Economic Opportunity Zones Offer Promise Amid Concerns

Jan 15, 2019

Wisconsin investors are starting to use a relatively new federal program called Designated Economic Opportunity Zones that aims to help what the government says are economically-distressed areas. Several cautions remain, but start-up technology firms are among the businesses that could benefit if the program succeeds.

The opportunity zones were created under the federal tax cut bill that passed late in 2017. Last year, then-Gov. Scott Walker named 120 of the high poverty zones in 40 counties across Wisconsin. About three dozen zones are in Milwaukee. 

Brenda Graat is with the accounting and consulting firm Baker Tilly. She says this year may be key for opportunity zone investments because it's part of a period of tax benefits for people who keep their money in a project. 

"To invest in 2019, there is a timeline for 15 percent of your gain to be forgiven. So, you don't even pay taxes on it. You're only being taxed on 85 percent of the gain you're investing in the fund,” Graat said.

She says the Internal Revenue Service is still working on some guidance for investors. But one person already talking with communities about their zones and putting money into them is former Wisconsin car dealer Jon Lancaster. He now runs Madison-based Lancaster Investments. Last Thursday, Lancaster told a Wauwatosa forum sponsored by the Wisconsin Technology Council that he's mainly focused on workforce housing projects.

"I think people need housing, but it's got to be at a point where people can afford it. That's what I think the opportunity zone will do long-term if we can get the right amount of money from municipalities to be able to help us build in those markets," Lancaster said.

But Lancaster cautions there are risks. He says the cost of construction in some communities is high. He also says the requirement that investors keep their money in funds for several years could be a problem if other laws change or the economy tanks.   

State Rep. Jason Fields has another concern. The Democrat from Milwaukee’s north side wonders who'll be checking on the opportunity zones.

"We need to make sure it's getting targeted to the right areas, and we're not just saying, ‘Hey, you can come here, you can invest, but we don't know how many jobs will be created.’  We don't know who will actually benefit from it," Fields said.

Still, Fields, who is also an investor, says the opportunity zone idea is exciting.

The zones are of interest to some start-up technology firms seeking to locate in low-income neighborhoods. Graat, of Baker Tilly, says that's another topic waiting for IRS instructions.

"You have to acquire property, tangible property. So, the question is, when you're doing the calculations, are you still going to qualify as a tangible property," Graat said.

Madison investor Lancaster says there may also be another way to help start-ups, by setting up space inside a development project for an innovation center, even offering free rent.

"I would rather do that, than offer retail that doesn't work really well. I think you get a lot more buzz in the community. So, that's one of the things we've looked at really hard,” Lancaster said.

There have also been other forums around Wisconsin regarding opportunity zones. But it may be several years before we know if the interest continues and if the zones help reduce poverty in economically-distressed neighborhoods. 

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