NEW YORK -- Much of the New York City neighborhood selected by Amazon for one of its new headquarters is in a federal "opportunity zone," a designation created by President Donald Trump's tax overhaul that offers developers potentially millions of dollars in capital-gains tax breaks to invest in high-poverty, low-income areas.
Critics question whether Long Island City, the fast-gentrifying Queens neighborhood across the East River from the skyscrapers of Manhattan, needs such breaks. Median household income around Amazon's planned campus is $130,000 a year, poverty is half the city average and new buildings were going up long before the tax overhaul.
"All you have to do is look at the skyline from Manhattan. You can see billions of dollars of private investment there already," said Don Peebles, a real estate developer based in New York. "Long Island City doesn't strike me as high on the list for needing extensive tax incentives to stimulate economic development."
Under the new tax law, officials in each state designated 8,700 such zones across the country. Nearly 35 million Americans live in such areas, communities that in most cases have high poverty and unemployment, or contain or are near pockets in desperate need of development.
The site of Amazon's other new headquarters in Crystal City, Va., is not in an opportunity zone, nor is the site of another major Amazon office in Nashville, Tenn., that was also announced Tuesday.
Amazon did not mention the Long Island City opportunity zone tax breaks Tuesday in any of its announcements about the new campus. Company spokesman Adam Sedo declined to provide details about whether Amazon plans to take advantage of them.
But investors were already pouncing.
Craig Bernstein, founder of the investment fund OPZ Capital, said the capital-gains break is good public policy because it helps push investors to put up the money for new housing, which may be in high demand once Amazon fills an expected 25,000 new jobs in the neighborhood.
"This will help expedite the process of building up the surrounding area," Bernstein said.
Separately, Amazon is tapping New York state and the city for grants and tax breaks worth about $2.8 billion.
Investors who plow capital gains into Opportunity Zone projects can defer taxes on those gains up to 2026. If they decide not to cash out on the investment for up to seven years, they receive another benefit. They get to exclude up to 15 percent of those gains from taxes. And they can completely exclude paying taxes on any further appreciation of those gains if they hold on to the investment for a decade. Capital-gains taxes can be as high as 23.8 percent.
The $2.5 billion that Amazon said it will spend building its Long Island City campus could save Amazon potentially hundreds of millions on its federal tax bill.
Fund manager Bernstein said that he is not familiar with Amazon's tax situation, but that any company that is allowed to delay paying tax is getting the equivalent of an interest-free loan from the government. That benefit alone on $2.5 billion in gains is worth about $150 million in interest saved through 2026, assuming a conservative borrowing rate of 3.5 percent. Add in the portion of gains the company is excused from paying any tax on, and that would bump the savings to at least $225 million.
Critics worry that such sweetheart tax savings would benefit real estate interests aiming to invest in areas that are already on the rise, or are bolstered by their proximity to expanding institutions such as hospitals or colleges.
A Brookings Institution study of the administration's list of more than 8,700 opportunity zones found that nearly a third were already gentrifying, based on such factors as rent increases and the percentage of college-educated residents.
The Treasury Department, which approved the state choices of the opportunity zones, did not respond to a request for comment.
The census tract where Amazon is moving has a poverty rate of 10 percent, half that for all of New York City, and the household income of $130,000 a year is double the city median.
That makes the area too wealthy to qualify for tax breaks on its own, but the tax law allows such areas to piggyback on nearby ones that do qualify.
The Amazon deal has sparked a real estate frenzy to rival Cyber Monday.
Online searches for homes in Long Island City soared 248 percent last week, the real estate brokerage Redfin said. Searches in Crystal City jumped 84 percent.
Worries are arising that housing prices in both places -- whether for renters or buyers -- are destined to price out all but the most affluent in the coming years.
The same trend, critics note, has long been evident in such high-tech centers as San Francisco; San Jose, Calif.; and Seattle, where Amazon is based. In those cities, low- and moderate-income families increasingly struggle to afford housing anywhere near their workplaces.
By choosing the New York and Washington areas, Amazon has inadvertently thrown a spotlight on the gulf between a small group of thriving but high-cost U.S. cities and the rest of the country. Housing in Amazon's two new hubs is well more than twice the median home price nationwide of $255,000, according to ATTOM Data Solutions.
In the Seattle area, Amazon's presence, along with that of other tech giants like Microsoft, is thought to have contributed to home values that have priced out even relatively affluent families and have left poorer residents with few options. Homelessness has worsened. Over the past five years, the median home value in Seattle has rocketed 73 percent to $739,600, according to an analysis by the real estate firm Zillow, which is also based there.
Business on 11/15/2018