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Maryland jurisdictions scramble for Opportunity Zone investments.

Byline: Adam Bednar

As the clock strikes midnight on New Year's Day it will mark a critical juncture in a race among Maryland jurisdictions to entice Opportunity Zone investments.

Opportunity Zones are essentially federally designated districts providing tax incentives to reinvest capital gains. The initiative's boosters argue the incentives will attract substantial dollars bolstering real estate development and operating businesses in Maryland's 149 "economically distressed" census tracts designated as Opportunity Zones.

Not everyone, however, believes the inducements will bring investment to Maryland's most downtrodden communities, the same communities cited by Opportunity Zone boosters as the program's intended beneficiaries.

"I say this straight up: Capital is portable. Your city is not, and capital will go to the places where (lenders) believe they have the highest and best use of that capital, and it's not going to be into the hardest-hit areas," Spencer Levy, CBRE's chairman of Americas research and senior economic adviser, said. "It's going to be in the areas where (investors) think they can make an investable return in the next five years."

The Opportunity Zone program's design turns 2019 into a crucial year in vying for venture capital, a competition some communities start with significant disadvantages. That's largely because depositors must reinvest gains from 2018 by early 2019, through Qualified Opportunity Zone Funds, to fully realize tax incentives.

"So to the extent people have vision for what the future should look like and want to take advantage of the Opportunity Zones as a tool to help that come about, or they want to integrate it with other programs, now is the time," David Shapiro, an attorney at Saul Ewing Arnstein and Lehr LLP, said. "Because now is when you will have people looking to invest, and if you want it to be smart investment, and well thought-out investment, you need to get out in front of when the money comes in."

Created as part of the federal Tax Cuts and Jobs Act of 2017, Opportunity Zones allow investors who reinvest gains in a designated census tract to defer taxes until 2026.

If an investment is held for 5 years capital gains taxes on the original capital gains investment are discounted 10 percent, according to the Internal Revenue Service.

The tax break rises to 15 percent if an investment is kept for seven years. If an investment is held for 10 years, the lender avoids paying capital gains taxes altogether on appreciation stemming from the initial investment.

The timeline for realizing the maximum incentive, with a 2028 sunset on zone designations, spurs urgency among Maryland jurisdictions to secure investments this year. Increasing the pressure, Shapiro said, is an expected large pool of investors with capital gains from 2018.

Those investors only realize the maximum tax benefit if they reinvest profits in a Qualified Opportunity Zone Fund within 180 days of receiving the profits from the sale of investments, including real estate, bonds, and stocks.

Jurisdictions across Maryland, as a result, are competing with each other and areas across the nation to lure as much investment to their zones as possible in early 2019. Larger jurisdictions, such as the Baltimore Development Corp., the city's quasi-public economic development agency, already hired coordinators last year to prepare for the push.

But even as cities, counties and towns compete for investments, concerns about the program and its ability to lure dollars to the neediest areas of the state linger.

Certification as an Opportunity Zones, which were nominated by the state, requires a census tract meet certain requirements, such as a poverty rate of at least 20 percent, and a median family income in the census tract that does not exceed 80 percent of the area median income.

But some areas of Maryland, according to Community Development Network of Maryland's Executive Director Odette Ramos, aren't thrilled with their zones' locations.

"Some areas around the state aren't really happy with where their opportunity zones were placed. Some states did a really wide open process where ... they got sent an RFP (request for proposal) that asked where their Opportunity Zones should be ... and Maryland didn't do that," Ramos, said.

The potential for more densely populated areas to attract a disproportionate amount of investment also remains a concern.

One reason less populous rural areas remain at a disadvantage is they don't possess economic development resources to dedicate to securing investments. There's also the fact that urban investments, particularly in real estate, present better potential for quicker, stronger return on investment.

Also, some areas were certified as Opportunity Zones, such as downtown Baltimore and the city's Port Covington section, slated for a $5.5 billion redevelopment, that likely do not need the designation to retain investment.

As a result of their established potential those areas may pull more investment than areas struggling to entice venture capital. Those comparatively well-heeled areas potentially pull investment from a limited pool, which may have gone to struggling communities.

Michael E. Hough, Garrett County's director for economic development, said certain changes to Opportunity Zones tax incentives, such as boosting incentives for investing in a rural areas, may even the playing field.

The western Maryland jurisdiction, home to Deep Creek Lake and Wisp Ski Resort, has advantages, he acknowledged. But that's not enough when competing against urban areas nationally and locally.

"Really outside of some changes to the actual tax laws there's nothing that's going to separate us from an investor either wanting to go into the Baltimore market or Garrett County," Hough said.

There's no formal role for jurisdictions to monitor, track or steer investments, Benjamin Seigel, Baltimore's Opportunity Zone coordinator, said. A key function of his job, however, is providing information to Opportunity Zone communities without the same capacity to secure investment as downtown and Port Covington.

It's hoped his guidance on issues, such as helping match projects and businesses in struggling communities with the right Opportunity Zone Fund, will yield enough investment to stir a revival in those neighborhoods.

"I feel it's incumbent on my role ... to be very engaged with the community, and with the projects underway there," Siegel said.

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Publication:Daily Record (Baltimore, MD)
Geographic Code:1U5MD
Date:Dec 31, 2018
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