Amazon's Potential NYC Home Bolstered by Trump's Tax Breaks

(Bloomberg) -- Long Island City was preparing for its breakneck development to pick up speed even before news that Amazon.com Inc. may move in.

Earlier this year, much of the neighborhood was designated as an “opportunity zone,” a classification that comes with a suite of generous tax benefits for real estate developers. If Amazon selects the neighborhood for a major new North American campus, as is widely expected, it’ll bring thousands of new, highly paid employees to the area and create a unique and irresistible combination for New York City builders.

“We’ve been seeing so much activity in Long Island City,” said Jessica Millett, co-chair of the tax department at Duval & Stachenfeld LLP, a law firm. “The opportunity-zone activity ramps it up a level. Amazon threw fuel on that fire -- my phone started exploding.”

Amazon's Potential NYC Home Bolstered by Trump's Tax Breaks

At the center of both decisions is New York Governor Andrew Cuomo, who joked with reporters Monday he’d even change his name to “Amazon Cuomo” to win over the internet giant. Cuomo’s administration, expected to grant the company a bevy of concessions to open an office hub there, was also charged with picking New York’s opportunity zones.

The incentives were a little-known provision of the Republican tax overhaul that President Donald Trump signed into law late last year. Since then, they’ve captured the attention of developers and government officials because they have the potential to make projects in long-neglected areas more enticing. Treasury Secretary Steven Mnuchin has estimated that $100 billion may eventually flow to the roughly 8,700 struggling communities scattered around the country that were selected by state governors and officials in U.S. territories.

Even so, many of the zones are in urban areas that are already experiencing rapid development. That raises the risk that they will increase profits for projects that real estate investors would have undertaken anyway and end up displacing existing residents.

Investors start by plowing capital gains from the sale of a business, stock or other asset into funds that target opportunity zones, deferring taxes until 2026 -- and potentially reducing their liabilities by as much as 15 percent. If the funds buy and hold qualifying businesses or property in opportunity zones for at least a decade, investors can avoid paying capital gains altogether on any of the appreciation.

Real estate developers are looking for high-growth areas where they can reap the largest rewards from these incentives. To qualify, they need to significantly improve the property they purchase. While rules are still being finalized by the federal government, many types of new development -- from towering residential towers to new office and retail space -- are expected to qualify.

Long Island City, once a decrepit post-industrial neighborhood, has seen billions in investment in recent years, driven in part by its proximity to Manhattan. Last week, Mayor Bill de Blasio announced another $180 million to improve the neighborhood’s infrastructure, including sewer upgrades and a new school.

It isn’t yet clear exactly where Amazon would situate its offices in the neighborhood, or if it would be able to take advantage of the tax breaks. But developers that build or renovate real estate for Amazon could potentially use the breaks, in addition to whatever deal-sweeteners offered by Cuomo to woo the tech giant. Either way, its decision will boost interest in the area.

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Already, political opposition to Amazon’s potential move is mounting, with calls to extract concessions from the tech giant and even levy a “gentrification” tax. Jimmy Van Bramer, a city council member who represents the area, said that not all his constituents are excited about the prospect.

“We need to know what Governor Cuomo and Mayor de Blasio have promised Amazon, and what Amazon has offered the city in return,” he said.

For Long Island City developers and brokers concerned about the abundance of planned apartments, Amazon’s an answer to their prayers. Almost 1,700 units were proposed and more than 4,500 were already under construction in the neighborhood, according to an April report by the Long Island City Partnership, an economic development group.

“Our concern in Long Island City has always been that a lot of new supply is coming online,” said Sunder G. Jambunathan, co-founder of Certes Partners, a developer. “There’s always been a question of: Is there enough demand? This solves that in a pretty direct way. It brings in demand. People who need housing, who need hotels, who need retail.”

Developers will want to act fast, though. The combination of tax breaks and a major new corporate campus could quickly drive up the cost of land and commercial real estate in the area, said Rob Wrzosek, a managing director at Berkadia, a mortgage lender backed by Warren Buffett’s Berkshire Hathaway Inc. and Jefferies Financial Group Inc.

“Once it’s officially announced, I think prices will go up,” Wrzosek said. “There was a lot of excitement about opportunity zones there already. The only holdback was the overall economic and real estate picture. But those concerns are gone.”

©2018 Bloomberg L.P.