Walk into the indoor mall at Diagonal Plaza on any given weekday and it’ll most likely be empty. Gutted restaurants and gated storefronts line the hall, as a few people mill about outside the DMV Driver’s License Office, waiting for their turn in line. A clock repair shop looks like it still gets some business. A brightly decorated eyebrow threading studio has a handful of customers.
And that’s about it. In the parking lot, scaffolding surrounds the newly opened Walgreens that replaced Rite Aid. Both a Sports Authority and Walmart Neighborhood Market sit shuttered.
Situated on the southeastern corner of Iris Avenue and 28th Street in Boulder, the 33-acre Diagonal Plaza commercial center is ripe for redevelopment, which has proved elusive for years. Now, at least some economic development officials within the city and the state are hoping a federal tax incentive program can change that.
In April, the area was designated under the federal Opportunity Zone program, intended to spur growth in economically distressed communities around the country as part of the sweeping tax reforms heralded by President Donald Trump and passed late last year as the 2017 Tax Cuts and Jobs Act.
While the program is seen as a huge opportunity, for lack of a better word, by the state and the pro-development community in Boulder County, the designation in the City of Boulder has also drawn scrutiny from those who think it will only exacerbate affordability and equity issues, including some City Council members. Longmont and Lafayette also have designated opportunity zones and specific plans to leverage them, though it appears Boulder does not yet.
Uncertainty remains about the level of impact opportunity zone investments can and/or will have on local communities. “This whole thing is an incentive offered by the federal government, but not a classic program that the treasury might offer [where] there’d be a fixed budget and you’d know how it would be allocated among projects,” says Jeff Kraft, director, Business Funding and Incentives at the Colorado Office of Economic Development and International Trade (OEDIT), which led the initiative for the state’s opportunity zone designations. “This is a self-selected investment that [investors] claim on [their] taxes.”
Under the new law, investors have 180 days to roll capital gains over into new and unrelated investments — stock can be sold to invest in real estate projects, real estate can be sold to be used in a venture capital fund, etc. — through the use of “opportunity zone funds,” which have to significantly invest in designated opportunity zones. Qualifying investments include real estate projects as well as investing in local businesses and start-ups. (Under the draft regulations, a minimum of 63 percent of an opportunity zone fund must be invested in a designated zone, according to the Tax Foundation.) The investor then gets to defer federal taxes until either they sell the investment or Dec. 31, 2026, whichever comes first. If they’ve had the investment for at least five years by 2026, they essentially get a 10 percent discount. If they’ve had it for seven years, they get 15 percent. In other words, “To get the maximum financial incentive to the private entity, the fund has to do its investment by the end of 2019,” Kraft says.
What’s more, if they keep that investment for 10 years or more, they are exempt from future capital gains taxes on that investment altogether.
All of which initiates a pretty fast timeline for investors, and the state is encouraging municipalities to develop community-informed plans for what they want in any given opportunity zone in order to attract national capital and attract it fast.
“It’s important to get going and maximize the benefits that this can drive,” Kraft says. “While we think it’s important to take advantage and attract the maximum tax breaks and incentivize capital, there’s still chances for investments to occur for the next eight or nine years.”
Cities and local jurisdictions do have some say over what and how development will occur in the zones, as nothing in the law precludes local land use, zoning and permitting regulations. But it is largely a market-driven program that offers tax breaks to investors while, in theory at least, also providing some sort of social benefit.
“I believe commercial real estate can be a driver for social and environmental equity,” says Peter Vitale, a Boulder Planning Board member who works for Stantec, the commercial real estate and design firm responsible for the Pearl Street Mall. “Now, there’s an opportunity to go even deeper and be even more ambitious with projects that are designed to serve the community. Hopefully, this will inspire those developers to do that.”
Nationally, investments in some opportunity zones are already on the rise, spiking by 80 percent since the law passed, while non-opportunity zone investments have decreased, although minutely, according to an analysis by the Wall Street Journal. And investment in these areas has the potential to grow, as only draft regulations from the Department of Treasury have been released to date.
“We’re looking at them and we have folks who have capital gains right now who that could be an option for them,” says Elias Bachmann, an investment advisor with BSW Wealth in Boulder. “We’ve been hesitant to really go great guns to our clients [with opportunity zone funds]. The reason that we haven’t been so aggressive is that the final guidance from Treasury hasn’t even come out yet.”
Real estate has proved the most common investment method so far, but it doesn’t mean all projects will be attractive to investors.
“The biggest constraint right now is that so many of these funds are looking for $20-million-plus projects,” says Kelly Bianucci, who has a background in private equity and is consulting the state on investor engagement and education. “There are a lot of smaller opportunities that no one is really aggregating for these larger funds.”
Consequently, Colorado is currently building a website, expected to go live by the end of the year, to facilitate connections between investors with potential projects in opportunity zones across the state.
To date, there are nearly 9,000 zones, representing nearly 35 million people in all 50 states, Washington D.C. and five U.S. territories. Colorado alone has 126, whittled down to 25 percent of the 1,249 census tracts in the state that qualified. According to federal guidelines, opportunity zones were determined by census tracts, which had to meet median income and poverty rate criteria. In the end, the average poverty rate in opportunity zones nationwide is 32 percent, while the median family income is 37 percent below other tracts in the area, with an unemployment rate 1.6 times higher than the national average.
In Colorado, OEDIT asked local governments, economic development partners and the public for feedback on eligible tracts, including previous development hurdles and the ability to market the potential to investors, with a roughly two-week turnaround in order to make the federal deadline. (The state announced its nominations on March 23 and the Department of Treasury confirmed them on April 11.)
OEDIT also considered a series of data points, in addition to family median income and poverty level requirements, including unemployment rates, employment growth and geographic isolation when deciding which census tracts to nominate. While state officials deliberately nominated more census tracts in rural areas of the state (60 percent), they also designated plenty of census tracts in more populated, high-growth cities along the Front Range, including Colorado Springs, Denver, Boulder and Fort Collins.
“One thing you could do is just take the neediest tracts in the state and that might drive you to small rural tracts that don’t have any investable assets, and we didn’t want to do that because then nothing would happen,” Kraft says. “And at the same time we didn’t just pick a bunch of tracts that met the criteria for opportunity zones but were, say, in the path of development that was already happening so that you might just accelerate displacement.”
In the face of competition with coastal cities in New York, California and Washington D.C., it was a conscious effort to draw capital from national investors and opportunity zone funds, Kraft explains.
“The big funds are probably not going to want to place their investments in lower-population, lower-density areas,” he says. “Boulder and Denver have a chance at attracting that capital, whereas a smaller, really far-flung rural area might not.”
In the end, Gov. Hickenlooper nominated four census tracts in Boulder County, two in Longmont, one in Lafayette and one in the City of Boulder. The Longmont and Lafayette zones are already part of the statewide Enterprise Zone incentive, which provides 10 different income tax credits to businesses located or expanding into the zone for things like employee-sponsored healthcare, job skill training and capital investments. And both cities had already undergone significant planning processes with community support to help direct development in the areas, which made going after the opportunity zone designation a logical next step.
“We already had all the documentation in place to submit to the state,” says Roger Caruso, economic development director for the City of Lafayette, who says the opportunity zone designation, which was mentioned at a Lafayette City Council meeting in early March, has broad support from City officials. The census tract includes a lot of vacant land with the potential for commercial and industrial development, Caruso says.
In Longmont, the two adjacent census tracts straddle the southern part of Main Street, butting up against the St. Vrain Creek to the south and Ninth Avenue to the north. The western tract extends out to Hover Road, the eastern tract encompasses the abandoned sugar mill just south of Third Avenue.
“We looked at where we had opportunity and where we already had plans in place,” says Jessica Erickson, president of the Longmont Economic Development Partnership (LEDP), plans like the Envision Longmont Comprehensive Plan, Longmont Downtown Development Authority master plan and the First and Main streets transit plan.
“We’re going to be able to show potential investors that there is already public support from City Council and City staff for the plans that are put in place so that they won’t have to be concerned about if there is going to be resistance on the public side to make these investments in the opportunity zone.”
Erickson also says the City and its economic development partners were intentional about choosing census tracts that might not otherwise draw significant investment, even in a place that has seen significant growth in recent years.
“I don’t think it is clear that private capital will come because there are some risks,” Erickson says. Although a lot of work has been done through the Resilient St. Vrain flood recovery efforts, development along the river corridor has proved slow because of flood plain issues. And the sugar mill site will require additional capital to mitigate environmental issues and aging structures. Plus, the site is technically still a part of unincorporated Boulder County and any redevelopment of the site requires annexation.
Following the opportunity zone designation announcement in the spring, Longmont City Council met with an expert from the Brookings Institute to discuss the potential of having an opportunity zone, and Erickson says she hopes to have a community-informed investment prospectus with input from all stakeholders by the end of the year. And the City is set to finalize a housing plan in the next few weeks to ensure its in place before development in the zone begins.
“We were told early on that if you don’t already have housing policy in place you’re going to want to do that because one of the fears of the program is leveraging that tool to overly gentrify an area because of the value of it,” Erickson says.
Additionally, LEDP has been in touch with both current owners and potential investors within the zone to ensure they are educated about the program. Caruso too has been in touch with a variety of developers interested in the Lafayette zone, with projects ranging from senior affordable housing to multiple flex industrial-commercial spaces.
“We’re kind of in a holding pattern until we get the rules and regulations,” Caruso says. Developers, “are just following up to get into a position so that they have eyes on what they want to do when the information is released and then they’ll know how to proceed.”
In the City of Boulder, the designated census tract encompasses 2.5 square miles stretching east of 28th Street to 55th Street and north of Arapahoe to Diagonal Highway. According to U.S. Census data, the median household income for the area is $50,885, compared to $60,569 for the City of Boulder and $55,322 nationally.
“I think people look at the overall average income for Boulder and they figure all of Boulder is very prosperous, but that’s not really the case,” says Jennifer Pinsonneault, business liaison with the City’s Economic Vitality department, who submitted Boulder’s feedback to the state. “Once you start to drill down and look at census tracts or small areas, you find that there are areas where folks have not really benefited from the turnaround in the economy. We felt that there was certainly need here.”
According to emails released by the City, there was some hesitancy at first from both City staff and the Chamber of Commerce to pursue designation for an opportunity zone. After talking with state officials, however, Pinsonneault wrote, “Since OEDIT specifically mentions the possibility of using the program to address needs for workforce housing and infrastructure, it may be worth a closer look to determine whether the program could be useful in addressing housing affordability and workforce transportation issues or enhancing diversity and social equity efforts.”
By the beginning of March, City staff decided to pursue the designation for the census tract including Diagonal Plaza with only days to spare before the state deadline. Pinsonneault consulted with the Chamber of Commerce and City staff, but City Council was not involved in these conversations, and the issue has yet to be discussed at a public meeting. Staff did, however, alert the City Council in a Head’s Up memo at the end of March, after the state announced its nominations, which included Boulder. The quick process and consultation with the Chamber but not elected officials has caused some concern among certain Council members and community members worried about transparency, along with the designation in general.
“Really we are the elected,” says Council member Cindy Carlisle. “If people like us or not, or like what we’re doing, we were elected to set the policy, not to have staff doing policy work and then telling us what’s going on.”
The emails also show that the aging Diagonal Plaza is the primary reason City staff chose to support the census tract that was eventually designated, knowing City officials had long talked about redevelopment of the area. At City Council’s urging, the City conducted redevelopment studies for the Diagonal Plaza shopping center back in 2011, concluding that due to the large number of property owners and cost, redevelopment of the site over the next decade was unlikely unless the City actively participated in alleviating some of the “logistical and financial obstacles.”
However, there doesn’t seem to have been much emphasis on the area since then, and the City’s webpage dedicated to the area hasn’t been updated since 2013. Since then, several storefronts have closed or moved elsewhere, even after the original developer and property owner sold the complex in 2015 for $4.05 million to an LLC with several investors, presumably to redevelop the property.
“If this might break free some interest in working on enhancements on Diagonal Plaza, that might be a good outcome for the community,” says Clif Harald, executive director of the Boulder Economic Council which is part of the Chamber of Commerce, and who consulted Pinsonneault on Boulder’s feedback to the state. “This has been an ongoing conversation within the City and with lots of different interests. That’s our interest, is being supportive of that conversation that has been going on for years.”
The census tract is much larger than the Diagonal Plaza, however, encompassing other areas that are either recently redeveloped or in the process, like Boulder Junction and Boulder Community Health Foothills Hospital.
While the City is using the Boulder Valley Comprehensive Plan for guidance, Pinsonneault says, staff is still in the process of internally evaluating the opportunity zone program and what role local government can and should have in it, without citing specific projects the City has in mind.
“My understanding is that there are a lot of communities that have opportunity zones but aren’t quite sure what they have, and they are still in the process of analysis like we are,” Pinsonneault says. “And there are others that have definite projects in mind, and Longmont is one of them.”
The emails further indicate there is already some investment interest in the area, specifically mentioning plans for an assisted living development with affordable and mid-level pricing as a way of bringing “more inclusionary housing into Boulder.” Pinsonneault says since then she’s spoken to potential investors, but not many. Furthermore, she doesn’t have much information to give them. “A handful of developers have reached out but we don’t have much to tell them yet. It’s still the early days,” she says, emphasizing that they are still awaiting the final regulations from the Treasury Department and the IRS.
Council member Carlisle has been asking for more information regarding opportunity zones from City staff since early fall, she says, after she attended a Sept. 19 informational meeting hosted by Vitale that she was informed of by a concerned citizen. Pinsonneault was also there, as were a variety of investors and representatives from OEDIT.
State consultant Bianucci, who was also at the Sept. 19 meeting, says there were a lot of different ideas flying around about how “investments could be channeled” into Boulder’s opportunity zone. But the meeting also showed the state just how “important it is for each local community to be proactive in attracting the kind of investment they want, the kind of projects they want.”
Kraft from OEDIT agrees. To that end, the state is also offering grants, as well as technical assistance, to local governments through the Department of Local Affairs.
“From a state perspective, we do think local communities should tell a story about what they need and what they want,” Kraft says. “And even put other local incentives together to make sure they are getting what they want and there aren’t investments that displace low-income communities. It’s really up to every local area to figure out how to do that best.”
“That’s what we really took away from the Boulder community,” Bianucci continues. “Otherwise, there’s just too much of a risk that all this money is coming into opportunity zones without regard for what the communities need or want.”
There are other significant risks to the program as well, not least of which is the loss of tax revenue for the federal government. Deferring capital gains taxes could cost $9.4 billion over the first five years, according to the most recent estimates released by the Joint Committee on Taxation, although that will significantly drop after a decade.
The program could also prove risky for investors, even if they stand to benefit most.
“I think in this hurried environment as an investor you have to be extremely on your toes and really stick to whatever due diligence protocols you have and maybe even put a little turbo on that. It’s an environment that’s very tempting for potentially unscrupulous managers,” Bachmann, the investment advisor, says. “Whenever there’s urgency and tremendous demand you get into the situation where the people demanding it are the ones on the short end of the stick and that’s the investors.”
The quick timeline could also easily drive demand, and therefore property values up, shrinking the investors’ internal rate of return in the end, Bachmann says. Plus, there’s always a chance that the tax rate will be different at a later date, potentially shrinking any savings from the tax deferment. And like all investments, returns are not a given, Vitale warns.
“Everyone needs to remember, they could also lose everything,” he says. “There’s no guarantee that any of these investments in any of these places is going to work. People seem to be forgetting this simple fact.”
The program is marred by skepticism from economists, as well. There are concerns over the significant lack of reporting requirements in the regulations to measure the impact of opportunity fund investments, especially since earlier, similar tax incentive programs, like the ’90s Empowerment Zones, have proved difficult to evaluate, even with more stringent approval conditions. Although the state is encouraging municipalities to participate in development in the zones, there is nothing that says investors have to disclose they are using opportunity zone funds for either real estate or business development.
“There will probably be many, many projects that will go under the radar that no one will know about except the investors,” Kraft admits. “And local governments might not even know if they were opportunity funds or not.”
Still, the unknown is potentially one of the largest risks of achieving opportunity zone designations, as are the unintended consequences.
“This is something that we’ve never seen before, so we don’t know what all the risks are, which is not a comfortable space, especially for the public sector which is responsible for managing the City,” Erickson, from Longmont, says.
Further gentrification, driving up property taxes and pricing existing residents and businesses out of the area are also potential repercussions from the program.
“My concern as a U.S. taxpayer is that if we’re going to go to this level of non-progressiveness in the tax code, I want to be really sure that some social benefits are going to occur,” says Hal Hallstein, a local investment advisor. “Everybody who has called me about it, no one has focused in on the social benefits.”
With approximately 60,000 in-commuters each day, Boulder is already seen as unaffordable for many residents and non-residents alike. Rent prices are increasing exponentially each year and both commercial and residential property taxes have skyrocketed recently. Many fear the opportunity zone is only going to magnify these issues.
“This is going to lead to just a whole bunch more job development in Boulder or market-rate housing, neither of which we need,” Hallstein says. “There’s no upside to this. Boulder doesn’t need it. You’re going to get investments you don’t want.”
Attracting national investment to opportunity zones might therefore be a tradeoff for other community values like economic equity and diversity. When discussing whether or not to pursue designation, one Vitality Department official wrote in an email, “It is true that private investment could increase property values and property taxes on other properties, exacerbating a current high property tax situation. Is that a reason not to seek additional private investment? I don’t think so.”
Others in the community disagree, however, questioning Boulder’s pursuit of the designation when so much hangs in the balance. “To me it’s a matter of social justice,” says Jeff Flynn, a Boulder-area lawyer and fierce critic of the opportunity zone designation. “Boulder needs to help those who are in the middle- and lower-income levels come to and remain in Boulder, not pursue policies that benefit the wealthiest investors who will invest in these opportunity zones.”
Several Boulder Council members have also publicly expressed skepticism about the program as a whole. “It seems to be that we can’t just have this rah-rah booster mentality about it because there’s too much at stake,” Carlisle says. “And what’s at stake is the livability of the community for regular people.”
Other Council members disagree, arguing that the designation could help the City meet some of its affordability goals by attracting specific investors.
“While I understand questioning the motivations of the Trump Administration and the effectiveness of the broader policy decision (which is what many of the articles that have been shared with Council focus on), the reality is: Opportunity Zones exist and they have potential to serve our community goal of building more affordable housing,” Council member Jill Grano wrote in a Nov. 29 email to Council on the citywide hotline.
There’s no doubt the conversation will continue in coming months as Council is scheduled to have its first public discussion of the opportunity zone designation at its Dec. 18 meeting.
“I think it’s clear that Diagonal could be redeveloped and that there’s challenges with redeveloping it given that there are several different property owners,” says Council member Lisa Morzel. “What do people want to see there, do we want more retail, do we need housing, what is it? And that should not be a discussion by a select few but it should be a broad community discussion. I certainly hope that’s the next step.”
One thing is for certain: Boulder County opportunity zones are here to stay, as the federal designations are set for the duration of the program and only an act of Congress could change that. And with maximum benefit to investors in the next year, the City of Boulder needs to figure out its priorities quickly if it hopes to have a hand in shaping the outcome of redevelopment at the Diagonal Plaza, or anywhere else in the census tract.
“It just seems to me that we should put the horse before the cart on this one, and not back into the kinds of contentious situations the City tends to find itself in,” says Sarah Silver, a neighborhood advocate. “As long as this opportunity zone exists, I would like to see the City get ahead of it and figure out how it can support projects that meet actual needs for the city, versus projects that meet the needs for the very big-pocketed investors that are going to benefit from the entire federal opportunity zone program.”