Understanding Opportunity Zones with Kilbourne Group’s Bill Rothman

Written by: Brady Drake
Bill Rothman, Chief Financial Officer of Kilbourne Group

Opportunity Zones are an economic development tool that can easily be overlooked by business owners if they aren’t aware of their investment potential. We sat down with Bill Rothman, Chief Financial Officer of Kilbourne Group, to discuss what and where Opportunity Zones are, as well as how someone can use them to their advantage for their business.

How did Kilbourne Group become involved with Opportunity Zones?

This legislation had been contemplated by Congress for about 10 years. It started during the Bush administration, went through the Obama administration, and was approved as part of the Tax Cuts and Jobs Act in December of 2017. It is thoughtful, bipartisan legislation designed to encourage long-term private sector investment into disadvantaged areas and communities by providing compelling tax incentives. As part of the legislation, each of the states were tasked with designating areas under certain economic conditions and barriers that were considered opportunities based on the 2010 census. When economic data was taken, downtown Fargo, the industrial area, and a couple of small pockets within the Fargo metro area were determined to be eligible. There are a number of readily identifiable investment types in Opportunity Zones, including commercial real estate development and renovation, opening new business or expanding existing businesses into Opportunity Zones, and large expansions of businesses already located in Opportunity Zones.

Can you give a bit of background on Opportunity Zones for readers new to the topic?

According to the 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 investor’s share of capital profits in the QOF will be treated as 100 percent tax-free.”

Opportunity Zones are an alternative to the traditional 1031 Exchange, with which you can sell a property held for business or investment purposes and swap it for a new one that you purchase for the same purpose, allowing you to defer capital gains tax on the sale. Opportunity Zones expanded the deferral of capital gains to include sale of stock, sale of businesses, major assets that you might sell within a business and a number of other different things that create a capital gain.

Did You Know?
Kilbourne Group’s Opportunity Zone projects opened up roughly 360 brand-new apartments in downtown Fargo this year.

The Landing at 1001 NP

What are some of the rules?

In some states, there are a few exceptions and certain qualifications, for instance the property has to have been acquired after 2017. Another rule is that the investment can’t be made into a sin business, as defined by the IRS. Also, you are required to substantially improve the property within the “Safe Harbor” period of 31 months. This means you can’t purchase a piece of property and hold it for appreciation. Instead, you actually have to double the investment. If you buy a building for $500,000, you have to invest at least $500,000 into improving the building. This is the heart of the legislation. The investor is compelled to improve a property to benefit the community. Investing into an Opportunity Zone means you are really investing in that community, as you have to stay there for 10 years. That’s kind of the nuts and bolts of how Opportunity Zones are set up and why they work.

Have you and your team found it to be an advantageous policy for those participating in it?

Yes. 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 investors looking for low-risk, high-reward investment opportunities. The creation of the Qualified Opportunity Zone program provided a new tool for attracting investment capital from all corners of the country to our part of the world.

The Kesler Building in Downtown Fargo

As far as people investing and participating in the fund, is it open to anybody?

In order to invest in an Opportunity Zone fund, you must be an accredited investor as defined by the Securities and Exchange Commission (SEC). The rules created by the SEC and federal government are there to prevent people taking advantage of others that either don’t understand the investment or don’t have financial capacity to take the risk.

What have you done with the Opportunity Zone funds so far?

With our first fund, the Great Plains Opportunity Zone I established in 2019, Kilbourne Group built three projects in downtown Fargo. They are Mercantile, Kesler and The Landing at 1001 NP, all of which opened this summer. We are currently raising money for the Great Plains Opportunity Zone Fund II, which already has two projects in the works. We are aiming to break ground on Riverhouse this fall, and we have plans for another downtown Fargo project that could break ground in the spring.

Mercantile on Broadway

What are some of the things that accredited investors should be looking for in investments like this?

Start with the needs and desires of your community. In Fargo, we have a head-start with multiple citizen-driven comprehensive plans that lay out 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. Invest in projects with an experienced developer that knows redevelopment the local market. Redevelopment in existing neighborhoods is challenging, but a necessary part of the sustainability of a community. How does a project create value in your community? Plan for the long run. Because the Opportunity Zone program requires a 10- year holding period, be sure that the project meets your cash flow and return objectives.

How do you verify accredited investors?

Individuals may qualify as accredited investors based on wealth and income thresholds, as well as other measures of financial sophistication. The IRS requires these qualifications to protect investors. There are IRS forms and/or documentation from an accountant that can verify your accredited status.

What should readers know before looking further into the opportunity for themselves?

Our team is happy to share more with anyone looking to learn. Understand the nature of what you are investing in and if it meets your investment objectives. We recommend working with legal counsel and/or your tax professional to determine if Opportunity Zone investments are right for you.

Before these kinds of programs ramped up, downtown Fargo didn’t see much new housing built substantially for around four decades. There’s a reason that downtown Fargo was qualified as an Opportunity Zone, and the program really works. We’re suddenly seeing multifamily housing opening in a neighborhood that really needs it. The programs are working and doing what they’re designed to do, which I believe is a powerful statement about this effort.

What are the rules and specific qualifications for setting up an Opportunity Zone fund?

We worked with a specialized fund attorney to navigate the process of setting up an Opportunity Zone fund. Our legal counsel assisted with putting together our Private Placement Memorandum (PPM), which is given to potential investors and outlines the investment, business thesis, and the partnership agreements. All of this is for the protection of the investor, as well as for the fund sponsor.

Contact Kilbourne Group:

Phone: 701.237.2279
Email: [email protected]
Web: kilbournegroup.com/contact-us
Facebook: @kilbournegroup
LinkedIn: linkedin.com/company/kilbourne-group-llc
Address: 210 Broadway, Suite 300 Fargo, ND 58102

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Brady is the Editorial Director at Spotlight Media in Fargo, ND.