By Adrienne Olson, Kilbourne Group
Photos courtesy of Kilbourne Group
As a multi-disciplinary, passionate team dedicated to the redevelopment of downtown Fargo, we are never short on big ideas. We’ve experienced the deep sense of gratification that comes from bringing a treasured historic building back to life. We find it easy to imagine every surface parking lot as a multi-story mixed-use building full of people living, working and enjoying this vibrant downtown neighborhood. In a way, the vision is the easy part.
But nothing happens without adequate capital behind each idea. In the world of real estate, small Midwest cities – no matter how incredible they are – are not the first places that come to mind for institutional investors looking for low-risk, high-reward investment opportunities. The creation of the Qualified Opportunity Zone program in the Tax Cuts and Jobs Act of 2017 has provided a new tool for attracting investment capital from all corners of the country to our part of the world.
This new tax law is designed to incentivize the reinvestment of an estimated $6.1 trillion in private, unrealized capital gains into designated low-income communities nationwide. From Urban Land Institute:
Here is how it works: if a taxpayer sells an appreciated asset, such as stock, real estate, or some other capital asset, that taxpayer is normally liable for payment of a capital gains tax of up to 20 percent. Under the new tax law, the taxpayer may now defer payment of this capital gains tax liability by reinvesting it in a “qualified opportunity fund” (QOF) within 180 days of the sale.
If the QOF invests its capital in a [Qualified Opportunity Zone] for at least 10 years, the taxpayer/investor will have received a 15 percent tax break on the initial amount invested and the investor’s share of capital profits in the QOF will be treated as 100 percent tax-free.
The program doesn’t put public funds into projects; instead it incentivizes private funds to be invested into locations in the United States that need them.
There are 25 designated Opportunity Zone tracts in North Dakota, many of which cover our downtowns across the state and all of which meet the federal government’s definition of low income. In Fargo, the zones were identified by City staff through Census tract data, put forth by the Mayor, then approved by the Governor’s office.
The Great Plains Opportunity Zone Fund (GPOZF) is one of many being created across the state. Sponsored by Kilbourne, LLC, the GPOZF will be dedicated to Opportunity Zone eligible real estate development primarily in downtown Fargo and other urban areas in the Great Plains. Thinking of starting one in your community?
Start with the needs and desires of your community. In Fargo, we have a head-start with multiple citizen-driven comprehensive plans that layout an exciting community vision. These plans drive our development decisions. The Opportunity Zone program should be paired with the goals of a community to ensure the development creates a positive impact.
Identify the characteristics of your community and your project that would make it attractive to an investor. What are your thriving economic centers that create strong jobs that attract and retain residents and opportunities for growth? Accurately assess your construction, development and maintenance costs, as well as the support or resistance you’ll receive from your city government and surrounding neighborhoods. Determine that demand exists for the space you will create.
Create fully vetted, shovel-ready projects. A pro-forma will tell a bank what it needs to know to decide whether a project should be financed. The vetting process will flesh out risks and tailwinds, such as competing development, market trends, expectations for lease-up, rent levels and effect on the neighborhood. How does your project create value in your community?
Plan for the long run. Because the Opportunity Zone program requires a 10-year holding period, what is your plan for caring for the project and its tenants for years to come?
Promote your community and projects to investors. One of Kilbourne Group’s key performance indicators to judge the impact of our work and the health of our neighborhood is the count of people walking on the sidewalks. We’ve watched this grow year after year, telling us that more and more people are enjoying what downtown Fargo has to offer. We are often reminded when we are in other parts of the country attempting to attract capital investors to downtown Fargo that our sidewalk traffic is uncommon and impressive. Downtown Fargo has a seemingly endless variety of unique, local shops and fabulous places to grab a drink and a bite to eat. These local businesses are quite special. Make it a point to support them in your community. They are what makes your community unique, creating an environment that keeps people living there and attracts newcomers.