by Terry Rogers
On Monday, April 8, the City of Milford, in conjunction with the State of Delaware, held a workshop to provide information on the Opportunity Zone (OZ) program. The program was established as part of the 2017 Tax Cuts and Jobs Act as an innovative approach to spur long-term private sector investments in low-income urban and rural communities around the country.
“Senator Tim Scott of South Carolina and Senator Cory Booker of New Jersey put their heads together to try to develop a way to address the need for affordable housing around the country,” Brad Molotsky, a real estate attorney with Duane Morris who has helped several investors take advantage of the program, said. “Initially, they planned to use the Investing in Opportunities Act encourage investors to create more affordable housing. However, what they eventually realized is that the program needed to expand beyond just housing.”
After the bill was passed, the United States Treasury Department requested information from the Census Bureau regarding areas of the country that were low- to moderate-income. Maps were created and sent to governors in all 50 states and Puerto Rico. Each governor was given 90 days to select 25 percent of the areas in their state that had been identified to become Opportunity Zones. In Delaware, five areas in Kent, five areas in Sussex and ten areas in New Castle were selected. One of those areas is located in Milford.
“Currently, investors in the United States hold $6.1 trillion in unrealized capital gains,” Molotsky explained. “This represents a significant untapped resource for economic development. Opportunity Funds allow investors to pool and deploy their resources as OZ investments. Currently, if you receive capital gains, the tax on those gains is 24 percent just to the federal government. What this program does is delay those gains. If you invest in real estate or a business in an Opportunity Zone and you hold onto that property for five years, your capital gains tax is reduced by 10 percent. If you hold it for ten years, it is reduced by 15 percent. And, if you can keep the investment for 10 years and one day, you pay no capital gains tax.”
Investment must be made in any type of business, real estate or other assets within the Opportunity Zone. In addition, the investor must use the fund to improve the property in some way. It could mean demolition and rebuild, converting a vacant warehouse into a retail outlet or renovating an old apartment complex into an updated, low-income housing complex. The investor must decide within 180 days of receiving the gains that they want to participate in the program and, within the next 180 days, must create the fund and invest their gain. They then have 30 months to improve the property. Investors may not use the gain for “sin businesses,” which include liquor sales, massage parlors, golf, horse racing, hot tub sales, tanning salons or places for gambling.
“Now, if you wanted to open a casino in one of the zones, you will probably also have restaurants and a hotel,” Molotsky said. “You could use Opportunity Zone funds for the portion of the business not related to gambling as long as it is under a completely separate entity. You could also invest in a bar or restaurant that sells alcohol. The restriction is mostly for liquor stores. We have closed deals as small as $1.2 million and as large as $80 million under the Opportunity Zone program. The program does not take a bad deal and make it good, but it can take a good deal and make it great.”
Dan Bond, who has invested in quite a few historic properties throughout Milford, praised the plan at the workshop. Bond explained that Delaware makes it very easy to “stack” incentives, allowing investors to use multiple streams of incentives, tax breaks and grants to encourage improvement throughout the state.
“I am working on the Lou’s Bootery project and have completed several other projects throughout the town,” Bond said. “I have used stacked incentives and grants from the state for many of these projects. For the Lou’s Bootery project, I was able to use Downtown Development Grant funds, Opportunity Zone funds, historic tax credits and other incentives to bring this project to completion. Another project I am working on didn’t really allow for stacking. All of this takes time, paperwork and attention to detail. I thought I could do this without an accountant or attorney, but it turns out I needed their help. I would suggest that anyone who is interested in this excellent economic benefit, talk to me or to Rob at the City of Milford. We can help each other and hopefully bring in the millions in investment that can turn our downtown into something outstanding.”
For more information about incentives available through the City, state or federal government, contact Rob Pierce at 302-424-8396 or firstname.lastname@example.org.