Developer tax breaks impact Union Square negotiations and beyond
On Tuesday, December 11th, the Finance Committee of the Somerville Board of Aldermen heard updates regarding the negotiation of a Community Benefits Agreement between the Union Square master developer, US2, and the Union Square Neighborhood Council, the citizen body designated by the City to negotiate with US2 for community benefits. Both report the negotiations are proceeding as expected — the developer is eager to portray the talks as harmonious and productive, but less keen to satisfy the actual demands of the neighborhood residents. The balance of power in the discussion could shift dramatically, however, with the revelation that the city administration has designated two Somerville census tracts — including much of the proposed Union Square development — as Opportunity Zones: areas where, according to the 2017 Federal tax reform, profits on long-term investment in real estate development would be excused from capital gains tax. The program is designed to attract to Union, Assembly Square, Brickbottom, Boynton Yards, and 9,000 similar sites nationwide vast sums of money which will be parked in real estate as they multiply, tax-free.
If a developers’s profits are jumping by ten or fifteen percent, then they should have more to share with the community” -Ward 5 Alderman Mark Niedergang
The Finance Committee Tuesday considered whether to transfer to the developer part of the city-owned D2 parcel. This is the corner of Prospect Street and Somerville Avenue, presently occupied by dirt and construction vehicles, but slated to become a large commercial building next to a 27-story, 450-unit residential tower. US2 President Greg Karczewski and USNC Negotiating Team members Katrina Jazayeri and Ben Bradlow testified regarding their negotiations toward a Community Benefits Agreement. Both parties reported progress, but Jazayeri described “meaningful distance on critical issues like affordable housing, workforce participation, and quality green space”. Mr. Bradlow, also an elected member of the USNC Board, added a fourth subject of difference between the parties — sustainability — before adding: “We believe it is in the community’s interest to postpone consideration of […] transfer of publicly held land into private ownership” until negotiations are successful.
The Aldermen agreed, and the motion to transfer (part of) parcel D2 was kept in committee. Next, Tom Galligani, Somerville’s Director of Economic Development, responded to the Board’s order to present, in writing, an explanation of how the Opportunity Zone designation would affect Union Square development, particularly the amount of profit anticipated by the developer and investors. The Administration offered no written testimony, and not many facts or much speculation: in forty minutes of presentation and questions, Mr. Galligani asserted that he or the City “don’t know” ten times. The Administration doesn’t know:
• Who will benefit from the Opportunity Zone tax break.
• How the Opportunity Zone “affects the bottom line for Union Square”.
• How investor benefits will “trickle down to real estate projects”.
• Whether the City has considered renegotiating agreements with developers in light of higher investor profits.
• How to take advantage of the Opportunity Zone to benefit the community.
• Enough to compose a written presentation to the Board.
• What the rules are.
The exact regulations of the Opportunity Zone tax shelter have yet to be promulgated by the IRS, but there is already guidance available from the Treasury Department. There’s been plenty of time to consider the consequences — the city chose which two census tracts to submit for designation in March, and was informed of their approval in June. Neither the Board of Aldermen, the Neighborhood Council, nor the public were informed of the designation at all, and might still be in the dark had Ward 3 Alderman Ben Ewen-Campen not read about Opportunity Zones in the newspaper and submitted an order for a written explanation.
“If our developer partners are suddenly ten or fifteen percent richer, they have ten or fifteen percent more of their wealth they can share with the community. If we understand the impact this is having on their bottom lines, then we can ask for more than we would have otherwise,” said Ward 5 Alderman Mark Niedergang, connecting the tax break to the ongoing community benefit negotiations. “I’m astonished to find that the Administration heard in June that these two census tracts were accepted for inclusion in the program, and that information was never shared with the public.”
Other Aldermen called more aspects of the designation into question. Ward 2 Alderman J.T. Scott described the inevitability that a bull market, fueled by a capital gains tax shelter, would further inflate the price of housing. Ward 1 Alderman Matt McLaughlin questioned the choice of census tracts: “Union and Assembly Squares already have billion-dollar developers who don’t need our support. But with the Clarendon Hill affordable housing development we were forced to fight over prevailing wage law, give $10 million to a state project, and privatize our land for luxury apartments. That’s where the tax breaks would have done the most good.”
Neighborhood Council members were also pessimistic about the Opportunity Zones. USNC Board and Negotiating Team member Jacob Kramer called them “an archipelago of tax havens; the Cayman Islands dropped on American cities. They will accelerate growing inequality and permanently transfer wealth upwards.”
How will the tax break affect the ongoing community benefit negotiation? “The pie just got bigger,” remarked Alderman Ewen-Campen as the discussion concluded. “We could consider this manna from heaven. We’ve been fighting over all these different things, but the pie just got bigger.”
The Administration is expected to respond to the Board’s request for written testimony on the affect of Opportunity Zones by the end of January. Community Benefit negotiations between US2 and the Neighborhood Council are ongoing.
Matt Lavallee reminds you that opportunity knocks once, not twice.
