Great Expectations

The new Qualified Opportunity Zone program has planners fired up

The federal program has a few nifty features that planners believe will make it highly attractive to investors. For one thing, they can get the tax benefits, even if they don’t live, work or have a business in a Qualified Opportunity Zone.

The initiative is widely expected to bring bigger pots of money into low-income areas of the state. “The federal program will attract bigger projects and people with larger resources into our county,” says Trip Tollison, president and CEO of the Savannah Economic Development Authority.

But the Internal Revenue Service has not yet issued the final regulations. Originally slated for release in the summer of 2018, the rules had not been released by Labor Day, and there’s been no updated announcement. That has put eager planners on the edge of their seats.

“We are still waiting on the IRS to issue its rules and regulations,” says Tollison. “Once they are out, we will work with the investment community to let them know where the tracts are located and what is needed.”

Until that happens, planners are using the time to develop wish lists of their county’s economic needs and thinking about how to best take advantage of the new program.

Investor Incentives

In June 2018, the U.S. Department of the Treasury released its final list of tracts that met criteria for designation as Qualified Opportunity Zones. In Georgia, 260 tracts were designated in 83 counties, and the split is roughly 60 percent rural and 40 percent urban in areas where poverty rates are greater than 20 percent.

According to Rusty Haygood, deputy commissioner of community development and finance at the Georgia Department of Community Affairs (DCA), the highest concentrations of Qualified Opportunity Zones are in Metro Atlanta, Central Georgia and South Georgia. Among the counties receiving the most designations are Richmond, Muscogee, Fulton and Bibb.

The Qualified Opportunity Zone program is sometimes mistaken for another initiative, the Georgia Opportunity Zone program. The latter is a state program that offers businesses a tax credit for generating new jobs. For every job a company creates, it may qualify for a $3,500 tax credit, as long as the business is within or adjacent to an opportunity zone. The tax credit is applied to the employer’s state tax liability.

But despite the confusing similarity in titles, the state program has no relationship to the federal initiative. “The two programs are completely separate,” says Haygood. “The state opportunity zones are intended to help job creation, while the federal program is about access to capital.”

Both programs deal with development in designated low-income and distressed areas, but the qualifying zones don’t always overlap. In some counties, such as Baldwin County, state and federal zones are almost identical. “Our six federal tracts closely align with the state tracts in our county,” says Hank Griffeth, city planner of Milledgeville.

In other counties, however, the Qualified Opportunity Zones are in different areas. In Chatham County, the state and federally designated zones do not overlap. While the federal zones are largely located within the Savannah city limits, the state zones tend to be in rural parts of the county.

Another key difference lies in who gets the tax benefit. While the state program offers incentives to businesses, the federal program offers incentives to investors. The latter stipulates that individuals may set up a Qualified Opportunity Fund either as a partnership or corporation. The investor may use capital gains from a previous investment to fund eligible projects located in a Qualified Opportunity Zone. Tax on the capital gain is deferred until as late as Dec. 31, 2026.

“The state program was just a tax credit for employers, whereas the federal program is an investment vehicle,” says Roberts. “The new program is much more aggressive. It’s a huge shot in the arm for our area because it has the potential to bring more business into the area, not just serve existing ones.”

For rural counties that have had difficulty attracting out-of-state funding, this feature could open up new opportunities. “It’s entirely possible that the program will attract more money from outside investors,” Haygood says, “because Georgia’s population is increasing and needs affordable housing in many communities. This may be a driver to investors outside the state.”

“This program will really move the needle,” Roberts says. “It will encourage new businesses to come in and also help to expand existing infrastructure.” He thinks it may offer opportunities that the state program did not. “The current program allows businesses to take tax credits, but it’s not as robust as the new program,” he says.

Outreach Plans

With no final regulations out yet, planners have not completed their strategies for investor outreach. But while they wait, they are using their time to generate ideas about how they might tap into this new funding market.

How will economic development opportunities be promoted? “We are looking into posting opportunity parcels out on our website and possibly social media,” says Roberts. “Some states provide an interactive map to show investors and business owners where the parcels are, and Douglas County would certainly want to participate in that.”

Baldwin County is considering similar types of promotion. “We will advertise the tract’s opportunities on our websites and social media.” Griffeth says. However, he notes, “We don’t expect to pitch deals, so we’re not developing lists of people.”

Chatham County’s Qualified Opportunity Zones fall almost entirely within the city limits of Savannah. The historic city has long been a top destination for global investment funds. Tollison believes the federal program will make the city even more attractive to new funding.

“We’ve been getting phone calls from developers and investors expressing interest in the program,” Tollison says. “There have been high-level conversations about it, but we have not marketed the program on social media or taken other steps. We plan to do marketing once the IRS rules are out.”

The DCA is also in a planning stage. “We are still trying to figure out the nuances and elements of the program,” Haygood says, “Until then, we are in the process of trying to position it to benefit the state.”

However, he acknowledges that the DCA may not be a one-stop source of information on opportunities. “It would be difficult to have a central repository of all Opportunity Funds in the state,” he suggests, pointing to logistical challenges in gathering such data.

So Many Projects

For Baldwin County, the program could not come soon enough. “We are coming out of a difficult time in our county’s history,” says Griffeth, “From 2005 to 2014, we were really struggling, due to the closure of some businesses and state government entities.”

Baldwin County took a major economic hit from the downsizing a few years ago of Central State Hospital, which once accounted for 60 percent of the county’s GDP. “It’s a prime target for redevelopment,” Griffeth says of the old mental health facility, which dates back to 1837.

The multi-building hospital complex is within a Qualified Opportunity Zone and will likely benefit from the tax incentives. It’s a big redevelopment project that will require big money to undertake. That’s why it’s at the top of the list of projects Baldwin officials have identified as possible beneficiaries of the new program.

Savannah officials are eyeing a parcel near the city’s historic neighborhoods as a prime target for the tax incentive. “West of Savannah’s historic district, there’s an opportunity zone that has a lot of potential,” Tollison says. “It is a mixed-use area with low-income neighborhoods, distribution facilities and warehouses. It’s a great opportunity for investors because it’s near the port and a major highway.”

Roberts sees high potential for his county’s two opportunity zone tracts. “Douglas County has a lack of retail in that corridor,” he says, “so there are retail opportunities, as well as additional growth potential in the manufacturing area.” Roberts points to the Switch Data and Google data storage centers just south of the Qualified Opportunity Zones as another possibility. “Ancillary businesses taking advantage [of the tax incentive] might be developed within the zones that could service the data storage facilities.”

Douglas County is also taking proactive steps to ensure that tracts are ready for prime time. “Some areas could have environmental concerns, which might be challenging for some parcels,” says Roberts. “We are discussing state and federal grants to help cover phase 1 and phase 2 environmental testing. We are hoping to mitigate these concerns ahead of time.”

For now, planners are playing a waiting game, but given all the possible benefits, it seems worth the wait. In the downtime, they have plenty to think about, and thus far, see no pitfalls to the new initiative. “At this time, I don’t see any downside to this program,” Roberts says. “It has the potential to be a game changer for our county.”