Opportunity knocks for cities, but is there a hidden cost?
The Assembly Square section of Somerville has a lot going for it these days.
It’s home to one of the region’s busiest shopping centers, Assembly Row, along with one-bedroom apartments that go for $3,000 a month. Partners HealthCare moved more than 4,000 workers to a building there on top of a new Orange Line stop. Plans for nearly 5 million more square feet of office space are approved or are under review by the city.
And, soon, investors in Assembly Square could enjoy a federal tax break aimed at helping low-income neighborhoods. Despite the frenzied pace of development in this hot section of Somerville, it is one of 138 areas the federal government on Friday designated as “opportunity zones,” under a new program designed to spark jobs and development in places left behind by the economic recovery.
The program could bring much-needed investment to struggling corners of Massachusetts. But in booming markets like Greater Boston, some worry it will simply subsidize development that’s already happening, and could accelerate gentrification in some neighborhoods, increasing the chances that residents are pushed out.
“Some of these places already have a strong economy,” said Brett Theodos, a researcher at the Urban Institute who is tracking opportunity zones. “We could wind up subsidizing things that would have happened anyway.”
The program allows many real estate investors to avoid paying capital gains taxes on new projects in opportunity zones — enough to add a few percentage points to an investor’s bottom line and perhaps make a project profitable enough to build.
Because the program can be used for all kinds of real estate, from luxury condos to low-income housing, and is open to many kinds of investors, picking the right zones, experts say, is key to making the most of it.
On Friday, that process wrapped up, when the Treasury Department certified 138 zones that state officials proposed last month. That’s out of 584 tracts statewide that were eligible, based on income levels and poverty rates.
Nearly half of Massachusetts’ proposed zones are in poorer cities. There are three in Fall River, four each in Lawrence and New Bedford, and seven in Springfield. Another 20 percent are in rural areas.
Some, though, are sprinkled across Greater Boston, many in places that are already surging, thanks to the region’s long-running real estate boom — from the Alewife section of Cambridge to Bayside in Dorchester, Quincy Center, and downtown Malden.
That worries some people.
“This could be a very dangerous policy in high-growth, high-cost, areas,” said John Barros, Boston’s director of economic development. “It could just fuel gentrification.”
Boston was so concerned about supercharging the city’s already pricey real estate market that city officials considered not applying to the program. Ultimately, they proposed 14 census tracts — out of more than 100 that were eligible — to the state, mostly in places where the Boston Housing Authority or the city owns large pieces of land. They include the University of Massachusetts Boston campus, several tracts in and around Dudley Square, and public housing complexes in Charlestown and South Boston that the BHA is trying to redevelop.
“We can make sure the investments are being used for public benefits,” Barros said.
The tax breaks also could help finance some otherwise difficult projects, said Gilbert Winn, chief executive of WinnCompanies, which is partnering with the BHA to redevelop the Mary Ellen McCormack complex in South Boston. The $1.6 billion project is in an opportunity zone, and Winn’s firm is exploring how to make the most of it.
“We think it’s a perfect fit for Mary Ellen McCormack,” he said. “It will make things easier.”
Cambridge, too, hopes to use the opportunity zone program to boost affordable housing and has designated a census tract on the city’s western edge that includes several large low-income housing developments.
“That was our biggest focus,” said Iram Farooq, Cambridge’s assistant city manager for community development. “Preserving this affordable housing long-term has been a top priority.”
But the census tract in Cambridge straddles Fresh Pond Parkway, stretching across Alewife, where new housing and office and lab developments have fetched big rents in recent years.
Next door in Somerville, city officials picked tracts that encompass Assembly Row and Union Square, where billions of dollars in new development are planned over the next decade.
Despite the investments, said Tom Galligani, Somerville’s director of economic development, those areas still have major needs. The city’s master plan aims to funnel 85 percent of new development into these neighborhoods and old industrial areas nearby, a concentration of building that would require straightening tangled roads, rails, and other infrastructure.
“There are a ton of challenges in the areas we did choose,” Galligani said. “It’s not a fait accompli that development is going to spring up in all these places.”
And it’s not clear who might tap the program. The program’s rules are still being hashed out in Washington, and several major land owners in Somerville — including the primary developers of both Assembly Row and Union Square — and in other local opportunity zone tracts said they’re waiting for that process to wrap up before determining whether it makes sense to use, or if they’re eligible.
Ash, whose office set the guidelines for, and then blessed, all of the state’s opportunity zones, acknowledged the incongruity of giving tax breaks to draw investment to already-thriving real estate markets. But, he said, municipalities are free to layer their own needs on top of the zones — such as requiring more affordable housing in new projects. He also hopes it will boost projects in parts of the state where development has lagged.
“I wouldn’t throw the baby out with the bath water,” Ash said. “This is an opportunity to bring greater investment to places that need it.”
He was especially hopeful the program might spark more market-rate housing in Massachusetts’ so-called Gateway Cities — older and smaller former industrial cities — many of which have struggled to draw that kind of investment. That could revive their downtowns, he said, and perhaps take some pressure off of Boston’s pricey housing market.
That makes sense to Kyle Warwick. He’s a principal at Redgate, a Boston developer that specializes in housing in “outer urban” neighborhoods. It has built market-rate buildings in Quincy and Chelsea but knows it can be tricky to sell investors on unproven markets. Tax breaks, he said, could help open more doors.
“It will expand the geography a little bit,” he said. “Institutional investors that may not have looked at a community outside of Boston will now look twice.”
That’s the hope, Theodos said — that the program drives investment to places that have long been passed over and sparks projects that help the people who live there.
But once the zones are set, there are few rules governing what they might help pay for. And that makes the early stages of this new program very important.
“A lot of this will depend on what’s selected,” Theodos said. “The kind of places that have a $1 billion project already underway, close to expensive urban markets, I’m skeptical that this will be worth our money.”