Not too far from the new Google campus in Boulder, an aging strip mall is in need of a makeover.
Redevelopment of Diagonal Plaza has been tried before. A Walmart Neighborhood Market, for example, popped up in 2013 but closed last year. Now, there’s a renewed effort to invigorate the shopping center, Google’s neighborhood and the rest of the 2-square miles in this Boulder census tract, thanks to new federal incentives for distressed communities.
But, but, … Boulder?
“The interesting thing has been that there is a reaction, ‘Why Boulder?’ But Boulder has several census tracts that meet the requirements,” said Clif Harald, executive director of the Boulder Economic Council. “We knew that we had tracts that would qualify, this one in particular.”
Let’s back up a bit. Just before Christmas, Congress passed a massive tax overhaul. Buried in the new law was something The New York Times in January called a “little noticed section” of the $1.5 trillion tax cut (page 130). It was a plan to help distressed America.
That section defines the Opportunity Zones. Areas considered economically distressed (read: with poverty rates of at least 20 percent or with family incomes below 80 percent of the state average) could become sites where investors plunk their billions of dollars to get major tax breaks. Investors would need to set up a fund that puts 90 percent of the investment into real estate or businesses within the zone. Taxes on financial gains would be deferred or even partly avoided if the investment stays in the zone over a 10-year period.
Now, investors are eagerly waiting for the U.S. Treasury Department to unveil the rules for the program, and that could happen any day, said Marc Schultz, a tax lawyer with Snell & Wilmer in Phoenix who has become an Opportunity Zones expert. While the motivation is to aid lower-income communities, the prime attraction for investors is money.
Update: IRS releases proposed regulations for Opportunity Zones on Oct. 19, 2018.
“I always go back to Apple stock” as an example, Schultz said.
If he bought the tech stock for $1 million and it’s now worth $3 million, he’d have to pay taxes on the $2 million after he sold the stock. But if he invested the $2 million in an Opportunity Zones fund, “I won’t be subject (to capital-gains taxes) until Dec. 31, 2026,” he said.
But wait, there’s more — and that’s what is getting investors excited.
If Schultz keeps his money in the fund for 10 years and the investment appreciates to, say, $6 million, he pays taxes on only the original $2 million gain.
“The growth from $2 million to $4 million is tax free,” he said.
There’s even protection for the investor — if the market tumbles and the $2 million declines in worth to $500,000, “I won’t have to pay tax on the $2 million but on the $500,000,” he said.
With the rules still not final, it’s anyone’s guess about whether they will have social impact and serve the distressed communities they were intended to serve, Schultz said.
“We’re going to see a lot of funds and we’re going to see ones with different social impact,” he said. “That is a lot of the questions. Will the deals be impactful for the community? Yes. But there is no requirement yet.”
How Colorado’s 126 tracts were picked
Colorado’s Office of Economic Development and International Trade spent the first several months of this year finding those distressed areas.
“We had 500 eligible census tracts in the state,” said Stephanie Copeland, the agency’s executive director. “The Treasury said now you get to pick 20 percent of them.”
Copeland’s team built an elaborate scoring program with 130 variables, such as level of distress, remoteness and other investments in the same tract. The team, seeking feedback, asked every region in the state to “tell us what you know that won’t show up in data,” she said.
Ultimately, 126 tracts were approved for Colorado, including sites in Estes Park, Fort Collins and Boulder. There were low-income neighborhoods, such as Denver’s Sun Valley, where Mile High Stadium sits. It also includes land south of Denver International Airport, where an Amazon distribution center is located. There are a large number of remote regions, including the majority of Las Animas County, the Ute Mountain Ute Reservation and large swaths of eastern Colorado, most near the Kansas border.
But here’s the thing to keep in mind about why affluent areas made the cut, Copeland said. There is a ton of money — some say $6 trillion — just sitting around in private coffers looking for something to invest in. And it’s not just in Colorado. Approximately 8,700 tracts nationwide were approved, so investors have their pick. Boulder’s Diagonal Plaza is competing with sites in California’s Silicon Valley, as well as in New York and Chicago.
MAP: Click for an interactive map of Colorado’s Opportunity Zones
“This has to be a tract that attracts private capital,” Copeland said. “So we thought, let’s look for census tracts where in the next 10 years, this would make a difference in its pace of development.”
That meant including a part of Boulder still on the cusp of revitalization even after Google opened its local headquarters there in December. It also meant eliminating RiNo, the former industrial neighborhood in Denver that has become one of hottest spots for urban development in recent years.
“This would not be catalytic for RiNo because that catalyst has already occurred,” Copeland said. “If we only designated tracts where nothing was going on, we’d be completely overlooked by national investors. … We had to put some areas in there that wouldn’t make it so hard for investors to find something.”
Another selected area is Estes Park, the eastern portal to Rocky Mountain National Park. The town is known for tourism and a large senior population. Its Opportunity Zone doesn’t encapsulate the entire town, just the south half, the part south of East Elkhorn Avenue, said Jon Nicholas, president and CEO of the Estes Park Economic Development Corporation.
“People were surprised that Estes Park would be a distressed community because we have a lot of affluent retirees. But what it comes down to is we have a workforce-housing shortage,” Nicholas said. “The biggest need for us is attainable housing and workforce housing.”
His office doesn’t spend much time recruiting large employers because of the limitations on housing. But it focuses on entrepreneurs, telecommuters and small businesses. Housing, though, remains an issue.
“Some of those companies are starting to develop a workforce, and that’s why workforce housing is such an important piece,” Nicholas said. “If your workforce housing is in Longmont (30 miles east), that’s not going to work.”
Communities near the resort town of Telluride almost weren’t picked, said Paul Major, president and CEO of the Telluride Foundation. His organization worked with nearby San Miguel, San Juan and Dolores counties to make their pitch to the state. The town of Telluride is not in an Opportunity Zone.
“In the recovery since the recession of 2009, many of our counties have lost jobs,” Major said. “They talk about two Americas. Everybody lost jobs in the recession, but it’s the recovery that matters.”
He pointed to the looming shutdown of coal and mining operations in Nucla, where major employer Tri-State Generation and Transmission is winding down operations of a power plant and coal mine.
“One of the Opportunity Zones here has a coal-fired power plant. And that’s closing in two years. Not only are you losing the jobs and the coal plant, but you’re losing the jobs in business development,” Major said. “If the coal plant is closing and nothing is replacing it, no one is going to open a restaurant.”
But the data didn’t show that. According to the state Labor Department data, the three counties don’t even come close to having the highest unemployment rates — in fact, they’re lower than Denver’s rate. Major is glad the state asked someone who actually lives in the community.
“To the credit of the state, they were looking for opportunities to maximize the tax benefit,” he said. “Unless you have the community and entities in a community actively trying to grow the economy, you’re not going to have anything to invest in.”
Major, like other community advocates, is actively working to make sure potential investors get matched up with businesses and properties in the communities that would benefit the most. He met a woman in the process of raising money to launch Camp V, a luxury campground in Naturita — and an idea that has taken off in Moab, Utah. And he talks up the local bakery in Norwood that must expand its facility to serve more customers.
“That’s a big mistake if people think investors are just wandering around wondering where to put their money,” he said. “That’s not the case. The fact is this is a way to get an additional benefit for an investor, but at the end of the day, it has to be an investment. Is it going to return 7 percent or 90 percent? Until you get into that discussion, it’s a charitable discussion and this isn’t charity.”
It’s not just traditional business
The idea of Opportunity Zones is to help develop more apartments in communities such as Estes Park. Or invest in a larger facility to help a small business — say, assisting Blue Grouse Bread in Norwood in expanding its bakery.
In Montrose, a new business park focusing on outdoor companies such as Mayfly Outdoors is already underway in an Opportunity Zone along the Uncompahgre River, said Sandy Head, executive director of the Montrose Economic Development Corporation. Housing developers are now interested in the land.
“The fact is that the Opportunity Zone gives us an excellent tool in our toolbox. Business recruitment is a very competitive piece,” she said. “We’ve talked to some manufacturers about the difference between them locating in Montrose versus another community, and it weighs heavily on the Opportunity Zones.”
But she knows it’s not as simple as that.
“I had an economist who was frustrated and said, ‘Someone’s going to put their money in Montrose and do nothing.’ But you have to show a gain,” she said. “There has to be an economic gain.”
The other thing going for local leaders looking out for their communities is a different type of investor is also jumping in. Numerous philanthropic and social-minded foundations have expressed interest, including the The Rockefeller Foundation, which sent a representative to check out a recent Colorado event that addressed the topic.
“At The Rockefeller Foundation, we see an opportunity to shape the implementation of this policy toward an outcome we care about: inclusive economic development,” said Matt Herrick, the group’s managing director of communications.
Last month, the foundation, which partnered with The Kresge Foundation to find potential investments, heard from 141 fund managers across the nation who are raising “billions in new capital” because of the new tax benefit.
But Herrick said there’s confusion over whether this new tax benefit will really help the distressed communities that it’s designed to.
“There’s much uncertainty about how much investment will flow into Opportunity Zones, what those investments will look like, and how they will impact people’s lives,” he said in an email to The Colorado Sun. “There is excitement and momentum for how this new investment platform could lift communities, but we need to see clear guidelines.”
When those rules do come down, the state plans to examine them and share its knowledge immediately.
The state has received praise from across the country about what it has done so far. The Economic Innovation Group, a public policy entity that had earlier criticized California’s governor for including tracts such as Stanford University and San Diego State University, gave props to Colorado for being an “early mover” and showing how its “rigorous data-informed approach to balancing need and opportunity served as a model for several others.”
“Colorado stacks up very well,” said Jason Brinkley, a Denver-based partner at Snell & Wilmer. “Whether it’s the Eastern Plains or Western Slope, it has great characteristics appealing to certain types of investors. The point of Opportunity Zones is not to make bad projects good, but good projects great.”
How exactly would an investor benefit from an Opportunity Zone investment? Let’s walk through it.
- Investor makes $20 million profit on a $10 million stock investment
- Avoids paying capital gains tax by investing the $20 million in Opportunity Fund in 2018.
- By end of 2026, investor now pays the capital gains tax on the original $20 million minus 15 percent (or $3 million) because Opportunity Fund reduces original capital gains tax by 10 to 15 percent after five to seven years.
- If there has been appreciation in the new investment, investor doesn’t have to pay any taxes on it after 2028. So if the fund appreciated to $60 million from $20 million, there are no taxes on the $40 million gain.
What does it take to create an Opportunity Fund?
- Financial entities can create a fund, including banks, venture capitalists or local investors and developers. Guidelines are expected soon from the U.S. Treasury.
- The fund must invest in real property, a new or existing business, equipment or stock within the qualified zone.
- 90 percent of the fund’s assets must be invested in the qualified zone
- Fund must be certified by the U.S. Treasury Dept.
- Can’t invest in a “sin” business — such as a golf course, country club, massage parlor, hot-tub or suntan facility, gambling site, or liquor store.
- There must be a substantial improvement to the property over a 30-month period.
- Tax incentive depends on length of investment:
– Fewer than 5 years: Deferred taxes
– 5-7 years: Above plus 10 percent reduction of the original capital gains tax
– 7-10 years: Deferred taxes, plus 15 percent reduction of the original capital gains tax
– 10+ years: Above plus no additional capital gains tax on the appreciated investment
Source: Snell & Winter, Economic Innovation Group
More info:
U.S. Treasury Dept./IRS FAQ: Link
Economic Innovation Group FAQ: Link
Map of Colorado’s Opportunity Zones: Link
Guide for cities and local communities: Link
Update: IRS releases proposed regulations for Opportunity Zones on Oct. 19, 2018.
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