When the Opportunity Zone program became law as part of the 2017 Tax Cuts and Jobs Act it brought with it hope for investors and low-income communities. But now that 2019 is well underway, has the opportunity zone program resulted in new projects in the Midwest?
The short answer is “yes.”
The program offers investors financial incentives to bring private capital to those low-income areas designated as opportunity zones. The hope is that this new program will bring much-needed capital to communities that have long struggled to attract investors.
One project now underway in the Minneapolis market is a good example of what the Opportunity Zone program is supposed to accomplish.
McGough has started construction on The Fenley, a 402-unit multi-family complex at Bloomington Central Station in Bloomington, Minnesota. The high-end apartment project is the third multi-family development on the company’s 50-acre master planned site, which has sought to revitalize and create a new mixed-use community in Bloomington’s previously underutilized South Loop District.
The Fenley is one of the first ground-up development projects to be built in Minnesota under the new Opportunity Zone tax program established by the Tax Cuts and Jobs Act of 2017.
David Higgins, vice president of development with McGough, said that the Opportunity Zone program played a key role in the project.
“It was absolutely a meaningful catalyst for getting our financing closed,” Higgins said. “That is particularly because of the size of our project. At 402 units, we are well above the typical size of a multifamily project in this market. When you do a project that is meaningfully larger than is typical in a market, you narrow the number of investors who might be interested in it.”
Higgins said, though, that the financing portion of The Fenley project moved quickly once the Opportunity Zone program was announced. McGough is now working with an equity partner that had held off on investing in the project until the Opportunity Zone program became law.
“Once the partner realized that the whole South District was in an Opportunity Zone, they came back to the table really quickly,” Higgins said.
Project entitlements were approved last spring and a tax increment financing subsidy was approved jointly by the Bloomington Port Authority and City Council in October 2018. Debt financing was provided by The Northwestern Mutual Life Company. A total of 10 percent of the units at the Fenley will be priced at 80 percent Area Median Income affordable rents with the remaining at a high-end market rate.
Higgins said that he expects the Opportunity Zone program to bring new developments to underserved areas across the Midwest. The biggest challenge? There are a limited number of investors for whom this program will work.
“This requires a special type of investor,” Higgins said. “It’s not a small population, but it’s not for all investors.”
Why? To get the greatest benefit out of the Opportunity Zone program, investors have to hold onto their investments for 10 years. That’s not something every investor wants to do. Higgins said that many investors look to exit their investments after seven years. Some want to exit after just three or five years.
“This program doesn’t work for them,” Higgins said.
The Opportunity Zone program is now making a difference at Bloomington Central Station.The Fenley, designed by ESG Architecture and Design, will feature such amenities as a pool patio with grill stations, bocce court and lounge spaces; top-floor sky-lounge with viewing deck; fitness room with a yoga studio and sauna space; community and party room; work-from-home café lobby space; parking garage with tenant stalls matching the floor of their unit; and a park-side courtyard with supportive ground floor retail space.
The project is located within walking distance of two stops on Metro Transit’s Blue Line Light Rail Transit System. It also offers convenient access to freeways and is near regional amenities such as the Mall of America, Minneapolis-St. Paul International Airport and the Minnesota Valley National Wildlife Refuge.
Higgins said that the Opportunity Zone program should help other developers take on projects similar to the Fenley, both in the Minneapolis-St. Paul area and across the Midwest.
“Sometimes attention makes a difference,” Higgins said. “The Opportunity Zone program is a way to bring more attention to areas than they otherwise would have gotten. It takes neighborhoods that couldn’t get on anyone’s radar and makes them more attractive. There are other Opportunity Zones in areas that are in a more intermediate state. They would get investments, but it might take longer to make the case for them. The Opportunity Zone can help these areas attract investors much faster.”
The Fenley is the newest result of a long-standing collaborative partnership between McGough and the City of Bloomington, which began with the original acquisition and master planning of the Bloomington Central Station site and included the establishment of a tax increment finance district to further boost the area’s redevelopment.
Upon the project’s completion, McGough will have driven the development of 1,060 housing units on the site, providing new housing opportunities within the City’s South Loop District, ranging from condominium homeownership to market rate rental and affordable unit rental opportunities.
The site is also home to HealthPartners’ and Ceridian’s corporate headquarters offices and a full-service Hyatt Regency hotel. An additional 1.9 million undeveloped square feet is available for commercial and related uses.
Higgins says that the Fenley project is a unique one in the Twin Cities market, one that offers plenty of benefits for its residents.
“It’s just this little urban hub, a mixed-use community where all the pieces are falling into place,” Higgins said.