Study: Dane County ripe for investment in distressed areas

Greater Madison is ranked high in a national survey on potential for opportunity zone investment. Now we just need the investors.

A new study confirms what some local observers have been saying about Greater Madison since a new economic development tool created under the 2017 Tax Cuts and Jobs Act was enacted — the area is ripe for investment.

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.

IB spoke to Husch Blackwell attorneys Rebecca Mitich and Jeff Vercauteren, who have been tracking the opportunity zones program since its inception, this past fall about the prospects for investment locally. At the time, both Mitich and Vercauteren indicated Greater Madison has a number of great opportunities, including the Oscar Mayer site and University Research Park, but it was just a matter of when people would start utilizing the program.

Now comes a report from COMMERCIALCafé, a commercial real estate information services provider, that has compiled a list of top counties nationally for investment by allocating points for the following indicators: employment, GDP, population growth, poverty rates, the educational attainment level of the labor force, and the number of eligible opportunity zones within each area. The study also details the fiscal benefits of the program, the selection criteria for OZs, and the importance of public sector investment along with private capital in these areas.

Of the 306 counties ranked by COMMERCIALCafé, Dane County came in at No. 17 overall, with a score of 58.83 out of 100. For reference, the top county on the list, Travis County in Texas, scored only slightly higher at 65.93. Just two other Wisconsin counties made the list — Milwaukee County came in No. 223 with an aggregate score of 34.94, and Rock County at No. 229 with a score of 34.43.

“I’m not surprised by the high ranking,” says Vercauteren. “If you look at the general economic development trends in Dane County, Madison is certainly on the leading edge of a lot of the metrics measured in this report. While there has been a lot of discussion about opportunity zones in and around Madison, we haven’t seen much in the way of actual projects moving forward. As we shared last fall, there are great opportunities, but we haven’t seen much movement quite yet.”

“I think it is worth noting that, ultimately, this report is using self-established metrics to identify the opportunity zones that the authors believe will be of the most interest to potential national investors,” comments Mitich. “Right now, in Wisconsin, even without these national investors — who are generally awaiting further guidance from the IRS — we are seeing local developers utilizing opportunity zone capital for individual real estate projects.”

According to Mitich, “taxpayers with capital gains invest in businesses or properties located in those opportunity zones, 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.”

Widespread utilization of the opportunity zone program still hasn’t come to fruition, however.

“In Madison specifically, there are a couple large potential projects in opportunity zones — namely the Oscar Mayer and University Research Park sites,” notes Vercauteren. “While there is great potential with these sites, we have not yet seen forward progress.”

“There are no public reporting requirements under the opportunity zone program, so there certainly could be deals happening in opportunity zones that we wouldn’t be aware of,” notes Mitich. “Still, the general consensus is that deal flow is slow.”

Throughout the state, explains Mitich, some developers who are already familiar with alternative financing sources are currently doing deals. In those cases, the developers are leveraging opportunity zones as a way to source additional investment for their specific projects.

“That being said, we likely will not see major opportunity zone capital flowing until we have more guidance from the IRS,” says Mitich. “We should see the next round of guidance in April, but there will likely continue to be open issues that have to be settled in additional rounds of guidance in the future.”

(Continued)

 

According to Vercauteren, if we’re to see opportunity zone investment any time soon in Dane County, it will likely be in the aforementioned Oscar Mayer and University Research Park sites.

“Dane County has a lot of good things going for it,” says Vercauteren. “It has a strong economy, an educated workforce, and a high quality of life. All of those things factor into an investment decision. It also helps that Dane County has major projects like Oscar Mayer and University Research Park as designated zones. Those are two very large sites with great development potential.”

Ideal investments

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.”

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