How Amazon’s Booming NYC Neighborhood Got Tax Perks Meant for the Poor

(Bloomberg) -- The Inc. executives looked battered after more than an hour of questioning last week about their plans to build an office in New York. City Council members thrashed the retailer for its resistance to unions, working conditions at warehouses and its founder’s wealth. The responses drew laughter from the balcony.

So when Jimmy Van Bramer, who represents the Queens neighborhood where Amazon decided to locate its new office, raised the issue of a suite of generous tax breaks the project was eligible for, it was an opportunity to offer a satisfying answer.

“We will not be using the opportunity zone on this project,” Holly Sullivan, Amazon’s head of economic development, said at the Jan. 30 hearing.

The Washington Post reported Friday that Amazon is reconsidering its plan to bring 25,000 jobs to New York in the wake of opposition from local politicians, citing people familiar with the company’s thinking.

For those involved in luring the company to New York, last year’s designation of a relatively prosperous strip of Long Island City as an opportunity zone had become a headache. After Bloomberg reported in November that the project was eligible for incentives designed to spur investment in poor areas, it became a prime example of public policy gone awry. Starwood Capital Group Chairman Barry Sternlicht, who’s raising $500 million to invest in low-income areas, called giving a tax break to Amazon “abhorrent.”

Van Bramer turned to James Patchett, chief executive officer of the New York City Economic Development Corp., which led the city’s efforts to win the Amazon bid. Patchett’s team had expected to be celebrated for bringing 25,000 new jobs to the city, according to two people familiar with the matter. But they misjudged the political climate and have been been defending the deal for months. Van Bramer wanted to know how the zone, picked at the same time the city was negotiating with Amazon, came to be.

How Amazon’s Booming NYC Neighborhood Got Tax Perks Meant for the Poor

“The state were the ones who were responsible for recommending opportunity zones,” Patchett said, explaining that the list wasn’t submitted to the U.S. Treasury Department for approval until April 2018, before any Amazon executives made site visits.

Patchett’s statement was both true and incomplete. While the state recommended the zones to Treasury, Patchett’s chief of staff, James Katz, played a crucial role behind the scenes, proposing city neighborhoods deserving of the tax breaks to the state in early 2018. The suggestions made by Katz included census tracts that contained properties he’d pitched to Amazon months earlier, according to four people familiar with the process. One of them covered the booming Long Island City waterfront.

How Amazon’s Booming NYC Neighborhood Got Tax Perks Meant for the Poor

Katz’s recommendations were incorporated into maps used in the formal review process to pick the zones, the people said. When New York Governor Andrew Cuomo, a supporter of the Amazon bid, submitted the state’s list to Washington, the potential sites were included.

“Together with city and state agencies, we ran a data-driven process to prioritize outer-borough areas with the potential for job creation and affordable housing investment,” said Stephanie Baez, a spokeswoman for Katz and the Economic Development Corp., a nonprofit organization whose board is appointed by the mayor. Kristin Devoe, a spokeswoman for the state agency charged with selecting sites, Empire State Development, said recommendations were based on local input and the ability to attract investment. “This was a data-rich, regionally focused process,” she said, “and all nominated tracts were subject to federal approval.”

How Amazon’s Booming NYC Neighborhood Got Tax Perks Meant for the Poor

This account of how New York, one of the world’s most important real estate markets, picked its opportunity zones, is based on conversations with more than 20 state and city officials, developers and others familiar with the process. Many agreed to speak only on condition of anonymity to talk about decisions that sparked a political firestorm.

The rush to pick zones played out in some form in every state. The program, part of President Donald Trump’s December 2017 tax law, didn’t register for many until two months later, when the Internal Revenue Service issued its rules. States had to make their picks, which could shape how and where developers invested for a decade, no later than April 2018.

Investors who develop real estate or fund businesses in the 8,700 census tracts that were eventually chosen for the program are able to defer capital-gains taxes on profits earned elsewhere and completely eliminate them on new investments.

How Amazon’s Booming NYC Neighborhood Got Tax Perks Meant for the Poor

As in other states, most of New York’s 514 tracts are impoverished, with more than 20 percent of the population living below the poverty line. But a few outliers, such as the Long Island City tract, stand out. The poverty rate there is less than 10 percent and the median household income is about $137,000, higher than any other opportunity zone in the state, according to the most recent census data. Another zone the city pitched to Amazon, which includes the Brooklyn Navy Yard, also has one of the highest household incomes among the selected tracts. 

Because the tax benefits are tied to capital gains incurred when assets rise in value, critics worry that these gentrifying neighborhoods will receive the lion’s share of new investment and that the tax perks will go to projects that would have been developed anyway. Because states could only pick a fixed number of tracts, selecting a gentrifying zone meant a poorer area would be left out.

How Amazon’s Booming NYC Neighborhood Got Tax Perks Meant for the Poor

Amazon’s headquarters competition was occurring in tandem with the selection process. By January 2018, the company had narrowed its options to 20 municipalities. Some were assembling subsidy packages more than twice the size of New York’s. The city wanted to stay competitive, but its hands were tied by a promise made by Mayor Bill de Blasio not to craft tailor-made subsidies.

The state had no such compunctions. Months later, describing New York’s “very strong” incentives, Cuomo joked about changing his name to “Amazon Cuomo” to win the bid.

The task of sorting through more than 2,000 low-income census tracts in such a short time fell largely to Pravina Raghavan, an executive vice president at the state agency who had built a reputation for savvy targeting of investments.

The time crunch meant local input was welcome. After the IRS regulations were issued, a call was arranged with city officials, including Katz, who nominated about 300 zones, according to the people familiar with the process. New York had pitched four sites to Amazon in October 2017. Two were developed areas in Manhattan. The others—in Queens and Brooklyn—were gentrifying zones that Katz would recommend for the tax breaks.

The state agency sent its selections to the New York Regional Economic Development Council, a group of local business and government leaders, for review. The suggestions didn’t raise eyebrows because both tracts had long been targets for public investment, which had helped spur their growth. Council members who spoke with Bloomberg said they had scant insight into the Amazon negotiations.

“I don’t recall that conversation even coming up,” said Kathy Wylde, CEO of the Partnership for New York City and a council member. “It would have been on our lists already, just because the area was primed for investment and redevelopment. At that point, I don’t think we really thought we were getting Amazon. Only the most optimistic really thought that.”

Two officials with the Economic Development Corp. said the Long Island City tract met all their criteria. It overlapped with an area targeted for manufacturing growth, was close to an academic institution and had received previous public investment.

Many in New York saw something different: rampant gentrification. More apartments were built in Long Island City in 2017 than in any other New York neighborhood. Still, the census tract qualified under the IRS guidelines because it’s near poorer areas.

“I don’t feel the program is functioning as intended,” said Michael Gianaris, who represents the area in the New York state senate and has introduced legislation that would prevent developers from taking advantage of a similar break on their state taxes. “It would be different if it were helping genuinely distressed communities.”

Cuomo submitted the zones to Treasury in April, the same month city officials led Amazon executives on a tour of the proposed sites. After Treasury approved the state’s selections in June, Amazon became much more interested in Long Island City, according to two people familiar with the process. It wasn’t until the fall that the company focused on a waterfront site in the opportunity zone, the people said.

When the deal was announced in November, it faced criticism, and not just because of the hefty price tag—more than $2.5 billion in potential subsidies, almost all from the state. The governments also agreed to bypass the routine land-use review process, and the site Amazon picked was the same one where the city had been planning to build 5,000 apartments and a school.

Even the organization backed by Facebook Inc. billionaire Sean Parker that had pushed the tax breaks into being described the zone as a one of the nation’s “unfortunate outliers.”

Now that Amazon has promised not to use the tax breaks, focus has shifted to others eager to develop the neighborhood. And Amazon could still benefit indirectly. A development partner could claim the tax break, then rent space to the retailer at a discounted price.

Plaxall Inc., which owns the privately held portions of the development site, has said it won’t seek the tax breaks. Jodi Seth, a spokeswoman for Amazon, didn’t respond to questions about whether the opportunity zone designation had been a factor in the company’s choice of site or why it decided not to take advantage of the program.

©2019 Bloomberg L.P.

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