More Opportunity Zone Developers Bet on Cleveland's East Side

Michelle Jarboe, Crain's

Opportunity Zone investors are venturing further from downtown Cleveland and other bustling areas — and tiptoeing into long-overlooked stretches of the city's East Side.

That's one takeaway from data appended to the Ohio Department of Development's annual report, released earlier this month, and a Crain's analysis of public records.

The federal Opportunity Zone program, and Ohio's companion tax credits, helped shape the conversion of an industrial building into a venue in the St. Clair-Superior neighborhood. The warehouse, on East 72nd Street, hosts the traveling "Immersive Van Gogh" exhibit and now serves as a regional distribution and assembly hub for similar art experiences.

In the Central neighborhood, investors are exploring plans for a business park between Woodland Avenue and Kinsman Road, off East 61st Street. And in nearby Kinsman, workers are moving dirt for construction of a cold-storage facility along the Opportunity Corridor boulevard.

Backers of those projects — and, yes, notable deals in the central business district, Ohio City and University Circle — were among the 400-plus applicants who sought state Opportunity Zone tax credits this year. Development officials approved just over $26 million worth of credits, based on $289.9 million worth of investments by individuals, trusts and companies.

Across the state, investors largely focused on real estate — not businesses, though a new manufacturer of disposable gloves in suburban Columbus attracted a substantial amount of equity. Investors flocked to apartments and mixed-use projects. And they gravitated to sites in or near urban centers, with occasional forays into smaller cities including Alliance, Elyria and Sandusky.

State records don't paint a complete picture of Opportunity Zone activity. But they offer a glimpse of how money is moving through an otherwise opaque federal incentive program.

Opportunity Zones, established in 2018, offer tax advantages to investors who redeploy capital gains in distressed communities. The program was meant to give impoverished areas a lift, but critics say it hasn't lived up to that lofty goal yet.

A few years in, though, developers have completed the first wave of projects, including long-gestating deals that just happened to benefit from new federal and state incentives. And in Northeast Ohio, at least, there are subtle shifts in the investment landscape.

"We're seeing more interest in early-stage activity on the East Side of Cleveland now," said Mike Sikora, a Cleveland attorney who works with clients across the state. "And it is, in part at least, spurred or … benefiting from whether a particular property is in an Opportunity Zone."

Ohio's program, created in 2019, is a sweetener. The state offers an income-tax credit equal to 10% of an investor's contribution to a project, capped at $1 million. That investment does not have to involve gains from the sale of real estate, stocks or other assets.

The General Assembly recently doubled the size of the tax-credit pool for the 2023 and 2024 fiscal years and made other tweaks to broaden access to the program. Officials can award up to $49 million in credits over the next year and $50 million between July 1, 2023, and June 30, 2024.

Without that change, the program likely would have been tapped out, Sikora said. Investors who sat on the sidelines in 2020, in the early days of the coronavirus pandemic and accompanying economic upheaval, shook off their anxiety last year and are staying busy.

"We are living it," Sikora said. "We're having discussions with clients every week."

Sikora Law, his firm, submitted 80 state tax-credit requests for clients this year and expects to handle more applications in early 2023. He and other professionals are watching closely to see what happens in Congress, where bipartisan bills to extend and modify the Opportunity Zone program are pending in both chambers.

Ohio ranks 11th in the nation for planned investments in qualified opportunity funds, the vehicles that investors use to place their money, according to a midyear report from Novogradac, an accounting and consulting business. Cleveland ranks 19th among cities, ahead of Chicago, Columbus and Detroit.

Novogradac is tracking an estimated quarter to a third of the industry through regulatory filings, other public documents and information volunteered by a subset of investment funds.

"We're still seeing a tremendous amount of interest," said Angel Rice, a tax director at accounting firm Cohen & Co.'s Cleveland office. "We're finding that the Ohio Opportunity Zone credit, it's still a critical asset that's making Ohio more competitive than other states."

This year, investors received tax credits for putting money into Circle Square, a mixed-use project at the edge of University Circle. An apartment tower called the Artisan is set to open in late February at Chester Avenue and Stokes Boulevard. And construction is ramping up on a second building, where the Library Lofts apartments will sit atop a new Cleveland Public Library branch.

The balance of the block, the first phase of a massive development, will include parking, ground-floor retail and, possibly, a hotel. The project involves a mix of local and far-flung investors, said Steve Rubin of Cleveland-based Midwest Development Partners.

"It takes a project that is sort of on the edge, if you will, and makes it attractive. Which I think is what the law's intention was," Rubin said of the ability for investors to shelter gains and offset liabilities.

The City Club Apartments, a 23-story project downtown, also is taking advantage of its Opportunity Zone address. State data show that qualified opportunity funds invested $16.3 million in the building, which is rising from a Euclid Avenue parking lot near East Ninth Street.

The other apartment deals range from Bridgeworks, an Ohio City tower that will include a hotel, to a 139-unit revamp of part of the former BFGoodrich complex in Akron, to renovations at the midcentury Kenwood Crossing property in Euclid.

Michael Panzica, a member of the Bridgeworks team, said the Opportunity Zone designation is a key factor when he's picking project sites. The federal tax benefits and state credits are even more important during a period of rising interest rates and escalating construction costs.

He's also one of the developers behind the Monroe, a Little Italy project that appears on the state's Opportunity Zone tax-credit list. The 80-unit building, on the old Woodhill Supply site that backs up to Lake View Cemetery, is scheduled to be complete in late autumn or early winter.

In some cases, state tax credits are going to investors in deals that are well under way. That's true of Innovation Landing, a 50-unit apartment conversion near Cleveland State University, and of office renovations for Omni Title LLC's new headquarters on Bolivar Road, in downtown's Gateway District.

Other developments are still on the drawing board. 

In the Flats, investors in an apartment project called the Pine also received state tax credits. But Realife Real Estate Group, which purchased a strip of buildings along Columbus Road last year, hasn't started construction. The company took the project through the public-approval process and is marketing the shovel-ready deal for sale to other Opportunity Zone investors.

And some proposals are nascent. The business park in Central, for example, is a concept being floated by Bob Biggar, a sales associate at the Hanna Commercial Real Estate brokerage in Cleveland; his father, a longtime real estate broker; and an unidentified partner.

"We've invested some money, and the end goal would be to invest a lot more money and create a lot of jobs," said Biggar, who wants to bring employment closer to neighborhoods where many residents don't have cars.

State records show the park, which Biggar is calling "Project Jobs Hub," could span 20 to 30 acres.

"Ohio's Opportunity Zone program is a nice benefit and helps us to invest those early dollars before we're sure we have a project," he said. "But, certainly, the project will require a lot more collaboration, and probably some sort of public-private partnership."

Several investors and developers said the incentives aren't making or breaking their deals. But the tax benefits are allowing them to do more, and to take a longer-term approach.

"Without those dollars, there's no chance that we would have gone as far as we've gone — and will keep going," said attorney and investor Jon Pinney, who is working with CrossCountry Mortgage CEO Ron Leonhardt Jr. on a procession of deals in Cleveland's Superior Arts District.

Leonhardt received state tax credits this year for multiple projects in the district, where CrossCountry Mortgage's new headquarters is the centerpiece of a plan that includes apartments, parking and dining.

On East 72nd Street, real estate broker Rico Pietro and business partner Erik Loomis were able to put more money into Lighthouse ArtSpace Cleveland, where the Van Gogh show opened last year. They redid the roof, instead of making basic repairs. They repaved the parking lot, rather than patching.

A deal that began as a short-term lease became a long-term relationship with Lighthouse Immersive, an international tenant. To take full advantage of the Opportunity Zone tax savings, Pietro and Loomis expect to hang onto the formerly vacant property for at least a decade.

"I don't think the Opportunity Zone was the genesis of the development," said Pietro, a principal at Independence-based Cushman & Wakefield-Cresco Real Estate. "But it was absolutely the motivation for making a more sincere economic investment."