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Breathing new life into Madison’s most distressed areas

Private investment into economically disadvantaged “Opportunity Zones” could be the key to new growth in Greater Madison.

Greater Madison's Opportunity Zones (marked in dark green) for investment include the former Oscar Mayer property, the Capitol East District, the Alliant Energy Center, South Madison, the Allied Neighborhood, and the University Research Park, as well as part of Sun Prairie.

Greater Madison's Opportunity Zones (marked in dark green) for investment include the former Oscar Mayer property, the Capitol East District, the Alliant Energy Center, South Madison, the Allied Neighborhood, and the University Research Park, as well as part of Sun Prairie.

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Thanks to a new economic development tool created under the 2017 Tax Cuts and Jobs Act, Greater Madison could soon see some changes to some of the region’s most economically challenged areas.

The Opportunity Zones program is designed to spur private investment in distressed communities by allowing private investment through tax incentives that are designed to accelerate economic growth and job creation.

In March 2018, 120 areas of Wisconsin were deemed eligible for the program based in part on the number of low-income households in each area, including 11 in Dane County. The local selected areas include economically disadvantaged neighborhoods, large-scale redevelopment opportunities, and key employment areas. The designation includes the former Oscar Mayer property, the Capitol East District, the Alliant Energy Center, South Madison, the Allied Neighborhood, and the University Research Park, as well as part of Sun Prairie.

How these Opportunity Zones may ultimately function will become clearer once the IRS releases new guidance on the program, which is expected any day now. However, there’s still a lot yet to be sorted out with the new program.

Rebecca Mitich

Jeff Vercauteren

The Treasury Department sent the proposed regulations to the Office of Management and Budget in the middle of September, notes Rebecca Mitich, a partner in the Milwaukee office of law firm Husch Blackwell. The OMB has 45 days to review and then the regulations are sent back to the IRS, which then has about six days to issue the regulations to the public. “This being the case, we expect and hope that the regulations will be issued by the end of October,” says Mitich. “Indications are that these will be interim regulations. We expect that the regulations will provide clear definitions of certain critical but vague terminology in the current law and will clarify certain qualification thresholds, but we are not expecting that they will provide all of the guidance that investors and practitioners are hoping for.”

According to Mitich, what is known is the intent of the program. “Taxpayers with capital gains invest in businesses or properties located in those OZs, and the investments trigger immediate capital gains deferrals, as well as the potential for additional gain forgiveness. The program incentivizes taxpayers with gains to invest those gains in distressed communities.

“The program is designed to spur new growth,” Mitich continues. “This means that if you want to invest in a parcel of real estate in an Opportunity Zone, you will have to substantially improve that piece of real estate or put that piece of real estate to use for the first time. Likewise, if you want to invest in a business in an Opportunity Zone, that business will either need to be a new business or a significant expansion of an existing business. There are various other requirements and qualifications so anyone interested in making an Opportunity Zone investment should discuss the program with knowledgeable counsel before doing so.”

Given the significant economic growth in Dane County, the Opportunity Zone program is coming at an important time for determining areas of future growth in the county over the next several years, says Jeff Vercauteren, a partner in Husch Blackwell’s Madison office. “Areas that were previously struggling, such as the Capitol East District, have experienced significant redevelopment since the recession,” Vercauteren notes. “Adding a new incentive to encourage investment in these areas will likely help increase redevelopment in certain areas, such as the southern end of Park Street, which have not yet experienced significant new investment.”

According to Vercauteren, Greater Madison stands to benefit from several areas already targeted for redevelopment that were identified as Opportunity Zones. These include the former Oscar Mayer site on the north side of Madison, portions of the Capitol East District, University Research Park, portions of Park Street, and the area around the Alliant Energy Center. Some of these areas also overlap with existing TIF districts, which provides an additional opportunity to leverage multiple incentives. The city is considering changes to its TIF underwriting policy to encourage development in new Opportunity Zone TIF districts, Vercauteren says.

Opportunity Zones are similar to other incentive programs in that they offer tax relief in exchange for targeting certain areas or types of investment, explains Mitich. They are particularly similar in some ways to the tax deferral that one can experience with like-kind exchanges of real estate, or to the tax credits that are available through the New Markets Tax Credit program. “But they are also different from either of those programs in many ways,” says Mitich. “There is no central system to allocate benefits to taxpayers or approve investments; if a taxpayer follows the rules, then the tax benefits may be used.”

Opportunity Zones are accessible to any taxpayer with gains. There is no minimum investment amount and Opportunity Zone Funds are self-certifying, which means that the taxpayer need only complete a form that will be provided by the IRS and attach that form to a tax return.

“Established investors are certainly excited about this program, but it’s likely that we’ll see investments by small investors, too,” says Mitich. “Taxpayers may either make investments in very narrowly focused funds, or may contribute to very large and broad based funds. We anticipate that smaller investors will primarily take advantage of the larger funds.”

(Continued)

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