Real Estate Investors Exploit Communities of Color Through Tax Loophole

While low-income minority communities in the United States continue to struggle with financial marginalization, they are also subject to exploitation by developers luring wealthy investors into projects that provide little or no benefits to the community.

As the federal government tries to crack down on the misuse of a popular cash-for-visa program that awards wealthy foreigners a legal immigration status when they invest in economically distressed areas, the Trump administration’s recent tax overhaul opened another door for investors to exploit economically distressed areas.

Under the Republican-sponsored Tax Cuts and Jobs Act of 2017, investors can receive lucrative tax deferments for investments in federally delineated “opportunity zones,” and any profits they earn from these projects are tax free if they keep the money in these projects for at least a decade.

But early indications of this new tax break for the rich shows that much of this money is being used to fund luxury apartments and other projects in fashionable and gentrifying urban districts; low-risk investment in housing for college students who are categorized as economically poor; and commercial developments that employ a small number of workers. All of which provide marginal if any long-term benefits to the residents of economically distressed areas.

Without greater scrutiny into how these and other targeted investment zones are defined — and without thorough auditing of the impacts of these investments — real estate developers will continue to exploit economically downtrodden communities. Due to the enduring racial and ethnic wealth disparities in the United States, the exploited communities where the rich launder their investments are disproportionately in denser urban areas.

Some of the high-profile early beneficiaries of this federal tax subsidy include people hardly considered to be champions of the poor. They include New York hedge funder Antony Scaramucci, former New Jersey Republican Gov. Chris Christie, President Donald Trump’s son-in-law Jared Kushner, and Sean Parker, who made his fortune in Silicon Valley and played a key role in selling the idea of opportunity zones to lawmakers, including Democratic presidential candidate Cory Booker. Goldman Sachs said recently that its portfolio of projects eligible for the opportunity zone tax breaks has doubled over the past year.

While money is flowing into the low-income areas of cities like Birmingham, Alabama, critics argue that all too often developments occur in areas that are gerrymandered to manufacture the conditions needed to qualify for the tax breaks. These opportunity zones are drawn up using census tracts, which can include both poor and minority communities as well as affluent areas — especially in urban areas where the poor live geographically close (but economically distant) to the rich. Some of these zones have household annual incomes well above the national median of $63,179, or are areas where incomes were already rising before they were designated as “distressed.”

These zones include Houston’s downtown Market Square district that’s filling up with luxury condos, the tony Warehouse District of New Orleans with its boutiques and high-end restaurants, and Miami’s Design District where the tax break is being used to coax investment into a nine-story retail building whose developer admits was an attractive investment “regardless of any tax benefits associated with it.”

A study from the National Community Reinvestment Coalition — a Washington, DC-based organization that advocates for fairness in banking, housing and business — found that 69 percent of neighborhoods that gentrified between 2000 and 2017 are either located in an opportunity zone or are adjacent to one.

Defenders of the program argue that it’s too early to tell if these tax incentives are benefitting marginalized communities because early opportunity zone investments will naturally flow to the most lucrative low-risk luxury projects first before trickling down into higher-risk developments that will more directly benefit poor residents.

Regardless, the question remains: Should wealthy people — who already received a windfall of tax breaks from the Republican-sponsored tax reforms that went into effect last year — receive any federally subsidized benefits from investing in projects that don’t require an incenter and have marginal — if any — benefits to low income residents. Apparently, the answer is yes.

Even some opportunity zone investors themselves openly admit their projects are no brainers for investors, with or without the tax breaks.

“These markets are up-and-coming metro areas with population and job growth rates that, in many cases, are outpacing larger 24-hour cities such as New York and San Francisco,” Ian Formingle, vice president of investments at the Oregon-based investment firm CrowdStreet, told The Real Deal in September. CrowdStreet is one of many asset managers that have been setting up opportunity zone investment funds specifically targeting growing metro areas.

The U.S. Treasury Department has approved more than 8,700 census tracts as opportunity zones nationwide. However, according to The New York Times, early indications show that billions of dollars of federally subsidized investment money — supposedly aimed at helping thousands of economically marginalized communities — is flowing into a small number of low-risk, high-end developments in “up-and-coming” districts.

While still in its early stages, the opportunity zone tax break appear to replicate the problems that emerged from the cash-for-visa program that allowed wealthy foreign investors to fast-track their permanent US residency.

Known as the EB-5 Immigrant Investor Program, foreign families have for years been able to invest $1 million in qualified commercial enterprises that create or preserve at least 10 jobs in return for legal U.S. residency and a quicker path to citizenship. The investment threshold drops to $500,000 if the money is invested in qualified projects in rural and/or high unemployment areas.

But the way these investment zones — known as Targeted Employment Areas (or TEAs) — were created in the same manner as the opportunity zones. TEAs were gerrymandered to direct these investments into luxury projects by including low-income areas. One of the most striking examples of how poor, minority communities have been exploited by targeted investments is the $25 billion Hudson Yards project on the west side of Manhattan.

The Hudson Yards TEA was gerrymandered through Central Park to include five uptown Harlem public housing projects. Without their knowledge, these Harlem residents were exploited by real estate developers to help raise funds for a cluster of high-end apartments and luxury retail stores in one of the most up-and-coming areas of Manhattan.

“Hudson Yards ate Harlem’s lunch,” declared CityLab reporter Kriston Capps who wrote about the issue earlier this year.

A Congressional Research Service report from 2016 said the government has struggled to measure the efficacy of the EB-5 program and that the methodologies used to measure jobs created by these investments have been called into question by the Department of Homeland Security and the US Government Accountability Office.

As a result of this and other scrutiny, U.S. Citizenship and Immigration Services will implement new rules starting in November, some of which will address the “gerrymandering” of high-unemployment areas. “Gerrymandering of such areas was typically accomplished by combining a series of census tracts to link a prosperous project location to a distressed community to obtain the qualifying average unemployment rate,” the USCIS says on its website.

But just as the federal government is trying to close the door on the gerrymandering of TEAs, another door appears to be opening through opportunity zone tax breaks.

At face value, there are good arguments for providing incentives to wealthy people to pour money into poor areas. Low-income communities — that are disproportionately populated by racial and ethnic minorities — certainly could use good-faith financial investment in their communities to provide safe and affordable housing and commercial opportunities beyond pawn shops, payday lenders, dollar stores, and low-paying service-industry jobs.

But if investors truly want to put their money to good use in helping these communities, they need to look past the PowerPoint presentations of asset managers and real estate developers and look to projects that really do help — rather than exploit — low-income minority communities.

About the Author

Angelo Young is a NYC-based reporter, editor, and writing coach who enjoys pondering world events and idle chatter on the subway. He has more than a decade of news editing experience with bylines in Newsweek, International Business Times, Salon, Arab News, The Daily Star (of Lebanon), Mexico Business magazine, The News (of Mexico City) and The Oklahoma Daily.