Turning Vacant Buildings Into Opportunity in Reno
How new tax policies can offer more opportunity in terms of development for Nevadans.
Downtown is our pearl. With two non-gaming hotels, the addition of “Little Portland,” The Eddy, The Basement, a Patagonia retail store, and Starbucks, walkability from Arlington to Center Street is now within our grasp. So close we can taste it!
Reno has made so much progress, and yet, there are still some dead spots in our urban landscape — places like giant parking lots or government buildings that are only open weekdays during office hours. We also have a few vacant buildings — and empty, underdeveloped land are problems in every city. Reno is no different from any other city that is growing in spurts and fits. And frankly, it’s difficult to get landowners to develop land or work on vacant buildings that they are not incentivized to develop.
Redevelopment needs to pencil.
When construction costs, material costs, and land prices are at unprecedented heights, these all become hurdles to overcome. These empty lots and undeveloped areas are problematic for a number of reasons, but in light of the housing crunch in Reno which KUNR covered extensively, it’s especially important to not let any stone go unturned.
There are many components to the housing crunch, but this lack of development, where development seems easy, is the one we’d like to focus on for a moment. Specifically, we’re looking at one silver lining that is the most recent regulatory clarifications of the 2017 Tax Cut and Jobs Act — literally the least likely place to find a solution for anyone who isn’t mega-rich or a corporation.
Naturally, this solution is really only a trickle-down solution where investors and land owners are given yet another reason to develop their vacant properties. Unbeknownst to many, this is good news!
Why are these vacant buildings problematic for cities?
Increases costs due to fire risks and crime, requiring public service spending (police and fire)
- More than 70% of fires in vacant structures are arson or suspected arson
- Poses environmental, health, and safety hazards
- Can pose direct safety risk to neighboring properties
- Studies have shown blocks with unsecured vacant structures can have twice the number of drug, theft, and violent crime calls to emergency officials
- Vacant buildings also pose much higher risks for emergency personal such as pits, opens shafts, and other unknown hazards; NFPA estimates that nationwide over 6,000 firefighters are injured every year in vacant and abandoned building fires
- Reduces tax revenue from depressed property values
- Burned out homes can reduce neighboring property values by 25%
- Drains local infrastructure resources (road, sidewalk, and utility maintenance)
- Although demolishing structures saves cities money on maintenance and safety costs, rehabilitating structures can save the city 35% more money in maintenance and safety over twenty years
- Slows local economic development
- Reduces available commercial and industrial properties
- Detracts potential entrepreneurs and developers
- Increasing insurance premiums for adjacent property owners
- Demoralizes communities
Eliminating these vacant spaces through redevelopment can:
- Turn community health and safety liabilities into community assets
- Create new, local jobs
- Increase property values
- Enhance economic/tax base development
- Support sustainable use of land and greenfield preservation
- Prevent urban sprawl and decreases civil infrastructure costs (water, sewer, electric)
- Rehabilitation retains community identity through the architectural fabric
Silver linings Found in Opportunity Zones: What are they good for?
( the policy-nerd download)
“As part of the Tax Cuts and Jobs Act, Congress enacted two companion provisions designed to encourage investment and economic growth in certain low-income communities. First, Sec. 1400Z-1 paved the way for nearly 9,000 such low-income communities to be designated as “qualified opportunity zones” (QOZs). In turn, Sec. 1400Z-2 offers three federal income tax incentives to a taxpayer who invests in a business located within one of these zones: (1) the temporary deferral of capital gains, to the extent the gains are reinvested into a “qualified opportunity fund” (QOF); (2) the partial exclusion of previously deferred gains when certain holding period requirements in a QOF are met; and (3) the permanent exclusion of post-acquisition gains from the sale of an investment in a QOF held longer than 10 years.”
Opportunity Zone Regulations Have Good News for Vacant Properties
Last week, the IRS released a second set of regulations on the Opportunity Zones we were all anxiously awaiting. Prior to the second set of regulations, investors who acquired property in an opportunity zone would be required to meet a substantial improvement provision by providing upgrades to that property.
But what if the acquired property was abandoned, dilapidated or run down and vacant?
Under the new regulations, the government says a building or other structure that has been vacant prior to being purchased by a qualified opportunity fund will satisfy the original use requirement. In short, the investor will not need to meet the substantial improvement provision. That’s bananas!
If investors of vacant properties don’t need to meet as stringent guidelines for building or improving Opportunity Zone land, the theory is that more of them will not leave their buildings and properties vacant. Only time will tell if this trickle down policy will actually impact the underserved communities it hopes to impact.
What does this mean for everyone?
Overall the Opportunity Zone tax incentive, much like some other tax incentives, serve as a mechanism for getting money into impoverished areas. While, in theory, this is a great concept, sometimes it comes at the cost of destroying the overall culture and community of the areas. It still remains to be seen if a trickle-down policy — where those in higher wealth and economic status are favored in hopes that they will develop properties and buildings that will contribute to the overall good of that neighborhood — is the solution to our housing crunch. Also, in some regions, such as San Diego, we’ve seen property rates go up after they received the Opportunity Zone designation. Land owners merely seeing the tax benefits as additional value and raising their property prices in order to turn the dirt at a higher profit.
With these things in mind, the Opportunity Zone tax credit is not a promise, nor a make-well, but rather a possible solution to kick starting the development of vacant buildings. Our hope is that developers will seize this opportunity to redevelop on land that did not pencil before — and that they will do it sooner rather than wait for another economic downturn.
VALUES
// transparency: we believe that the community needs to know how development works and what makes projects pencil as well as the policies that drive certain incentives. Politics, policy, and the market are all involved in positive community outcomes.
// public/private partnerships: we believe that a healthy eco-system includes the public +private+citizenry. Aligning incentives is always the best way to get strong projects.
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Ethan Clift is the founder of Clift & Co. a government affairs and business development firm dedicated to elevating communities, individuals, and technologies that better our future.
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