Tennessee prepares to use tax breaks to aid 'Opportunity Zones'

FILE - In this April 30, 2018, file photo, Treasury Secretary Steven Mnuchin speaks during a discussion at the Milken Institute Global Conference, in Beverly Hills, Calif. Mnuchin said Sunday, May 20, that the United States and China are stepping back from a possible trade trade war between the world’s two biggest economies after two days of talks that he said had produced “meaningful progress.” (AP Photo/Jae C. Hong, File)

Tennessee's economic development agency is sponsoring training programs across the state next month to help investors, developers and community groups to use new tax incentives Congress adopted at the end of last year to encourage investments in targeted, low-income areas.

Within 8,700 "Opportunity Zones" certified this year across the country, including 176 zones in Tennessee, capital gains invested in the designated areas will be exempt from being taxed through the end of 2026, or when any investment is sold, whichever comes first. Any gains from the fund are permanently shielded from taxes if the investment is held for 10 years. In addition, the initial investment will be discounted by up to 15 percent for tax purposes after seven years.

The tax breaks are designed to encourage multifamily housing, industrial development, brownfield redevelopment, retail development and a variety of other business and building projects in the areas selected earlier this year by the Tennessee Department of Economic and Community Development, based upon county recommendations.

Tennessee's 176 tract designations are located in 75 of the state's 95 counties, including seven census tracts in Chattanooga in Hamilton County, two tracts in Cumberland County and two in McMinn County, and one census area each in Bradley, Bledsoe, Grundy, Meigs, Polk, Sequatchie and Van Buren counties.

Bob Rolfe, commissioner of the state's Department of Economic and Community Development, said his agency will conduct nine training sessions in December about the Opportunity Zones, including one next Tuesday, Dec. 4 from 2-5 p.m. at the Edney Innovation Center, 1100 Market Street. (Registration available at https://tnecd-chattanooga-oz.eventbrite.com).

"We place a heavy emphasis on attracting and expanding businesses to Tennessee's low-income communities, and with the assistance of the Opportunity Zone benefit, these communities will have another advantage to grow and create more jobs and opportunities," Rolfe said in an announcement of the programs.

The seminars will feature presentations by LaunchTN, accounting and legal experts in the new law and a keynote address by Alexander Flachsbart, president and CEO of Opportunity Alabama, a nonprofit initiative formed to connect investors with investable assets in Alabama's Opportunity Zones. The sessions will pair potential investors with projects, review various use case scenarios and provide time for open discussion, Rolfe said.

In October, the U.S. Department of Treasury issued proposed rules to govern investments in the "opportunity zones" and Treasury Secretary Steven Mnuchin said he expects as much as $100 billion in private capital could be funneled into those areas.

"This incentive will foster economic revitalization and promote sustainable economic growth, which was a major goal of the Tax Cuts and Jobs Act," Mnuchin said in a statement.

The Treasury Department guidance clarifies that only capital gains are eligible for preferred tax treatment. Investors who can participate include individuals, corporations, businesses, real estate investment trusts (REITs), and estates and trusts. Mnuchin said additional guidance will be released before the end of the year, with final rules likely to come in the spring.

Some investors are already setting up funds for the new program.

"I think these regulations are going to free up and unlock a lot of capital that has been sitting on the sidelines waiting to get involved," said Craig Bernstein of OPZ Capital, who said he has already identified more than $50 million in funding for Opportunity Zones.

The American Investment Council, which represents private equity investors, said it welcomes the new tax incentives to direct capital gains into neighborhoods and parts of communities needing new investment.

"The private equity industry supports Opportunity Zones and looks forward to playing a role as this important program moves forward," AIC President Drew Maloney said in a statement last month. "Our members have a successful record of investing in communities across America, supporting millions of jobs, and strengthening local economies."

The average poverty rate in the Opportunity Zones is 32 percent, compared with the national average of 17 percent, the Treasury Department said. In Tennessee, the Department of Economic and Community Development said it designated Opportunity Zones based upon opportunities for development and proximity to entrepreneur centers and universities, in addition to affording opportunities for low-income housing or community initiatives.

As a result, the top-ranked zones in Hamilton County included the central business district and Innovation District, where River City Co. counts more than $1 billion of retail, housing and other commercial development has already been made or planned in the past five years.

While proponents of the new tax breaks argue they will help funnel needed capital into overlooked areas and communities, critics contend the exemption from any capital gains tax represents a tax giveaway to developers of projects that would be profitable without the incentives.

"There are very few guard rails on this investment," Jesse Van Tol, CEO of the National Community Reinvestment Coalition, told CNBÇ. "There's very little in the way of ensuring that the social impact of what comes out of this is beneficial to low-income communities."

Researchers at the W.E. Upjohn Institute for Employment Research concluded in a 2002 study of 75 enterprise zones in 13 states that the programs fell short in creating jobs for local residents because "the majority of jobs were taken by commuters from outside the enterprise zone."

"Although there is a lot of business turnover in enterprise zones, zone incentives have only a minimal impact on new investment," University of Iowa researchers Alan H. Peters and Peter S. Fisher wrote.

Contact Dave Flessner at dflessner@timesfreepress.com or at 757-6340