamp the rule and change the way the CRA views geographies where banks accept deposits. Regulators are also looking to combine zones of opportunity in ARC rules under a proposal released by the OCC and FDIC.

However, this inclusion of the Opportunity Zones in the redesign has also drawn the most criticism from those who are skeptical of the proposed changes to the CRA.

A section of the proposed regulation mentions that banks may receive credits for loans to sports facilities in areas of opportunity. In other words, a bank could potentially receive credit upon its review from the CRA for funding the proposal to build the Tampa Bay Rays Stadium in Ybor City, Florida, that was estimated to be nearly $ 900 million.

“Baltimore Ravens Stadium would be considered a credit. We need to look at large-scale projects that might not have a local impact on the community, ”said Nikitra Bailey, executive vice president of the Center for Responsible Lending.

Giving credit to sports stadiums in Opportunity Zone projects amplifies the argument of critics who claim that the program is in fact a tax break for wealthy developers masquerading as a benefit to the poor. Critics have pointed to Richard LeFrak’s $ 4 billion mixed-use project, Sole Mia, in an opportunity area north of Miami, as well as Kushner Companies plans to build a 1,100-unit luxury apartment building. in Miami’s Edgewater neighborhood.

The Opportunity Zone developers have largely focused on construction projects in gentrification zones and on projects already planned before the release of the Opportunity Zone legislation. The Ministry of Housing and Urban Development under Sec. Ben Carson said the agency grants preferences on certain credits to developers who build affordable housing in areas of opportunity. But so far, large-scale investments in affordable development in these areas have yet to materialize.

Lending to the land of OZ

The Opportunity Zone program has become the most talked about program in the real estate world over the past two years. Tucked away in President Trump’s tax plan, it offers developers and investors the ability to defer or waive the payment of capital gains tax for an investment in one of more than 8,700 areas of opportunity. federal governments across the country. Treasury Secretary Steven Mnuchin even said it could lead to $ 100 billion in private investment.

Despite the hype, investor interest in hasn’t quite materialized.

Many funds have struggled to raise capital. Out of a sample of 103 Opportunity Zone funds that sought to raise $ 22.7 billion, only $ 3 billion was raised, according to an October report by accounting firm Novogradac & Co. A notable pullback is the SkyBridge Capital d ‘Anthony Scaramucci, who initially sought to raise $ 3 billion, but is now only seeking $ 300 million.

But there are signs that the finalization of the program rules has already contributed to an increase in investment. At least $ 2.3 billion was invested in Opportunity Zone funds between early December and early January, according to a Novogradac poll, a 51% increase from the previous month. (It should be noted that investors had to commit their capital by the end of 2019 to fully benefit from the program, which is probably a more important reason for the increase in investment.)

Brett Forman of Trez Forman, a Boynton Beach-based non-bank lender, said he was skeptical of some of the projects proposed in the Opportunity Zones. So far, some of the borrowers who approached him are less experienced in real estate development and are sometimes the ones who would not be able to secure bank financing.

“They think a non-bank lender will jump on it,” Forman said.

Avra Jain, a Miami-based Opportunity Zone developer, however, has previously told The Real Deal that the program makes funding for certain projects more accessible, like his group’s. 15-story office building in Midtown Miami.

Shane Neman, who bought a cold storage facility in an opportunity area in Miami’s Allapattah neighborhood, said he is now considering refinancing the property. Neman said the property’s position in an area of ​​opportunity makes it more attractive to obtain financing from lenders.

“I even have private lenders and funds offering me loans that exceed the terms of regional banks, which usually offer the best deals,” Neman said.

Some banks have already started investing in Opportunity Zones themselves, such as PNC Bank which has created an Opportunity Zones Fund to invest in affordable housing, economic development and revitalization projects. In July, the bank provided $ 15 million in financing to transform a nearly 100-year-old vacant office building into workforce housing in downtown Birmingham, Alabama.

Woodforest National Bank, of Woodlands, Texas, also partnered with a community development finance institution (CDFI) and commercial real estate group to create a $ 20 million Opportunity Zone fund.

John Hope Bryant, entrepreneur and founder of the non-profit economic empowerment organization Operation HOPE, lobbied for reform of the ARC. He recently toured five cities over the summer with Comptroller of the Mint Joseph Otting to discuss potential changes. Bryant said adding opportunity zones to ARC’s modernization can only help encourage lending in low-income communities.

“You create a magnet and direct the capital and the equity there and say, ‘Go invest there. “”

Do you have something to say about the areas of opportunity? You can reach Keith Larsen at [email protected]

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