Uncertainty over the program’s rules is freezing activity. But it is not freezing discussion.
For now, developers and economic development groups are weighing how they might use the opportunity zone program in combination with other state and federal incentives.
Community First Fund, a nonprofit with experience in those programs, is fielding many of the early calls.
Under the opportunity zones program, investors can get a tax break on capital gains by investing in projects in distressed areas, dubbed opportunity zones. Many zones are in major cities and county seats like Harrisburg, Lancaster, York, Carlisle and Lebanon in Central Pennsylvania, and Reading, Allentown, Bethlehem and Easton in the Lehigh Valley.
The investments typically will flow through what are known as qualified opportunity funds.
Community First has been working to develop such funds, said David Nikoloff, vice president of real estate lending at the nonprofit, which covers 15 counties in Central Pennsylvania, the Lehigh Valley and suburban Philadelphia.
Each fund may target a specific project, mitigating the risk for investors of putting their money in distressed areas.
Developers often have to spend more to restore vacant and blighted properties than they can expect to earn back in rent. Tax incentives help offset costs so developers can keep rents in line with what a local real estate market can support.
But time can be a killer in such deals. One downside risk with the opportunity zone program is that investors have just 180 days after they reap capital gains from the sale of stocks, bonds or other investments to put the money into a qualified opportunity fund.
It’s unclear if that 180-day rule may change.
Developers and investors, however, could blend opportunity zone incentives with other deal-sweeteners, such as New Markets Tax Credits, another federal program designed to encourage investors in low-income areas, both urban and rural.
“Right now we’re still looking project by project,” Nikoloff said. “We’re still several months out from having projects.”
The opportunity zone program was created under the 2017 federal tax reform law to steer investment into low-income, largely urban areas by granting tax incentives to investors. The Internal Revenue Service is expected to issue final rules and regulations for the program over the coming months.
“We are obviously watching this, but think it will still take a while to fully ramp up,” said David Black, president and CEO of the Harrisburg Regional Chamber and Capital Region Economic Development Corp.