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tax credit

RXR Seeks $500 Million for Fund That Benefits From New Tax Break

The fund will target developments in “opportunity zones.”

(Bloomberg)—RXR Realty is planning to start a fund targeting projects in low-income neighborhoods that are now eligible for breaks created by last year’s federal tax overhaul.

The fund will target developments in “opportunity zones.” Qualified funds that invest in eligible projects in the zones can defer, avoid or reduce capital gains taxes. The RXR fund -- among the first of its kind -- is initially seeking to raise at least $500 million dollars, primarily from high-net-worth individuals, who it plans to tap via wealth-management channels, according to a person with knowledge of the matter who asked not to be identified because the information isn’t public.

Opportunity zones are designed to encourage investments in low-income urban, suburban and rural communities throughout the U.S. There are roughly 8,700 communities that were nominated by governors in each state, Washington, D.C., and U.S. territories earlier this year.

New York-focused RXR already has projects that are a fit for its opportunity zone fund, in part because it has already selected sites for development through vehicles such as RXR New York Metro Emerging Sub-Market Venture LP, which has focused on areas that have suffered from under-investment, and RXR Real Estate Value Added Fund III LP, according to a presentation seen by Bloomberg News.

Projects earmarked for the opportunity zone fund include a $170 million development in downtown New Rochelle, in Westchester County, with 354 residential units and 13,000 square feet (1,200 square meters) of retail space; an $83 million development in downtown Glen Cove, in Nassau County, with 146 units and 15,500 square feet of retail space; and a $319 million development adjacent to the Brooklyn Navy Yard involving 680,000 square feet of commercial space that could be a creative office hub, according to the presentation.

The fund has the flexibility to provide capital to potential tenants, the person with knowledge of the matter said.

RXR may allow investment in the fund via preferred equity as well as the more traditional common equity based on their risk and return preferences, the person said.

RXR, led by Chief Executive Officer Scott Rechler, was active in opportunity zones even before the associated tax incentives were passed into law. The firm is finalizing a 28-story, 280-unit rental building with attached retail and theater space in New Rochelle. In Glen Cove, it’s under construction on a project that will turn a derelict former industrial site into a development with condominiums, rental apartments, retail space, parking and amenities including a bike path, children’s playground and waterfront esplanade.

Rechler is a longtime proponent of developing under-served communities in New York. He’s chairman of the Regional Plan Association, an urban research and advocacy group that works to improve prosperity, infrastructure, sustainability and quality of life in the New York, New Jersey, Connecticut region, according to its website.

The opportunity zone provision of last year’s tax overhaul allows people to defer paying capital gains taxes until 2026 if they sell investments and roll the money into funds that target opportunity zones. Investors can avoid paying capital gains on any further appreciation if they hold their new assets for at least a decade. There are smaller benefits for investments held for five or seven years.

Some researchers and community groups have said the law could promote the kind of investments that are intended, such as new small businesses and affordable housing. But many have also voiced concerns that the legislation is so broadly written that savvy investors, corporations and real estate developers could exploit it for projects they might have done anyway or that displace lower-income residents.

--With assistance from Noah Buhayar.To contact the reporter on this story: Gillian Tan in New York at gtan129@bloomberg.net To contact the editors responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net Daniel Taub, Christine Maurus

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