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November 13, 2019

Qualified Opportunity Zones: State & Local Municipalities Sweeten the Pot

While developers, investors, fund managers and business operators consider how to capitalize on the tax-advantaged investing offered by the Qualified Opportunity Zone (QOZ) program, many state and local governments are seizing the opportunity to court that investment and tap into the anticipated capital flow in excess of $10 billion. In 2019 alone, 17 state legislatures have introduced and considered various bills that offer a variety of additional tax breaks and incentives that could be paired with a QOZ project.

Governors tailored their QOZ selections to the needs and potential of their communities. They relied heavily on public and local government engagement, rigorous analytics, pee -learning and interagency collaboration to determine their zones. Selected tracts have high need as well as proven growth potential.

Now that zones have been finalized, state and local governments are signaling a clear desire to court investment associated with the QOZ program. This could have a transformative impact for many communities that have previously struggled to capture the attention of outside investors.

The State of Maryland, in particular, has been active in laying the groundwork for public-private cooperation. A Maryland Opportunity Zone Leadership Task Force, created in January 2019 and led by the lieutenant governor, engaged dialogue between the state and local governments, as well as business owners, economic development groups and community members. The task force’s final report aligns QOZ goals with state and local economic and cultural priorities, including recommendations for a State Opportunity Plan.

The City of Cleveland and surrounding Cuyahoga County have pursued other strategies. For instance, OpportunityCLE was formed as an “agile network of public, private, and philanthropic partners” to help facilitate investor entry into the market and to provide access “to the full spectrum of resources, including neighborhood level organizations, state and federal governments, utility and infrastructure agencies, workforce development organizations, private developers, and key industry experts.”

As part of its strategy to court investors and businesses, Erie itself is investing in free Wi-Fi for its eight designated QOZs. Erie was one of the first to market with a branding campaign for its designated QOZs, declaring them “Flagship Opportunity Zones.”

In Alabama, Birmingham Mayor Randall Woodfin has been one of the more prominent QOZ boosters, announcing the Birmingham Inclusive Growth public-private initiative in April 2019, which is now live. There are 24 QOZs in Birmingham, touching 77 of the city’s 99 neighborhoods. Similar to the Erie campaign, the platform intends to identify and fund QOZ projects that offer goods and services needed by communities.

In Memphis the Union Row QOZ project is slated to be the largest redevelopment project in Memphis history. Currently it’s the site of a low-dollar hotel and abandoned auto dealers, but soon the 11-acre tract will transform into a mixed-use space filled with apartments, a hotel, retail and office space, transforming the city’s downtown. Touring the site ahead of the groundbreaking for the $950-million project, Housing and Urban Development (HUD) Secretary Ben Carson praised the project as showcasing the QOZ program’s potential.

Only one city, Boulder, Colorado, took the extraordinary step of telling developers and investors to hold their horses while it updated the zoning and land-use regulations in its lone QOZ census tract. In August, the city essentially lifted its temporary moratorium with the approval of the Google complex construction.

The intention of these programs and dedicated agencies is clear – attract investment, facilitate and streamline the various levels of approval, and channel outside investment into the most desirable QOZs. Understandably, in the grand scheme of city planning and revitalization, local governments are seeking to guide investment into areas that will have the largest impact within communities.

The tax break could be a game changer for towns in rural areas as well. Development plans of 164 acres of farmland along the Uncompahgre River near downtown Montrose, Colorado include a hotel, apartments and space for outdoor recreation businesses. This is an unusually ambitious project for a sleepy town of about 20,000, known mostly for an airport where the glitterati disembark on their way to Telluride. The project is attracting an unusual amount of attention because it’s in a federally approved QOZ.

It should be noted that there are at least six states, including California and Massachusetts, that currently are not fully conforming to the program. Investors in states that do conform to the federal QOZ provisions may receive state tax incentives similar to those available at the federal level. Conversely, investors residing in nonconforming states may be unable to defer and reduce state taxation on the initial gains invested in QOZs.

What is clear is that the early actions by some communities have set the stage for a competitive environment; cities and counties previously passed over for investment opportunities are keen to ensure that fate is not repeated. QOZ projects breaking ground today are leveraging the appeal of another key program feature – funding and favorable tax treatment available to Qualified Opportunity Businesses (QOZB) setting up through a Qualified Opportunity Zone Fund (QOZF). Startups, business expansions and relocations can qualify. This is the promise for both business owners and developers that many local and state municipalities envisioned.

Your Team

Sean Haggerty is a Director in the Kansas City office. Sean specializes in complex tax engagements and leads CBIZ and MHM emerging markets initiatives, including guidance and commentary on Opportunity Zones. You can reach Sean directly at shaggerty@cbiz.com or 816.945.5500.

Steve Dunavant is a Managing Director in the Memphis office. Steve provides guidance and counsel on variety of financial and taxation matters involving the utilization of tax incentives to individuals, private equity funds, venture capital funds and family groups. You can reach Steve directly at sdunavant@cbiz.com or 901.842.2730.

2019 Individual Tax Planning Supplement

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