What Are Keystone Opportunity Zones?

What Are Keystone Opportunity Zones?

Posted by on Aug 14, 2021

mortgage-schedule-pen-IS-1181541530

Since its inclusion as part of the 2017 Tax Cuts and Jobs Act, the Opportunity Zone Program has been discussed and debated for both its benefits and shortcomings. Introduced as a way to funnel private monies into federally designated Qualified Opportunity Zones (QOZs), the program’s goal is to boost economic and business development in lower-income areas. In return, investors receive tax advantages for placing their capital gains into Qualified Opportunity Funds (QOFs).

But long before the QOZ program came into being, the commonwealth of Pennsylvania had its own economic revitalization program. In the late 1990s, the Keystone Opportunity Zone Program (KOZ) was passed by the Pennsylvania Legislature, and signed by then-Governor Tom Ridge. The KOZ program is still in effect today, with 2,000-plus areas divided into 11 regions. 

Has the KOZ been effective? According to organizations – such as the Pennsylvania Department of Community and Economic Development – definitely. 

Much like the national QOZ program, however, the Keystone Opportunity Zone program has attracted its share of supporters and critics. As such, those involved with, and supporting, the Opportunity Zones program could learn important lessons from the challenges arising from the well-meant KOZ.

Some History

At one time, Pennsylvania was a thriving industrial power, filled with active plants, mills, and factories. However, as time went on, many companies outsourced their activities to other countries, leaving behind blighted industrial parks, decaying facilities, and deteriorating land. Keystone Opportunity Zone legislation first passed in 1998, and was later amended through some of the following:

  • Keystone Opportunity Expansion Zone and Technical Change Bill – 2000
  • Keystone Opportunity Improvement Zone – Act 219 – 2002
  • Keystone Opportunity Zone/Keystone Opportunity Expansion Zone Act – 2003
  • Keystone Opportunity Zone, Keystone Opportunity Expansion Zone, and Keystone Opportunity Improvement Zone Act/Omnibus Amendments – 2012

The idea behind the original act, and its ongoing amendments, has been use of tax abatements and elimination of state and local taxes within state-designated Keystone Opportunity Zones. This, in turn, encourages businesses to relocate and/or develop within the 2,000 KOZ-designated parcels and locations. The abatements would expire on the zones, as development took place, leading to job creation, capital investment, and overall economic growth. 

Success Stories

According to Pennsylvania Department of Community and Economic Development (DCED) guidelines, the program is open to businesses interested in operating within designated zones. Successful applicants can receive both state and local tax breaks, with the idea of promoting economic development and revitalization.

Some examples of successful KOZ developments in Philadelphia include Schuylkill Yards and Circa Centre (both of which are owned and operated by Brandywine Realty Trust). Lehigh Valley indicated benefits from the KOZ program. And, in Reading, PA, Hydrojet Inc. and Canada-headquartered Sun Rich Foods placed their businesses in Buttonwood Gateway industrial Park, a KOZ-designated location. 

The latter, unfortunately, shuttered operations, due to the pandemic.

Problems with the KOZ

Though the KOZ has been touted for its economic and job-creation successes, plenty of concerns have arisen.  

One such concern is the lack of specific data pertaining to the program. For instance, there are no specific metrics about exactly how many jobs are created through the program. Furthermore, the DCED doesn’t track specific costs associated with job creation. Why not? The KOZ statute doesn’t have a requirement to ensure the law’s intent is met.

In addition, a 2014 analysis conducted by the Comptroller of the city of Philadelphia indicated that while the state revenue department awarded $384.7 million in tax credits to 617 business entities in the KOZ program, “the records necessary to provide adequate oversight of the KOZ program largely do not exist . . .” 

Finally, there have been concerns about “double-dipping.” In other words, companies are returning to the tax-elimination program to collect a second round of KOZ tax breaks, especially if they move from an expired zone to a new one. Again, the lack of apparent program oversight is allowing this to happen.

Lessons Learned?

The above criticisms of the Keystone Opportunity Zone program are similar to those levied at the national Qualified Opportunity Zone program. While one program focuses on tax abatements and the other on capital gains investments, the lack of oversight and specific data has been an issue.

Similar to the KOZ program, the QOZ initiative has been put into place to spur economic revitalization, providing jobs and development in lower-income areas. However, it would be a good idea for supporters of the Qualified Opportunity Zone program to study its forerunner in Pennsylvania, to help ensure that the spirit of the program is met.

 

There are material risks associated with investing in QOZ properties and real estate securities including liquidity, tenant vacancies, general market conditions and competition, lack of operating history, interest rate risks, the risk of new supply coming to market and softening rental rates, general risks of owning/operating commercial and multifamily properties, short term leases associated with multi-family properties, financing risks, potential adverse tax consequences, general economic risks, development risks, long hold periods, and potential loss of the entire investment principal. Costs associated with the transaction may impact investors’ returns, and may outweigh the tax benefits. Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation. This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice, meeting the particular investment needs of any investor.

Download The Guide To Opportunity Zones

Download The Guidebook to QOZ's
Download eBook

 


Download The Guidebook to QOZ's

Download The Guide To Opportunity Zones

Learn More About Qualified Opportunity Zones Investments.