Tax program takes aim at zones of opportunity
Tucked into the 2017 tax cuts were a few pages establishing a program aimed at providing a shot in the arm for communities that had yet to rebound from the 2008 recession.
The program created a tax incentive to encourage development in over 8,700 Census tracts, 300 of which are located in Pennsylvania and one which is located in Warren County.
They’re called opportunity zones.
And local officials recently heard how to take advantage of the opportunity in a presentation from Tim Wachter with Knox Law Public Strategies.
In short, the opportunity zone tax incentive program – aimed at enhancing investment in “low-income” communities, according to the text of the bill – would allow the investment of unrealized capital taxes into opportunity funds which would, in turn, be used for investment in the opportunity zones.
The zone in Warren County includes much of the City of Warren and some territory in Glade Township.
Wachter explained that the incentive enables investors to defer when the tax would have to be paid as well as reduction in the amount. However, if the investment is maintained for 10 years, the capital gains become tax free.
He called investing in opportunity zones an “aggressive investment of patient capital.”
Wachter, who has been heavily involved with opportunity zone development in Erie, said that the kind of projects they consider are “economically viable” and “socially impactful.”
Investors can invest in equity, stock, partnership interest or property in opportunity zones.
“By invest, we mean buy,” Wachter said, noting that real estate investments are to be either original use or substantial improvement, criteria implemented to aim at making sure investors actually improve the property located in the opportunity zone.
“The fund has about a year to make its first investment,” he said. “We want this money to be invested. It’s not to be held in a fund.”
City of Warren Manager Nancy Freenock asked Wachter if any small, rural areas are taking advantage of the incentive.
“You’re going to do better with attracting regional investors than national investors,” Wachter said. “A lot of the national investors are looking at a 10 to 12 percent return. Because of depressed real estate values… (Warren) won’t be able to offer that.”
However, he noted that regional investors may be willing to entertain a smaller return because of the opportunity to make an impact in the community.
He acknowledged that governors weren’t given much time to select the zones and noted that “some won’t see any investment.”
“You need to quantify deals. What deals are out there? If you don’t think you can develop deals, don’t waste your time,” Wachter told the officials. “(You) have to have an investor that wants to be married to a deal owner and you put them together. Figure out the project. Figure out what’s possible. (You) need to be able to tell the story in a convincing fashion.”
Warren County Commissioner Ben Kafferlin asked about the timeline for lining up projects.
Wachter noted that the reduction in tax decreases for deals struck after next year.
“You’ve got to have money rolled over in 2021,” he said. “No later than that.”
“You have to have a dedicated person. You have to have a project (and a) prospectus,” Mayor Maurice Cashman said. “Then you have to reach out…. In six months, can you put it all together.”
“(We need to make projects shovel-ready in six months, max,” Kafferlin noted. “(I) can think of several such improvement owners that I think would step up. We have our work cut out for us.”