Opportunity is knocking, but who is answering the door?
That’s a difficult question to answer as it pertains to development tax incentives through a federal program available in Springfield.
Those familiar with the opportunity zones – 10 census tracts designated by the Missouri Department of Economic Development – say it’s nearly impossible to know who’s receiving the tax breaks for development.
“I’m not sure there’s a way to find out who has taken advantage of this program,” said Sarah Kerner, Springfield’s economic development director. “It could be people that aren’t even from Springfield.”
That’s the case for one new development on record as having utilized the incentive: STL 505, an apartment building targeting college students at 505 St. Louis St., the site of the former Arbor Motel.
The $50 million, 194-unit complex now stands complete across the road from the Discovery Center.
“Without the opportunity zone, it would be a very difficult project to pencil – certainly not at this scale,” developer Dan Weinstein told Springfield Business Journal when detailing plans last year.
Weinstein is a managing partner of Los Angeles-based College Town International. College Town’s website shows four similar developments near California universities, and notes that STL 505 serves students of Missouri State and Drury universities and Ozarks Technical Community College.
The lot selected for STL 505 had sat vacant for more than a decade. Two abandoned buildings, each with collapsed roofs, were demolished on the site in 2014, according to past SBJ reporting.
The apartment building seems like a textbook example of an economically disadvantaged neighborhood being improved through opportunity zone investment dollars. It’s also one of the few opportunity zone projects that readily identifies as such.
Ellington Dias is the property manager for STL 505. The on-site activity he describes is a far cry from the dilapidated buildings and vacant lots that were once there.
“I’m definitely for improving impoverished areas and overall beautification of the city,” said Dias, who recently moved to Springfield to open the complex.
The developer’s business plan goes beyond residential apartments.
“We’re looking for a retailer as well,” Dias said, referring to an available ground-floor space.
How the zones work
Opportunity zones were introduced in the bipartisan, bicameral Tax Cuts and Jobs Act of 2017, and municipalities across the country submitted eligible tracts for approval by their governors.
Derek Smith, an accountant with BKD LLP, specializes in opportunity zones and has assisted several clients in the program. Smith declined to identify the location of the projects in the interest of confidentiality.
He said the program allows investors who have realized a gain – say, a $100,000 stock purchase later sold for $300,000 – to roll the net difference into a federally identified opportunity zone and defer paying taxes on it for up to a decade. Otherwise, Smith said the investor could be taxed some $60,000 on a $200,000 capital gain.
By incentivizing the investment, Smith said, the hope is that by the next census, the landscape will have changed, and the tract would no longer be identified as a low-income area.
“Through this process and incentive, they could work themselves out of that,” he said of the communities involved.
Opportunity zone developments may be for software companies, restaurants, retail outlets, hotels and multifamily apartments, according to Smith.
However, golf courses, gambling establishments, liquor stores and tanning salons are among the uses prohibited under the program regulations.
Smith outlined three primary benefits for investors: They can defer their taxes, they can receive a step up in basis, i.e., a readjustment of an appreciated property, if they invest by a certain time, and they can take advantage of tax-free appreciation of the investment if it is held for at least 10 years.
“If you double your investment over 10 years – and that’s not an unreasonable return for somebody taking some pretty big risks – that doubling over 10 years is tax free,” Smith said.
Smith sees the program as being advantageous for investors and for the communities.
“We are seeing a lot of investment projects take place that otherwise would not have happened,” he said.
He gave the example of a community that had an impoverished area in need of a grocery store, but grocers were unwilling to develop in that part of town.
“They had a food desert, but the grocery store said it wasn’t feasible for them economically,” he said.
Through an opportunity zone investment, a grocery store was built in that area and is operating today for the good of the entire community, Smith said.
“A lot of people are going back in these zones and saying, ‘Hey, I tried to make this project work five, seven, 10 years ago, but with this opportunity zone, maybe it will work now,’” Smith said. “They’re going back to projects that they’ve shelved and they’re dusting them off … and reintroducing them.”
Criticisms crop up
There are criticisms of opportunity zones, and one that comes up repeatedly is a lack of transparency.
The Brookings Institution, a nonprofit public policy think tank, points out that 32 states are participating, and each has a unique approach to opportunity zones.
Brookings notes states are not required to report on the amounts invested in each opportunity zone, and they are not required to name the legal owner and beneficial owner of companies receiving investments, nor the owner of the capital invested.
Gentrification is a criticism in some areas, and another is the benefits that come without regard to employment levels or other considerations that would improve the local area.
Kerner said the gentrification concern is not as relevant in Springfield.
“We did not select areas that are heavily residential for ours,” she said.
Rather, Springfield’s opportunity zones include the area around the Bass Pro Shops and Wonders of Wildlife campus and most of the length of Kearney Street, as well as downtown and Commercial Street.
Kerner notes that opportunity zones are a federal incentive.
“If we were approving an incentive that gave up local funds, I would certainly want to get more information about it,” she said.
She added the incentive is not one for the average investor.
“It’s a little tough to market because it is so specialized on who would even qualify to use it,” she said. “Most people don’t have such large taxable incomes that they need to come up with these complicated tax structures to lower their tax bills.”
Nonetheless, Kerner fields a lot of questions about the program, and she welcomes more.
Smith said there is still time to take advantage of opportunity zones.
If an investment is made by Dec. 31, 2021, and held for five years, he said the investor can still realize up to a 10% step up in basis.
He added that he is seeing a lot of these investments still happening.
“We’re really seeing the effects behind the scenes,” he said.
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