Federal tax incentives for investment in economically disadvantaged areas find more traction in urban Virginia
Downtown Richmond at dusk. (Ned Oliver/Virginia Mercury)
In December of 2017, a Republican-controlled Congress made good on freshman President Donald Trump’s pledge to overhaul the U.S. tax code. It gave wealthy people and their businesses generous tax breaks and put the nation’s growing debt on steroids.
Drafters of the new tax overhaul sought to incentivize a major infusion of capital into designated census tracts in some of America’s most economically challenged regions. They gave them an altruistic-sounding name: opportunity zones.
There are 8,764 of them nationwide, including 212 seeded all across Virginia. Where they’re located has had a lot to do with how well they’ve done attracting capital.
Getting the attention of developers and investors is a lot easier for, say, a designated opportunity zone near the chrome-and-concrete corporate canyons of Reston or in Richmond’s ascendant Scott’s Addition neighborhood than a rugged, sparsely inhabited stretch of Appalachia in Tazewell County.
David McCormick is the founder and president of Waukeshaw Development in Petersburg, a city familiar with adversity. Waukeshaw is at the forefront of a nascent Petersburg turnaround and has enjoyed success restoring rundown vintage structures in other historic small towns to their former glory. He says he’s done it no thanks to opportunity zones.
“What’s driving what we’re doing is the state and federal historical tax credits,” said McCormick, whose renovations include sophisticated and in-demand loft apartments, breweries and restaurants in communities like Martinsville, Hopewell, Cape Charles and Blackstone. More projects are under way in places like Amherst County, Bedford and Clarksville.
Opportunity zones are attractive to investors such as private equity funds, real estate investment trusts or wealthy individuals because of their tax sheltering opportunities. Under the 2017 tax law, proceeds from the sale of stocks and investments can be protected from capital gains tax rates as high as 41 percent provided they’re put directly into projects in federally approved opportunity zones. Profits generated by the opportunity zone ventures themselves can be exempted from federal taxes. The longer investors wait, however, the smaller the tax advantages get for them. Two key deadlines for optimum tax savings expired in 2019.
McCormick said opportunity zone investors want more than just a tax-advantaged place to park their money for several years. They expect a prompt return on their investments, and that makes opportunity zone tracts well off the beaten path a much tougher sell than those a short cab ride from Dulles International Airport or the state Capitol.
“There are just too many unknowns for them to put their investments in places like Danville, Martinsville or Petersburg,” he said.
Opportunity Virginia is a nonprofit that partners with state agencies and local organizations to help investors and developers identify business and real estate ventures in opportunity zones across the state. Financial strategist Adam Northrup, its executive director, agrees that it’s tougher to lure investors into projects outside Virginia’s more populous and richer regions, and his organization is trying to level the playing field.
“Smaller communities and projects don’t have the same access to financing as larger projects in Richmond or Hampton Roads or Northern Virginia may have,” Northrup said.
Part of the problem is that efforts to rewrite the tax law languished through most of Trump’s first year in office before it came together quickly and chaotically in the late fall of 2017, passing in December and quickly getting Trump’s signature. It caught many by surprise, Northrup said.
“A lot of local and state governments were on their heels and it’s taken them a while to get ready for this. Investors weren’t ready for it either, and it’s taken them a couple of years,” he said.
In some ways, projects in population centers had a head start, Northrup said. In some places, urban revitalization initiatives were already under way before opportunity zones became law.
But qualified, vetted projects are out there ready to go, and Northrup says he’s had greater success this year elevating the profile of projects such as a student housing initiative at Martinsville’s Patrick Henry Community College, a Main Street redevelopment project in Pulaski and a food cooperative and a technology venture in Southwestern Virginia.
It’s easier to make a qualitative impact in smaller towns, he noted, and that could have tremendous long-term importance.
“In 10 years, if Congress looks back and sees that there hasn’t been enough community impact, it’s hard to see how that part of the law will continue,” he said.
Not everyone was caught flat-footed when opportunity zones enacted. McGuireWoods got wind of it early and put together one of the first multi-disciplinary teams to advise clients on such facets as fund formation, taxation, real estate and government affairs. Greg Riegle, a partner in the firm’s Tysons office and co-chair of its opportunity zone team, said that interest in opportunity zones is increasing, even though two critical deadlines for optimum tax savings passed in 2019.
He concurs that urbanized areas have had an edge, but that other regions should be able to compete.
“You just have more attention to projects and economic activity in urbanized areas,” he said.
The most attractive projects, however, have more going for them than the tax incentives available in opportunity zones, Riegle said. “It’s just one of the tools in the toolbox, but it’s not a dispositive thing.”
Those other tools? McCormick and his company used them to uplift the economic landscape of small-town Virginia long before federal opportunity zones were a thing.
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