Across Ohio, money has been pouring into Opportunity Zones, federally blessed places where investors can delay and reduce their tax payments on capital gains.
And more of those investors are taking advantage of a related state tax-credit program, according to public records. In early 2023, the Ohio Department of Development issued $42.2 million worth of tax-credit certificates tied to investments in Opportunity Zones. That’s up from $26.2 million in credits a year before, due in part to a temporary funding expansion.
Lawyers and consultants say the credits are helping to lure out-of-state investors to the Buckeye State. They’re enabling developers to put more money into everything from downtown Cleveland apartment towers to revival efforts in smaller cities like Elyria and Painesville. But high interest rates, a rough real estate landscape and a lending pullback could dampen that activity.
Even as proponents lobby to further grow the program, the demand outlook is murky.
“There’s more investors than ever contacting us,” said Mike Sikora, a Cleveland attorney whose firm facilitates Opportunity Zone deals. “There’s more developers than ever contacting us. The developers working with us are pursuing more OZ deals than they’ve ever pursued.”
But, he added, “what they are actually able to get done is just going to be dependent on market forces.”
The federal Opportunity Zone program, designed for investors looking to save on capital gains taxes, is opaque. It’s tough to track where the money is flowing. Ohio’s tax-credit program is more broadly accessible – and transparent. Crain’s analyzed data from the Ohio Department of Development’s annual report and other public records to get a sense of the landscape.
In the spring, investors received tax credits for putting $441 million into nearly 170 Ohio projects and businesses – more than 50 of them in Northeast Ohio. Collectively, those projects drew more than $1 billion in equity from special Opportunity Zone funds, state records show.
Most were real estate deals, ranging from land assembly to office renovations to a new subdivision. A few were companies, including the Cleveland Soccer Group, which aims to bring professional soccer and a new stadium to the city.
In Cleveland, a string of Opportunity Zone projects stretches from Ohio City and Tremont through downtown and out to University Circle. But there’s also activity in the suburbs, in Brook Park, Bedford Heights and Garfield Heights. There are deals in Akron, Canton and Barberton.
State officials recently processed another $21.6 million in tax-credit certificates to fulfill requests submitted in July, in the program’s first mid-year application round. The next wave of applications will be due in January, when officials will put roughly $28.4 million up for grabs.
“I think it encourages investment – and it works,” said Terry Coyne, a real estate investor and broker in Cleveland. “The state of Ohio credits are probably among the best in the country.”
He received credits early this year for putting money into an office-renovation project in Ohio City. The modest brick building, on Lorain Avenue, is leased to an internet service provider.
City Club Apartments, a Detroit-area developer, has made heavy use of the Opportunity Zone program on large downtown projects in Cleveland and Cincinnati. State records show that Michigan investors plowed more than $37.4 million into those deals last year alone.
In addition to federal tax benefits, they’ve received millions of dollars in state tax credits. Many investors sell the credits and put the proceeds back into their projects, or into new projects, to take advantage of long-term savings on capital gains taxes. During the last round of sales, tax-credit buyers paid 80 to 90 cents on the dollar, experts said.
Jonathan Holtzman, the chairman and CEO of City Club Apartments, described the state incentives as “fundamental” to making his projects work in a challenging economic landscape.
“We’re dealing with high interest rates and inflation, which is putting incredible pressure on the ability to make one of these brand-new apartment communities economically viable,” he said. “So the state of Ohio’s programs play an important part of this capital stack.”
City Club’s Cleveland project, a 23-story tower that replaced a Euclid Avenue parking lot, contains 304 apartments. The first tenants are on the verge of moving in. The complex also will feature a dog daycare and spa, a French restaurant, a basement speakeasy and a café.
In Cincinnati, the City Club Apartments Union Central project will add 281 units to a 294-unit complex and merge two historic towers into one residential community. The development includes an infinity pool and neighborhood retail, such as a salon, a dry cleaner and a pet store.
“Of all the Midwest states, Ohio seems to be the most pro-business,” Holtzman said.
The federal government created the Opportunity Zone program in 2017 as a sweetener for investors who put money into real estate projects and businesses in economically distressed places. Across the country, state officials subsequently chose certain Census tracts to qualify for those investments. The federal program provides tax deferral and savings to investors who want to shelter profits from the sale of other assets, such as stock, bonds or real estate.
In 2019, Ohio was one of the first states to create a complementary tax credit. The state program offers an income tax credit of up to 10% of an applicant’s investment in a project in an Opportunity Zone. Individual awards are capped at $2 million per biennium.
The investment does not have to involve redeploying capital gains.
The program picked up traction gradually. In 2022, the General Assembly temporarily doubled the pool of tax credits to $50 million in each fiscal year. Legislators also added a mid-year application round, allowing investors to apply for credits in January and July.
So far, investors have never hit the funding cap. But they’re coming close as the industry gets more comfortable with the program and the nuances of the federal and state rules.
“It was scary to start, but now I think people are understanding that you don’t need to use the federal structure in order to utilize the program,” said Alex Previts, an accountant and development finance manager at Project Management Consultants, or PMC, in Cleveland.
Ohio ranks ninth in the nation for Opportunity Zone investments based on the amount of equity raised, according to an August report from Novogradac, an accounting and consulting firm. And the state had the largest number of Opportunity Zone projects, by far. That’s likely due to the tax-credit program’s reporting requirement, which makes it much easier to track deals.
Similarly, Columbus, Cleveland and Cincinnati were the top-ranked cities in the nation by sheer number of projects. Cleveland ranked 18th in the country based on total equity raised.
PMC has worked with dozens of Opportunity Zone investors and manages a fund, with accounting firm Cohen & Co., to syndicate state tax credits. The fund buys credits from investors who don’t plan to use them and sells credits to wealthy individuals with liabilities to offset. “Appetite for the credits has increased,” said Ryan Sommers, PMC’s managing director of financial services. “We’ve never not sold all of our credits within 30 days of an award.”
But Sommers believes Opportunity Zone investment activity has peaked, for now.
“We see it decreasing based on the dislocation of the credit markets and the overall banking environment right now,” Sommers said. “The credit’s a catalyst, but it’s not going to make a deal that doesn’t pencil financially … move forward.”
Green Harvest Capital, an Akron-area apartment landlord, has made use of the state tax-credit program to buy and renovate older buildings, according to public records. The company is focused on modestly priced, workforce housing.
A related joint venture, Spark GHC, also tapped the state tax credits for its acquisition of the Hampton Inn Cleveland Downtown hotel. That property is being upgraded with a renovated lobby and refreshed rooms, said Bhavin Patel, a Spark GHC and Green Harvest principal.
“From a perspective of acquisition or capital improvement, everything helps,” Patel said of state and federal programs including Opportunity Zones. “We look at every variable.”
But it’s almost impossible to get loans for hotel projects. And Green Harvest’s apartment deal volume is down 95% from a year ago, Patel said.
“We’re pencils-down until there’s adjustment for various different asset classes,” he said.
Despite the macroenvironment, advocates are asking legislators to put more money into the state’s program. And they’re lobbying for other changes, including the addition of insurance companies and financial institutions to the list of eligible tax-credit buyers.
Today, users must be individuals, trusts, estates or pass-through entities. “I just don’t think there’s any way there’s going to be anywhere near enough to fund this program going forward,” said Sikora, who also is president-elect of NAIOP of Ohio, a commercial real estate industry group. He noted that the program’s annual cap is slated to fall back to $25 million after January.
“This is one of the bright spots in commercial real estate activity,” he said. “This is a program that has finally started to realize success and benefit from momentum.”
https://www.crainscleveland.com/real-estate/opportunity-zone-activity-grows-ohio-will-it-last
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