Turning an 83-year-old school into an assisted living facility.

Building a 125-room teaching hotel on a college campus.

Converting a downtown Birmingham building vacant for four decades into loft apartments.

Those are just three of about $1 billion in potential developments by private investors around Alabama. Each of the projects are located in poverty-stricken areas that, until recently, might have looked like risky investments for private developers.

But at the moment, 30 potential investment projects are eying parts of Alabama to take advantage of a new provision in the U.S. tax code, according to the head of a non-profit group created to help Alabama get the most out of opportunity zones – a plan supported by the Trump Administration to spur economic activity in places left stagnant or forgotten.

And Alex Flachsbart, CEO of Opportunity Alabama, says that’s only the beginning. His organization is tracking almost 200 potential real estate and operating investments being considered around the state – with interest not only in its urban areas but in areas with historic economic challenges, such as Macon County, Sumter County and elsewhere.

That’s everything from hotels to office spaces to repurposed housing, broadband infrastructure, advanced manufacturing, start-ups and ag-tech.

“We’re in the top of the first inning with this – it’s early,” said John Lettieri, CEO of EIG (Economic Innovation Group). EIG is a Washington-based public policy group founded by Lettieri, Steve Glickman, and Sean Parker, the founder of Napster and first president of Facebook.

Getting started

Opportunity zones were created as part of the 2017 Trump Administration tax overhaul, and were proposed by Sen. Tim Scott (R-S.C.). There are almost 9,000 nationwide, and administration officials say they are projected to attract $100 billion in private investments. The White House has also created an Opportunity and Revitalization Council to deliver support.

Its executive director, Scott Turner, said at a White House event Tuesday that its goal is nothing less than “the eradication of poverty in our nation.”

The OZ initiative allows people to sell stocks and other investments and delay capital gains taxes for years by putting the proceeds into projects in the zones. Any profits can avoid taxes.

Alabama has 158 opportunity zones located in all 67 counties. The zones were based on economic and poverty numbers, and were chosen by state officials in the governor’s office and the Alabama Department of Economic and Community Affairs.

The governor’s office submitted Alabama’s nominations for opportunity zones to the U.S. Treasury Department and Internal Revenue Service on March 20, 2018. They were approved about a month later. In fact, Alabama was one of the first states to receive full approval for its zones. The zones are fixed with little or no room for expansion. An interactive map of the zones can be found here.

More than half of Alabama’s are anchored by a university, airport, hospital or military base, and more than half have Interstate access. Sixty percent are in downtown or neighborhood commercial areas, some of which have existing housing or infrastructure that is vacant or unused. The average median family income in the zones is a little more than $30,000 a year, and 34 percent of those in the zones are considered poor. Unemployment in the zones is 14 percent, while Alabama’s current unemployment rate is at a historic 3.3 percent

Making a good deal better

The projects currently on the board in the zones come in several varieties. One is slated to pump $25 million into the west end of Tuscaloosa.

In July, Stillman College signed a memorandum of understanding with partners in a project to build a 125-room hotel on the college campus to serve as a teaching center for the school’s hospitality management program. Included in the project is mixed-use residential and commercial space, including market-rate housing for faculty, graduate students and others. The hotel would be operated by HDG Hotels of Ocala, Fla., in partnership with Stillman. HDG is a hotel management group that owns 18 hotels in Florida.

The plan is for the hotel to be sold back to Stillman College for its long-term use at the end of a holding period, with the cash flowing back to the college. It also uses the Renaissance HBCU Opportunity Fund, a $50 million real estate fund based in Washington, D.C., that provides assistance and financing to historically black colleges and universities.

Robert Jenkins, senior managing director for Renaissance HBCU Opportunity Fund, said the Stillman project is consistent with other projects being assembled in OZs, which usually involve some mixed-use development involving retail and housing. Stillman would not be happening without opportunity zones, he said.

“You’re attracting equity to a lower income neighborhood in a tertiary city,” Jenkins said. “As much as I like Tuscaloosa, it’s not Washington, it’s not L.A., it’s not Atlanta.” In addition, graduates of the program will not only have the ability to hold jobs in the hospitality field, but will have executive and entrepreneurial skills developed by the program, he said.

The long-dormant Stonewall Building in downtown Birmingham will be renovated to include 140 units of workforce housing.

A Birmingham opportunity zone project is the $24 million conversion of the 84,000-square-foot Stonewall Building, almost 40 years vacant, into the American Life Building, with 140 one and two-bedroom flats and loft-style apartments. In addition, five of the development’s units will be reserved for rental to clients of The Dannon Project, a local nonprofit that provides workforce development and other services for underemployed and unemployed residents. It is slated for completion next year.

Rising Tide Management of Birmingham was already buying up distressed housing in and around the Magic City before the creation of opportunity zones. Managing Partner Rob Ashurst said the company owns about 500 properties, with about 50 in the zones.

Rising Tide, which manages the Southeast Opportunity Zone Fund, buys the houses, renovates and manages the houses. In some cases, the company buys the houses for about $8,000, spends about $50,000 on renovations, and then rents them to tenants. By doing so, it is “solving the affordable housing problem,” Ashurst said. They have a 2 to 3 percent vacancy rate. This is a different model than other OZ plans which sometimes involve distressed large buildings repurposed as mixed-use properties with retail and housing.

“We’ve already got five years of operating history,” Ashurst said. “So we were able to put together a plan for investors, and the banks were willing to finance. The investors can get a pretty good return.”

Because of the OZ credits, rent is about $100 cheaper for tenants in the homes located in the zones, Ashurst said.

In Cleburne County, close to the Georgia state line, a project is taking shape to transform a school built in 1936 into a $13 million assisted living facility.

Mobile-based development firm Lathan & Coleman is planning Carillon Oaks to open next year in the old Cleburne County High School. It is the first project to use a combination of opportunity zone credits, historic rehabilitation tax credits and new market tax credits, another program targeting underserved areas, to make the project happen. The facility is expected to employ 40.

The school's former gymnasium at Carillon Oaks in Heflin is being converted into this dining and meeting area.

Census figures say Cleburne County has about 16 percent of its population at or beneath the poverty line. Its median household income is almost $37,400.

Partner Jerry Lathan’s development background is in historic restoration, while Stuart Coleman’s has been in senior care. Lathan’s interest in turning the old school into a senior care facility came before opportunity zones, he said.

The school’s sturdily built brick structure was a natural for transformation into an assisted living facility, he said. Wide hallways allow for wheelchairs or walkers, and the classrooms lend themselves to being subdivided into apartments. The project calls for 40 assisted living apartments, while 9,000-square-feet are being added for a memory care unit for residents with diminished cognition.

The kitchen and cafeteria are being updated, and a bistro, chapel and beauty salon are being added. The plan calls for an adaptive reuse renovation that preserves the historic façade of the building while updating the interior for use.

Lathan said the project would not have happened had it not been for opportunity zones, which reduced the cost by more than 40 percent with the tax credit.

“Very often these kinds of project don’t pencil out without tax credit help,” he said. “The cost of doing historic restoration can be a barrier. In some cases it’s more expensive than new construction. When you’re in a challenging market, it doesn’t support strong prices or strong demand, so you have to lower the overall cost.”

In Opelika, Hillstone Advantage Partners has begun construction on a $10 million 13-and-a-half acre business park off Hi Pack Drive.

On its website, Hillstone says its goal is “the acquisition and development of income-producing commercial and industrial real estate” in opportunity zones to “generate consistent returns and a profitable exit...all while maximizing community impact.”

The first building in the business park should be completed by the end of the first quarter of 2020, and will be used for startups and businesses that can take advantage of the zone. Developer Jacob Hill said the project was already being considered before the creation of an opportunity zone there, but it acted as an incentive.

“It won’t make a bad deal good, but it makes a good deal better,” he said.

‘Gates completely wide open’

Flachsbart has had an interesting perspective, watching the beginning of the zones. A few years ago, he was a lawyer at Birmingham’s Balch and Bingham specializing in economic development, taxes and financing. His job was “finding money under rocks” – such as low income tax credits, state incentives, etc.

One day, Flachsbart said, he stumbled on the opportunity zone plan, which wasn’t yet a law, and realized it would be a “total gamechanger for how we think about economic development.” Instead of narrowly targeted, specific economic incentives, the federal government had pledged itself to much more open-ended commitments.

“We finally have a new economic development program specifically geared toward anything that happens in low income places,” he said. “This was just gates completely wide open. It’s not really a program; it’s an incentive.”

Within a year, the California native found himself heading up Opportunity Alabama, a non-profit created to be a “one stop shop" for everyone from investors to developers to communities. He said the lag between approval time for the zones and the announcement of projects was mainly because developers were still waiting for a road map – the federal parameters for project eligibility and compliance.

The idea of OZs was to spur new development in stagnant areas usually too risky to lure private developers, where potential profit was not large enough to overcome fears of loss.

Flachsbart and Lettieri say the zones are not just changing investment, but the way cities view economic development. In some cities with blighted property, local governments are beginning to find out who owns those long vacant buildings.

“In a lot of cases, it’s the cities themselves,” Lettieri said. “Instead of the passive posture of nothing happening, we have some agency here. Over time, it motivates the cities to build a more proactive strategy. These properties are assets, and they’ve been treated like liabilities.”

Critics, however, say that developers are taking advantage of the tax breaks by spurring development in urban areas that don’t benefit the poor but do bring large returns on investments.

Jenkins said he understands some of the criticism, but his fund only works with community development projects involving HBCUs. It is currently in talks for projects on campuses in Virginia and the Carolinas.

“We have had other opportunities – presented practically every day – but HBCUs are exclusively our mission,” Jenkins said. “In the case of Stillman, for example, you have a campus where 90 percent of the students are receiving Pell Grants. That’s direct positive impact on low income people. If you had more projects like Stillman, I think there would be much less criticism.”

Lettieri said criticism of the zones as a way for the rich to get richer ignores the obvious benefit to communities. While some zones in big metropolitan areas may be harder to justify for tax breaks, that’s a small percentage of the overall picture.

“If we were talking about tax breaks for charitable deductions, we would be saying that’s the purpose of the tax benefit – to get people to give,” Lettieri said. “I thought we wanted people investing in cities and areas of poverty. What would you rather them do with their money? Buy another yacht? Another house? That part has never made sense to me.”

In addition, he said, look at the demographic numbers of opportunity zones, and it quickly becomes clear how residents living in them can benefit.

“We’re primarily a research organization,” he said. “Look at the data, the life expectancy gap between opportunity zones and the rest of the country is four years. Look at incarceration rates, upward mobility rates, drug abuse, child poverty. It’s not just worse, it’s substantially worse. If we were to make progress in those areas, that would make an incredible policy success story.

“This is designed to be a long-term exercise. It’s a very deep, difficult challenge. If we’re not patient, it’s not going to work. If anyone says its already succeeded, they’re not telling the full story. If anyone tells you it’s already failed, they’re not telling you the truth.”