How a Trump Tax Break to Help Poor Communities Became a Windfall for the Rich Pt. III

‘The Best Thing I Have Ever Done’

Backers of the opportunity-zone program say luxury projects are the easiest to finance, which is why those have been happening first. Over the long run, they say, those deals will be eclipsed by ones that produce social benefits in low-income areas. At least some struggling neighborhoods are already starting to receive investments. In Birmingham, for example, a developer is using opportunity-zone funds to convert a building, vacant for decades, into 140 apartments primarily aimed at the local workforce. “We are seeing projects that are being announced here in Alabama that would not have happened otherwise,” said Alex Flachsbart, founder of Opportunity Alabama, which is trying to steer investors to economically struggling neighborhoods. Similar projects are getting underway in Erie, Cleveland and Charlottesville, Va. Goldman Sachs is using some of its capital gains — profits on the company’s own investments — in opportunity zones, including $364 million for mixed-income housing developments in Salt Lake City, Baltimore and other cities.

Mr. Case, the AOL co-founder, and Derrick Morgan, a former professional football player, are among those who have announced that they will invest in opportunity-zone projects that are designed to address clear social and economic problems. As he announced his retirement from the Tennessee Titans in July, Mr. Morgan wrote on Instagram that his goal would be to “create more opportunities for those who are underserved and overlooked” in communities like Coatesville, Pa. where he went to high school. Emanuel J. Friedman, a hedge fund manager, is using some of his capital gains and money he has raised from others to build 11 warehouses in rural Jasper County, S.C., near the Savannah seaport. The warehouses won’t employ many people, but he said the jobs would offer higher wages than hotel housekeeping positions at the nearby Hilton Head resort, where many area residents now work. “Of course it will make a difference,” Mr. Friedman said. “It is mind-boggling. It is the best thing I have ever done.”

The developers of the Sole Mia project in North Miami, Fla., urged a local official to nominate the area as an opportunity zone and are now considering ways to take advantage of the status. But even supporters of the initiative agree that the bulk of the opportunity-zone money is going to places that do not need the help, while many poorer communities are so far empty-handed.

Some opportunity zones that were classified as low income based on census data from several years ago have since gentrified. Others that remain poor over all have large numbers of wealthy households. And nearly 200 of the 8,800 federally designated opportunity zones are adjacent to poor areas but are not themselves considered low income. Under the law, up to 5 percent of the zones did not need to be poor. The idea was to enable governors to draw opportunity zones in ways that would include projects or businesses just outside poor census tracts, potentially creating jobs for low-income people. In addition, states could designate whole sections of cities or rural areas that would be targeted for investment, including some higher-income census tracts. In some cases, developers have lobbied state officials to include specific plots of land inside opportunity zones.

In Miami, for example, Mr. LeFrak — who donated nearly $500,000 to Mr. Trump’s campaign and inauguration and is personally close to the president — is working with a Florida partner on a 183-acre project that is set to include 12 residential towers and eight football fields’ worth of retail and commercial space. In spring 2018, as they planned the so-called Sole Mia project, Mr. LeFrak’s executives encouraged city officials in North Miami to nominate the area around the site as an opportunity zone, according to Larry M. Spring, the city manager. They did so, and the Treasury Department made the designation official. The Far West Side of Manhattan is part of an opportunity zone — even as high-end towers have been replacing run-down apartment buildings and more than 15 percent of households reported income of $200,000 or more in 2017, according to an analysis by Webster Pacific, a consulting firm. This is the new home of Pershing Square Capital Management, the prominent hedge fund run by the billionaire Bill Ackman.

Mr. Ackman is trying to find tenants for 80,000 square feet of unused office space in his fund’s building, which has a Jaguar dealership on the ground floor. He said he was using its location inside an opportunity zone as a lure. That is because investors can use their capital gains to invest not only in real estate but also in businesses inside opportunity zones. A company that sets up shop inside Mr. Ackman’s building therefore would be eligible to accept tax-advantaged opportunity-zone money. One of the Sole Mia partners is Richard LeFrak, who donated nearly $500,000 to President Trump’s campaign and inauguration.CreditScott McIntyre for The New York Times Financial institutions are not even trying to make it look as if their opportunity-zone investments were intended to benefit needy communities. CBRE, one of the country’s largest real estate companies, is seeking opportunity-zone funding for an apartment building in Alexandria, Va., which CBRE is pitching to prospective investors as “one of the region’s most affluent locations.”

JPMorgan Chase is raising money to build housing targeting students in College Park, Md., near the University of Maryland. (Because many students do not have jobs, census data often wrongly suggests that college towns are poor neighborhoods.) In marketing materials, JPMorgan noted that while College Park “qualifies as low income due to the student population, the area around it is affluent.” The bank added, “The tax benefits can be remarkable.”

The Swiss bank UBS is raising funds from its “ultra high net worth” clients — requiring in some cases that they have at least $50 million in investable assets — for developments in New York and Connecticut. The projects include a 23-story retail and office building in Downtown Brooklyn and an upscale apartment building in New Rochelle, N.Y., with a yoga studio and 24-hour valet parking. There is even a spa — for residents’ pets. Other companies have set up subscription databases showing which zones have the highest incomes and fastest-growing populations to help investors steer their money to the most lucrative and least risky destinations. “The current system is clearly driving capital to places that are known to be winners,” said Christopher A. Coes, vice president at Smart Growth America, a nonprofit group that encourages investments in American cities.

Luxury Hotels, Abandoned Homes

This street in New Orleans became part of an opportunity zone after a hotel in the Virgin chain had already been planned there.CreditAkasha Rabut for The New York Times The Warehouse District of New Orleans is one of the city’s trendiest neighborhoods. Some of the area’s hottest restaurants — as well as a new one dishing out shrimp tempura tacos — are here. So are hipster barbershops. Boutique hotels spill well-heeled tourists onto the red brick sidewalks. High-end coffee shops are packed with young people buried in their MacBooks. And it is getting hotter. The sounds of heavy-duty equipment heaving steel or pouring cement are audible across the neighborhood. In other words, in a city grappling with acute poverty, this is not a neighborhood that especially needs a generous new tax break to lure luxury lodging. Yet state officials have established an opportunity zone here. That decision benefited businesses already operating or planned for the district. One of those is a 225-room hotel, part of Richard Branson’s Virgin Hotels chain, whose plans were unveiled a year before Mr. Trump signed the tax law. Its location inside an opportunity zone meant investors could earn greater profits than they otherwise would have, by financing the project with tax-advantaged money.

Those investors include Mr. Scaramucci, who briefly served as White House communications director in 2017 and has claimed credit for helping to create the opportunity-zone plan. “We got to get into this business because this will be transformative to the United States,” he said recently. Mr. Scaramucci’s investment firm, SkyBridge Capital, has raised more than $50 million in capital gains from outside investors, and most of it is being used to finance the hotel, according to Brett S. Messing, the company’s president. He said the hotel was likely to be the first of numerous opportunity-zone projects financed by SkyBridge. The Virgin Hotels construction site in New Orleans. Because of the zone, the 225-room hotel can be financed with tax-advantaged money. Less than two miles away is the poorest opportunity zone in Louisiana — and one of the poorest nationwide. The zone includes the Hoffman Triangle neighborhood, where the average household earns less than $15,000 per year. Block after block, streets are lined with dilapidated, narrow homes, many of them boarded up. On a recent afternoon, one of them was serving as a work site for prostitutes.

City officials, including the head of economic development for New Orleans, said they were not aware of any opportunity-zone projects in this neighborhood. Terrance Ross, a construction worker who has lived in the area for 20 years, is familiar with the building boom underway in the Warehouse District. “Why is the federal government putting money where money is already accumulating?” he asked, lighting a cigarette and standing across the street from an abandoned house. “This neighborhood just needs some tender loving care.” Similar scenes are playing out in opportunity zones across the United States: The federal government is subsidizing luxury developments — often within walking distance of economically distressed communities — that were in the works before Mr. Trump was even elected president. In Houston, construction recently started on the Preston, with 373 “luxury for rent” apartments as well as a “skydeck” and a resort-style swimming pool. The development is being financed by the investors in Cresset, a multibillion-dollar asset management firm, including one of its founders, Avy Stein.

And in downtown Portland, Ore., the developers of a 35-story tower with a hotel, condos and office space are hoping to raise up to $150 million in opportunity-zone money to pay for the project. Condos will go for as much as $7.5 million each. The hotel is a Ritz-Carlton.

Partying at Red Square

Exhibits at Mr. Scaramucci’s investment conference in Las Vegas, where opportunity zones were discussed as the next big thing. Club music blared from speakers as millionaires and billionaires — and the money managers, lawyers, accountants and other professionals looking to make money off all this wealth — milled around a pool and private cabanas at the Bellagio hotel in Las Vegas. They were at an annual investment conference to talk about the next big thing. This year, that thing was opportunity zones, which were the focus of five panel discussions. The Las Vegas event was hosted by Mr. Scaramucci. Among the attendees was Mark Cuban, the billionaire owner of the Dallas Mavericks basketball team. At one point he posed and smiled for a photo with Mr. Scaramucci and his wife.

“OZ are super hot right now,” Mr. Cuban said in an email after the event, adding that he had recently bought a property in an opportunity zone, but had not yet decided if he would use the tax break. “Every major investor I know has been pitched a property or fund within an OZ.” The feeding frenzy is not confined to rich individuals. Lawyers, accountants, wealth managers and consultants are enjoying a gusher of new work — and raking in fees — helping clients structure deals with the maximum tax savings. Real estate lawyers like Brad A. Molotsky are billing hundreds of extra hours as they field calls from eager investors. One day in June, Mr. Molotsky juggled clients who wanted to invest in $500 million worth of opportunity-zone projects.“I am just one guy, and that was from just two meetings,” said Mr. Molotsky, who works in New Jersey for the law firm Duane Morris. He has completed more than 20 opportunity-zone deals, he said, and has dozens more in the pipeline.

The night after Mr. Scaramucci’s pool party, more festivities were underway on the other end of the Las Vegas Strip — part of a separate event also focused on opportunity zones. One party was at the Soviet-themed Red Square restaurant. Inside, an investor handed out postcards with photographs of buildings he wanted to buy in opportunity zones. At another open-bar soiree, a man in a navy suit and a cowboy hat wandered the crowd, drink in hand. Attached to the top of his hat was a large sign. It beckoned: “Looking for OZ Funds.”

That readers is just one episode of how the Trumps have excited those one percenters who truly don’t care about his unsavory antics as long as he produces billions for their pockets