Maryland's Opportunity Zone Tax Incentives Have Drawn Little Interest

A lack of applications for Maryland tax incentives offered to companies in the state's Opportunity Zones highlights the limitations of the federal program to steer investment to operating businesses in economically downtrodden areas.

While doubts about Opportunity Zones' ability to lure investment to operating businesses emerged at the program's inception, Larry Hogan, Maryland's governor at the time, tried to rectify those shortcomings. The state focused incentives on boosting operating businesses in its 149 Opportunity Zones by providing loans and tax credits tailored to active enterprises. 

However, businesses have shown little interest in those incentives.

Of the five tax credits offered by the state, and monitored by its Commerce Department, four have received zero applications, a Commerce Department spokesperson told Bisnow. A fifth tax credit for biotech companies attracted five applications — four were awarded — in the past two fiscal years. 

Venable partner Elizabeth Stieff, an attorney who works on Opportunity Zone deals, said Maryland's tax incentives haven't generated interest because they didn't focus on the part of the program generating the most activity: real estate development.  

"Although the federal OZ program is available for real estate and operating businesses, we have seen the most success with real estate projects," Stieff said in an email. "So I think it’s an issue of alignment — most OZ projects are real estate focused but the MD OZ incentives largely are not applicable to real estate projects."

Federal legislators created the Opportunity Zone program as part of the Tax Cuts and Jobs Act of 2017. At the time, its architects hailed the initiative as an innovative approach to alleviate economic inequality. 

More than $34B has been raised to deploy into Opportunity Zones, but the level of economic impact it has had in disadvantaged areas remains unclear. Experts point to anecdotal examples of real estate developments in the areas that wouldn't have moved forward without the program, but they say that the larger disruptions in the financing market has slowed those down over the last year. 

And for investments in operating businesses in these areas, experts say the program hasn't spurred the level of investment that backers touted. 

"I have not seen a lot of businesses take advantage of [Opportunity Zone investments] that are operational businesses," Stieff said. "Other than one-off questions about whether or not a particular business would qualify, almost everything we see is real estate."

Jill Homan, president of real estate firm Javelin 19 Investments, develops and invests in Opportunity Zones, including the mixed-use Prosper on Fayette project in Baltimore. She said the states that have benefitted the most from Opportunity Zones did so by combining two approaches: dedicating resources to attracting investment into the areas and offering their own tax incentives.

States like Alabama and Ohio were among those that achieved these heightened benefits from Opportunity Zones, Homan said. While Maryland provided some additional resources, she said it could have leveraged its enhancements further.   

For example, she said Ohio and Alabama "twinned" their state capital gains tax with federal capital gains taxes and paired those inducements with additional tax incentives. As a result, they reaped the benefits.  

"Absolutely, the states that have prioritized opportunities are really seeing significant benefits," Homan said.

While investors have shown less appetite for backing operating businesses in Maryland, funding for real estate projects has been more attainable.

There is no comprehensive data on investment in Maryland Opportunity Zone real estate projects, but there is anecdotal evidence the program spurred development that may not otherwise have happened.   

Urban Atlantic Managing Partner Lois Fried said The Stella at the New Carrollton Metro in Prince Georges County was her firm's first project in an Opportunity Zone. While Fried said her firm would've tried to piece together financing for The Stella without Opportunity Zone-enabled backing, she acknowledged that investment made the project a reality.

"UA went into the market for conventional and OZ Investors; however; the only Investors who responded to the Stella opportunity were OZ investors," Fried said in an email. "The tax benefits allowed the OZ Investors to analyze the property on a 10-year hold basis, which gave the Investor the ability to hold the property as the entire New Carrollton community was being developed. This allowed value to be developed over time."

In Homan's experience, she said Opportunity Zones lured investment to areas of the country, such as Huntsville, Alabama, that only attracted funding with the program. That is primarily because the program's benefits give investors a chance to earn higher returns — about 400 basis points higher — compared to other investment types, she said. 

She said the anecdotal evidence so far is enough to show that Opportunity Zones have spurred development that wouldn't have occurred without the program. 

"The numbers demonstrate that the mechanics of what OZs were supposed to do, which is bring capital to these areas, is doing that," Homan said. 

Local real estate projects also attracted more investment because the structure of the Opportunity Zone program gives real estate projects an advantage in attracting funding. 

The most significant benefits for Opportunity Zone investors are for backers who maintain their investments for a decade. According to the Tax Policy Center, investors who keep an investment in an Opportunity Zone for 10 years don't pay capital gains taxes on the profits from the investment. 

As a result of the time investors must maintain their funding to earn maximum benefits, combined with lower risk compared to backing an operational business, most Opportunity Zone investment has flowed to real estate projects.  

However, attracting new real estate investment to Maryland's Opportunity Zones is getting harder. Dwindling benefits of investing in Opportunity Zones, a sagging economy and rising interest rates have substantially slowed interest in Opportunity Zone investing.

As a result of those factors and the limited number of locations designated as Opportunity Zones, Fried said Urban Atlantic doesn't have any Opportunity Zone projects in the pipeline.

"Rising interest rates and construction costs make the economics of new deals today difficult," Fried said.  

While investments in Opportunity Zones are flagging, Homan said a few things could breathe new life into the program in Maryland and elsewhere. She said the ideal situation would be for Congress to approve the Opportunity Zones Improvement, Transparency, and Extension Act.

Passing that legislation would boost the Opportunity Zone program and renew activity because it extends the tax benefits from the original Opportunity Zone legislation that are set to expire. However, that bill was introduced over a year ago and killed in committees in both houses. 

"It reminds me of ... there's the spray that you can spray on produce that's going bad, and it kind of makes it good again," Homan said. "It just kind of reminds me of that where you take that, and then you kind of spray it on [the produce]."