Why This Upscale Miami District Is Designated a Distressed Opportunity Zone

MIAMI—In Miami’s upscale Design District, shoppers carrying Dior and Chanel shopping bags stroll past valet lines packed with Bentleys and Ferraris. Diners lounge at outdoor cafes, sipping $42 cocktails and nibbling on $82 branzino.

Miami’s Design DistrictBut under U.S. tax law, most of this 30-acre neighborhood is classified as an “economically distressed” community. The district is designated an Opportunity Zone under a nearly decade-old federal provision created to encourage investment in lower-income communities by offering tax breaks.

The luxurious Design District was able to qualify for this designation because census-takers group it with adjacent poorer neighborhoods. Now, the federal government is launching the second phase of Opportunity Zones at the start of next year and this Miami arts and shopping district again qualifies for selection.

The way lawmakers drew up Opportunity Zones rules has sparked controversy. The map of qualifying zones was based on census income data that goes back as much as six years, meaning that it may no longer reflect the current status of a neighborhood.

Critics say Opportunity Zones allow sophisticated investors to funnel untaxed profits into projects that would likely have received investment anyway, and that little goes toward the lower-income communities it was meant to serve.

They also point out that any tax breaks are hard to trace because there are no public reporting requirements by the beneficiaries. “They’re really a subsidy to high net-worth individuals to do investments they already would be doing, in places they already would be investing in,” said Brett Theodos, director of the Center for Local Finance and Growth at the Urban Institute, who has studied the program and its effects over the past decade.

John Lettieri, the co-founder of Economic Innovation Group, a Washington-based think tank that conceived of the Opportunity Zones program, believes it has generally been a success, despite the outliers. Because the data is imperfect, the onus is on state governors to ultimately select the right locations, he said.

When Congress created the Opportunity Zone program in 2017, lawmakers heralded it as a way to attract investment by funneling risk-averse capital into neglected communities. The program offered investors the ability to defer or eliminate certain capital-gains taxes if they invested in real estate or in businesses in these areas.

These zones can also often incorporate lower-income neighborhoods near wealthier ones. In the case of the Design District Opportunity Zone, the census tract includes the luxurious retail corridor but also the more depressed neighborhoods of Little Haiti and Buena Vista.

Because the Design District has no residences and is mostly retail, the census data relies only on residential data from the outskirts of the tract. “Incentivizing other people to invest in the neighborhood, that’s positive,” said Craig Robins, one of the biggest developers in the neighborhood.

“It’s serving its purpose of bringing in people to do things that bring up the whole area.” When Robins first began investing in the Design District in the ’90s, it was a depressed area with little commerce that was reinvented into a luxury retail hub.

While large institutional investors began transforming the neighborhood before the tax breaks became available, there have been hundreds of millions of dollars invested since the Opportunity Zone designation. Land values have skyrocketed over the past decade, potentially generating hundreds of millions of dollars in untaxed profits for developers who own qualifying properties or businesses.

But there is little evidence that this investment has improved the lives of the lower-income residents. The census tract’s residential base remains largely lower-income, according to census data, which qualifies the area for selection to receive renewed federal subsidies, and calls into question whether that wealth was ever designed to reach the existing community.

Robins said he and his partners in developing the Design District—L Catterton, a private-equity firm backed by LVMH chief Bernard Arnault, and investment giant Brookfield—have benefited from the tax designation because of all the capital it attracted to the neighborhood.

But he said he and his partners aren’t pursuing the tax breaks themselves and don’t expect to benefit from the tax break directly. Because the partnerships acquired the central retail land long before the 2017 tax law passed, they couldn’t easily roll new capital gains into those specific parcels.

Instead, Robins said, the developers actively supported the Opportunity Zone designation to stimulate outside investment, relying on the federal tax break to improve the periphery of their neighborhood. “None of our partners in any of the Design District projects are pursuing Opportunity Zone benefits,” Robins said.

Several major luxury projects in the works could also qualify for federal tax breaks, including a Fouquet’s-branded hotel development and a 20-story office and retail tower called Ursa, where Robins is a partner.