Could Missoula’s West Broadway corridor and Northside neighborhood be in line for the next redevelopment boom because of a little-publicized federal tax incentive?
Tucked away in the federal tax overhaul legislation last year was a provision that could allow investors to receive a tax break in exchange for spending money in low-income areas. Missoula officials have nominated an area that includes most of the West Broadway corridor and the Northside neighborhood.
The Tax Cuts and Jobs Act included a program called “Opportunity Zones” that provides an incentive for people to reinvest capital gains into low-income areas and thereby avoid the capital gains tax.
The tax benefits include a temporary deferral of inclusion in the taxable income for capital gains reinvested. There is also also a permanent exclusion from taxable income of capital gains from the sale or exchange of an investment in an Opportunity Fund if the investment is held for at least 10 years, along with other benefits.
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A capital gain is a profit from the sale of property or of an investment, and the theory is that many people are reluctant to cash in on capital gains because of the tax implications. The new legislation ostensibly could spur investment and redevelopment in poor and undercapitalized communities.
“It’s essentially an investment vehicle authorized to employ private investment in low-income areas,” said Eran Pehan, the director of the city’s office of Housing and Community Development.
Back in April, Gov. Steve Bullock nominated 25 areas of Montana for designation as an Opportunity Zone after communities submitted 60 proposals for consideration. Although Montana has 106 eligible Low-Income Community Census tracts, the federal government limits Montana to identifying just 25 of those for designation.
Missoula nominated Census Tract 201, which includes a large portion of the Northside Neighborhood and much of West Broadway all the way to Reserve.
“We really looked at both the current demographics within the zone and the potential to redevelop,” Pehan explained. “They have to be low-income Census tracts with a poverty rate of at least 20 percent. This one really stood out because it contains the largest portions of undeveloped land. The northern portion has prime undeveloped land next to ongoing redevelopment. The Scott Street Village is a great example of that.”
Pehan said there have been talks between business leaders and city officials about creating an "innovation corridor" in the West Broadway area.
“We felt like our ability to impact the quality of life of the residents living in that zone, which is the focus of this program, was the highest in this Census tract,” she said. “I think West Broadway and the Northside is ripe for redevelopment that benefits individuals currently living in this area. What’s exciting is the ability to leverage financing in high-poverty census tracts. That will make a dramatic improvement and provide new job opportunities and reduce blight.”
Pehan said the goal is to “layer” the Opportunity Funds investments with other financing tools like low-income housing tracts to produce additional living space for low-income residents. The U.S. Treasury Department is expected to release guidelines on how the program will work in June.
“We’re seeing tremendous redevelopment in the downtown core and other areas, and that development carrying over to the West Broadway corridor is a natural progression,” Pehan said. “We can incentivize investors, layer different opportunities and utilize New Markets Tax Credits. We can kind of get more bang for our buck.
"The development climate is very challenging right now. The prices of land and construction are increasing, so to get more projects done we need more tools in the toolbox. This is one more tool that will allow us to engage on the kind of development we need, from housing to economic development.”
Bullock’s office believes that the Opportunity Zone financing tool has the potential to “direct private capital toward distressed communities and serve as a catalyst for long-term, inclusive economic development,” including possibly “downtown revitalization, workforce development, affordable housing, infrastructure and business startup/expansion.”
“We asked cities, towns, counties, tribes, and economic development organizations to nominate areas that are most likely to realize development which benefits communities,” Bullock said in a statement. “I’m confident that the final zones I’ve nominated to the U.S. Treasury Department represent both high-needs communities and areas that are ripe for investment in rural and urban corners of our state.”
Many financial experts have said that the program has the potential to be a huge redevelopment incentive across the country, but questions remain.
“Opportunity Zones offer favorable capital gains treatment for taxpayers who invest in designated high-poverty neighborhoods,” said Adam Looney, a senior fellow of economic studies at the Urban-Brookings Tax Policy Center in a report on the new legislation.
“Invest in real estate or businesses located in a qualified zone, hold it for 10 years, and not only can you sell your investments free of capital gains tax, but you also you get a tax break on un-taxed capital gains rolled into an Opportunity Zone investment."
He said that individuals in a high-tax state and with short-term capital gains can avoid $7.50 in taxes for each $100 they invest, even before considering any return on their Zone investments.
"It’s very favorable treatment,” he said.
But Looney also warned that the program could amount to a “tax cut for gentrification” by providing benefits to developers investing in already-gentrifying areas, thereby displacing residents of poor neighborhoods.
Looney said the problem of persistent concentrations of economic distress dearly needs a solution across the country, so he said this new legislation should be monitored carefully to see if it actually improves Opportunity Zones compared to other areas.
“Only one in four low-income areas in any state can be designated as an Opportunity Zone, so states must reject more neighborhoods than they select," he wrote. "This is a perfect opportunity to build in a rigorous comparison of places that made the cut to those that did not, to see whether the program helps residents of low-income communities, which elements are effective, and whether it should be renewed."
