A federal tax break intended to revitalize economically distressed neighborhoods has started to bloom in Maine as investors become familiar with new regulations.

The developer who is rehabilitating the Odd Fellows building in downtown Augusta is using opportunity zone tax credits to entice investors.  Joe Phelan/Kennebec Journal

Investors are beginning to dip their toes into more than 30 “opportunity zones” dotted across the state where profits from the sale of stocks or properties can be put into real estate or businesses tax-free for up to 10 years.

A $52 million, 250-unit apartment building on Clarks Pond Parkway in South Portland is partially financed through the opportunity zone program. So is a $5 million rehabilitation of the Odd Fellows building on Water Street in Augusta.

Some eastern Maine towns have put together their own opportunity funds in an effort to attract investment to defunct paper mills and industrial sites.

But opportunity zones have yet to attract heavy investment, despite creating a buzz in development circles.

That is mostly because crucial regulations about when and where to put money were only released in April, nearly a year after Maine and other states selected the neighborhoods and towns that officials thought would benefit most from the program.

“Until you have regulatory certainty, it is hard to convince investors to deploy capital,” said John Lettieri, president and CEO of Economic Innovation Group, a research nonprofit in Washington, D.C.

Now that rules are in place, Lettieri expects the hype over opportunity zones to translate into inventive investment for infrastructure, manufacturing and innovation as well as real estate development, which has already attracted funding from people who want to reinvest capital gains and get a tax break.

“It already seems like it is unlocking commitment and capital going forward,” Lettieri said. “You absolutely see a concentration of interest and attention across sectors.”

AN OPTION, NOT A SOLUTION

Opportunity zones were created under the 2017 tax law passed by the Republican-controlled Congress. Proponents of the program predicted that offering steep tax breaks for long-term investment would bring trillions of dollars of unrealized capital gains back into the economy.

In broad strokes, the investments work like this: A person with a $100,000 capital gain is looking at up to 20 percent federal tax and more than 7 percent Maine tax. But if they choose to invest that money into opportunity zone project, such as building an affordable housing complex, they are able to shelter that investment from taxes for up to 10 years. If investors take their money out after five years, they pay taxes on only $90,000 of the original. If they wait seven years, only $85,000 is taxable.

After 10 years, investors get the discounted tax, but also get to keep any of the returns from the original investment tax-free. Access to the tax break is set to expire in 2026.

That is a powerful incentive, especially for massive corporations that have hundreds of millions of dollars in unrealized capital gains, said Brien Walton, a professor at Husson University in Bangor and CEO of Acadia Capital Management.

Walton set up opportunity funds for Baileyville, Calais and Lincoln, three eastern Maine towns designated as opportunity zones.

The idea, Walton said, is to make it easy for investors to bring capital to these struggling areas of the state.

But being an opportunity zone alone won’t solve all the issues. Walton plans to entice investors with additional incentives like federal tax credits and local tax breaks and local support. With all those pieces he thinks towns have a shot to revive forest industries, build power plants and other manufacturing.

“The program is designed to invest in scalable industries in economically distressed communities,” Walton said.

“It is not just a one-off payment, but looking comprehensively at what the town and the region wants in its strategic growth.”

For Kevin Mattson, being in an opportunity zone will help his bid to rehabilitate the historic Odd Fellows building in Augusta. Most of that project is financed with bank debt, but he was able to access some cash he would not otherwise have, Mattson said.

But he’s skeptical that simply being in an opportunity zone will change the way he structures a redevelopment project. It gives access to different sources of capital, but doesn’t change the calculation about whether a project is viable or not.

“The project has to stand on its own anyway, the question is does the opportunity zone make it more attractive?” Mattson said.

SHOVEL-READY

In South Portland, a Huntington, New York, firm called URS Capital Partners used an opportunity fund and bank debt to buy an apartment development that was already permitted and approved by city planners, company spokeswoman Rebecca Windsor said.

Strict rules about the timing of investments in opportunity zones meant her company was looking for a “shovel ready” project in a market that was guaranteed to give a good return on investment, she said.

“Because the timelines are so specific, you don’t want to find a piece of land and then go through the (permitting) process because any hold-up can be very sensitive as far as reporting goes,” Windsor said.

That reporting might get a little more detailed. Currently, to get a tax break, opportunity funds have to file with the Internal Revenue Service, but there is no public reporting requirement. Last month, the Department of Treasury asked for public input on a plan to require annual reporting of the amount invested in opportunity funds, where and for what purpose.

Basic transparency like that is necessary to make sure the program is working like it is supposed to, said Lettieri, from the Economic Innovation Group. But he also worries that if the bureaucracy becomes burdensome investors will be turned off.

“You load up what looks good on paper that in practice creates a huge headache on the compliance side,” he said.

 

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