Amazon is coming! After months of national jockeying and speculation, Amazon announced on November 13, 2018, that Long Island City, NY will be one half of its planned HQ2. While opposing sides debate the cost versus value to the taxpaying residents of LIC, New York City and New York State, the fact remains that most of the land planned for the LIC HQ2 is in an Opportunity Zone.
As a result of the location selection and a December 12, 2018 executive order requiring 13 federal agencies to focus on promoting and facilitating the Opportunity Zone program, there will be great interest in utilizing the program for the construction of Amazon’s LIC headquarters. In addition, developers in the surrounding neighborhoods of Queens, Brooklyn and the Bronx will be interested in using the program for building projects that cater to the influx of additional Amazon employees and for related businesses.
The LIC HQ2 has been projected by the state and city to initially provide 25,000 jobs at an average salary in excess of $150,000. But the question remains: How will Amazon and the developers for surrounding businesses utilize the Opportunity Zone program?
Developers with shovel-ready, or close to shovel-ready projects, can immediately utilize the Opportunity Zone program to provide an additional benefit for their investors that have realized capital gains to place. They can raise equity from investors that have realized capital gains at a discount when factoring in the quantifiable amount of the tax benefits provided to such investors from the program.
Furthermore, since the LIC HQ2 will be a long-term generational development, there will be less of a concern over the 10-year hold period. There is a built-in growth factor simply from having the LIC HQ2 in Long Island City. While deal structures will vary in complexity, these types of projects and businesses fit well within the intention of the Opportunity Zone program by providing capital to distressed low-income communities for the long-term.
Even if a developer elects to sell its completed project, the investor’s Opportunity Zone fund will most likely have to promptly re-invest the received proceeds from the sale into another Opportunity Zone property or Opportunity Zone business. This is “most likely” because the Treasury Department has not yet offered guidance on the effects of and requirements following the sale of an Opportunity Zone property or Opportunity Zone business during the 10-year hold period.
Without knowledge of the plans for the LIC HQ2, we can assume that it will be a large, generational development project with at least several buildings that will be constructed over approximately 15 years. So, if Amazon is planning on utilizing third-party investor equity within the Opportunity Zone program (most likely excluding themselves as a “related party”) they will need to compartmentalize the overall development into short-term/immediate-future and long-term/distant-future buildings.
Due to the time constraints already present in the Opportunity Zone regulations, the long-term buildings can be disqualified barring new regulations that extend such time constraints. In order for the short-term buildings to qualify, each building will effectively have to be constructed as its own singular project with its own three prong-safe harbor test in order to distribute its applicable working capital appropriately over 31 months. This could include designating its plan for acquisition, construction and/or substantial improvement in writing, providing a reasonable written schedule for the project and utilizing the working capital in a matter substantially consistent with the plan and schedule.
Considering the scope in size and timing anticipated for the LIC HQ2 and the control that Amazon will want over the construction of the headquarters, it seems unlikely that Amazon will bring in third-party investors that can utilize the Opportunity Zone program. Unless Amazon can structure a near-term shovel-ready construction project to utilize its own independently realized capital gain without disqualifying itself as a “related party,” it seems unlikely that Amazon will utilize the program in building their LIC HQ2.
However, the developers and businesses nearby and in the surrounding neighborhoods that can benefit from and provide for the influx of activity will be able to take full advantage of the Opportunity Zone program. As intended, in turn, they will spur investment in the neighboring distressed communities.
Expect a lot of building.