The Land of OZ: Leaders hope new tax incentive can drive development in local Opportunity Zone
Local business leaders have high hopes that an unconventional, little-known federal tax incentive could pump millions of dollars of new commercial and residential investment into a low-income section of Grand Traverse County.
A 6.2 square-mile swath of land including a large area of Garfield Township and a small portion of Traverse City has been designated as an Opportunity Zone, which allows investors to delay and reduce capital gains taxes by plowing those gains back into business or real estate developments in the designated zones.
“I expect the program to have a significant impact,” said Turner Booth, managing director of Cochran, Cowell & Grumman, a Traverse City merchant bank.
Booth’s firm is currently working to finalize two undisclosed real estate deals and is evaluating a possible third deal in the Garfield zone, he said.
The bank also partnered with Westwind Construction of Grand Haven to develop a 228-unit multifamily housing project in Gaylord’s Opportunity Zone. The project, called Pines 45, broke ground in October.
Westwind also built the Ridge 45 apartment complex in Garfield Township.
“We’re excited about the Opportunity Zone program,” Booth said. “We’re looking at various ways to use it to drive money into Garfield and improve areas that are appropriate for investment.”
While much of the focus has been on the potential for real estate investing in the zones, Booth said investors could earn larger returns by relocating businesses into Opportunity Zones or starting new companies in the zones.
“This is not just about real estate,” he said. “Adding value to an operating business in an Opportunity Zone or moving it into a zone get the same tax treatment.”
A startup business in the zone could produce an investment return of 20 times the original investment, much higher than a typical real estate investment. If structured appropriately, the appreciation from that investment could be tax-free.
But others are more circumspect about the economic development potential of Opportunity Zones. Local officials say the program is complex, was hastily implemented and largely sidesteps involvement by local governments.
“Generally speaking, most other economic tools have a connection into the local units. This one does not,” said Matt McCauley, chief executive of Networks Northwest, a regional planning, and economic and workforce development agency.
In some cases, local officials aren’t even aware there is an Opportunity Zone in their jurisdictions.
That’s the case in Kalkaska County, where the county clerk and assistant zoning administrator said they didn’t know there’s an Opportunity Zone encompassing about a third of the county on its south side and had never heard of the program.
“There’s not as much knowledge about Opportunity Zones as one might think,” said McCauley, whose agency advised state officials in selecting the zones, which are based on census tracts.
Opportunity Zone legislation was a last-minute addition to the federal Tax Cut and Jobs Act of 2017. More than 500 pages of final rules on the law’s implementation weren’t issued until last December by the Treasury Department and the Internal Revenue Service.
State governors were required to designate a certain number of census tracts as Opportunity Zones within three months following passage of the federal legislation “with very little information about the incentive or opportunity for on-the-ground input,” said Richard Murphy, a policy research manager at the Michigan Municipal League.
There are more than 8,760 Opportunity Zones in the United States, including 288 in Michigan. In addition to those in Grand Traverse and Kalkaska counties, there is a zone in Antrim County covering an area surrounding Mancelona and another on the northern tip of Emmet County.
Treasury Secretary Steven Mnuchin said the Trump administration anticipates that $100 billion in private capital will be “dedicated towards creating jobs and economic development in Opportunity Zones.”
Michigan’s Opportunity Zone website (miopportunityzones.com) lists just three zone projects either planned or underway; two apartment complexes in Detroit and a mixed-use development in Lansing. That likely reflects the state’s inability to track investment under the zone enabling legislation.
The zones are aimed at jump-starting development in low-income or blighted areas. In the Garfield zone, nearly 8,000 people earn $11,000 a year less in average per capita income than residents of Grand Traverse County overall.
Joblessness and poverty also are much higher in the zone than in the county. The Garfield zone had an unemployment rate in 2017 of 9.4%, nearly double the county rate of 5.4%. And the poverty rate in the zone is 25.7%, more than two-and-half times the county rate of 9.7%, according to a demographic profile prepared by Garfield Township.
Local leaders say they would like to see more multifamily housing built in the Garfield zone to help ease the area’s housing shortage. And they see the Opportunity Zone incentive’s potential in aiding the redevelopment of the largely vacant Cherryland Center shopping complex.
“I want my organization to support what Garfield Township is trying to do with the Cherryland Center,” said Warren Call, chief executive of TraverseConnect, a local economic development agency. “There’s a lot of opportunity for development there.”
Call said he thinks the Garfield zone is “one of the most attractive in the state” because it’s close to a thriving downtown in Traverse City and has a lot of land available for commercial and residential construction.
But Garfield Township Planning Director John Sych said it’s hard to assess what the impact of the Opportunity Zone incentive might be in his township because there’s no oversight of the program by local governments or any local reporting requirement.
Any projects using the zone incentive still have to go through the normal planning and zoning processes. But local officials might not know the incentive is being used because the only reporting is to the Internal Revenue Service.
“It’s not something we have a good pulse on, to be honest with you,” Sych said. “We’ve only been hearing things about it by word of mouth. There’s no good way of tracking projects.”
Sych said he hasn’t spent much time marketing the zone, mainly because his department has been swamped with reviews of new real estate projects throughout the township in a booming economy. “We were supposed to have a lull this winter, but it never happened,” he said.
The Opportunity Zone program also is facing criticism that it’s handing out tax breaks to wealthy investors, some with ties to the Trump administration, who are investing in luxury real estate projects in affluent neighborhoods.
Treasury officials announced in January they were launching an investigation into those claims, which had been reported by the New York Times and ProPublica, a nonprofit investigative news organization.
Vance Maultsby, a shareholder of a large Dallas certified public accounting firm and who owns a vacation home on the Old Mission Peninsula, said the controversy could be rooted in the use of outdated census data.
Opportunity Zones were selected using 2010 census tracts, and some of those tracts that were considered low-income or blighted a decade ago are now thriving. “Things changed,” he said. “Some of the zones don’t need the designation anymore.”
Maultsby, who is his firm’s expert on Opportunity Zones, contacted local financier Casey Cowell about the potential for the Garfield zone in 2018. Cowell quickly became a cheerleader for investing in the zone.
“We have a unique chance here to reimagine the way our community uses a large section of land and attract private investment to help us get there,” Cowell wrote in 2018.
Maultsby said the success of the Garfield zone will largely depend on the involvement of “enthusiastic champions” to promote and market the zone for new investment.
“Is it a panacea? Not in the least,” he said. “But if you’ve got money and are looking for a good deal, an Opportunity Zone could make a difference in where you invest.”
In the Zone: How investors can profit from economic development tax incentive
Opportunity Zones were created by the federal Tax Cut and Jobs Act of 2017 to revitalize economically distressed neighborhoods. They allow investors to reduce or eliminate capital gains taxes by reinvesting those gains in businesses and real estate development in qualified low-income census tracts. Here’s how they work:
- Investments must be made through a qualified Opportunity Fund, a partnership or corporation that invests at least 90% of its holdings in one or more qualified Opportunity Zones.
- An Opportunity Fund can invest in real estate developments, new businesses or existing businesses already located in the zone. Investments in liquor stores, massage parlors, tanning salons, country clubs, casinos, racetracks and other “sin” businesses are prohibited.
- Investors can defer paying capital gains taxes on Opportunity Zone investments until April 2027 for investments held through Dec. 31, 2026. Capital gains taxes on investments held for at least five years can be reduced by 10% and by 15% for investments held for at least seven years.
- Capital gains taxes on the appreciation of properly structured Opportunity Zone investments held for at least 10 years are eliminated.