• Monday, June 24, 2019
    Investors, developers see 'flurry' of Denver opportunity-zone activity as key deadline looms
    Read this article from the Denver Business Journal

    Opportunity zones have evolved in less than two months from an oblique, almost aspirational economic-development concept to an investment opportunity that is generating a ton of activity as investors who were calmed by recent federal clarifications seek to find the right place to put their money before a window for major tax savings on capital gains closes at the end of June.
    Denver-area investment advisers and economic-development leaders say they have seen activity around the federally designated tax incentives for investment in economically challenged areas perk up significantly since the federal government’s late April rule-making specifying what qualifies as a business in an opportunity zone and what kinds of improvements to property must be made to be eligible for tax breaks. While only a few specific projects have been announced — such as a $200 million housing development in the Elyria-Swansea neighborhood of north Denver — legal advisers say they are getting a lot of requests to file paperwork to create qualified opportunity funds, and economic developers say they are getting more queries from both developers that have worked in this community and those who are eying the Denver area for the first time.
    A good part of the excitement revolves around the June 30 deadline for investors who recorded substantial capital-gains windfalls at the end of 2018 to reinvest that money within 180 days in a qualified opportunity fund in order to qualify for the tax breaks, which allow for a 15% decrease in taxes owed on the gains if they are kept in an opportunity zone for at least seven years or a 10% break for gains held there five years. There is expected to be another rush at the end of 2019, which is the deadline for any investment to qualify for the full seven-year timeline, but before investors can reap the benefits of any placement of their gains, they must at least get them into a fund that is meant to boost the economic prospects of areas in which the average income is well below the state’s median family income.
    “A lot of folks are on that clock now, and that’s obviously triggering a lot of excitement to get that going. We’re seeing a flurry of activity now, and many of us are super busy in that space,” said Marc Schultz, the Phoenix-based co-leader of Snell and Wilmer’s opportunity zone and fund practice group who was spent of lot of time along the Front Range explaining the program and advising prospective investors. “We have clients who are raising money, and they have investors who want to invest in their funds. We’re drafting a lot of offering documents.”
    The opportunity-zone program came to life as part of the federal tax reform bill, giving states the opportunities to designate a certain number of economically challenged areas as one where investors could receive major breaks if they were to invest through qualified funds in property or in a business in those areas. Colorado received approval for 126 zones — about 60% of them in rural areas, though the first ones to grab a lot of investor attention have been around Denver and Colorado Springs.

    But while they attracted notice and excitement, a lack of clarity around some key provisions of the law left a number of potential investors on the sideline. That changed, several officials said, after the Treasury issued clarifications on April 17 that Denver-based Husch Blackwell partner David Brenner characterized as “very favorable” to potential investors.
    The biggest clarification surrounded stated that a business eligible for an opportunity-zone investment must receive at least 50% of its gross income from the active conduct of trade or business within a zone, explained Erik Jensen, a shareholder specializing in tax practice at Brownstein Hyatt Farber Schreck. But it gave a lot of leeway to what that meant — allowing for at least half of the services in hours of employees and contractors to be conducted within a zone, at least half of the amount paid in compensation to employees to be given to workers located in an opportunity zone or at least half of the gross income for a business to be created by tangible property and the management of the business from within such a zone.
    “It gives people an incentive to move their businesses into opportunity zones, because most business today isn’t conducted at the physical location,” Brenner said. “This gives people the flexibility to have your headquarters or management there but still be able to do your business outside the opportunity zone.”

    Another key clarification stated that while investors have a limited amount of time to get their capital gains into an opportunity zone to delay and reduce payment of taxes on them, the funds that are launching have 31 months to complete spending that money. That gives them time to do due diligence on how to invest the money and not be forced to rush a project forward.
    Finally, the Treasury statement clarified that a 10-year clock on investment — crucial because investors who hold their money in the opportunity zones for 10 years pay no taxes on any gains in the value of their investments that they see in that time — starts when the money is invested, not when the property is bought or approved. This fully realized set of rules, explained Brownstein shareholder Nicole Ament, still won’t make a bad project good, but it could make a good project great.
    “The interest in this tax program and the benefits of this are just astronomical,” Ament said. “The amount of money we’re seeing out there looking to invest that hasn’t looked to invest before is fascinating ... It really is spurring the economic growth that [program supporters] were hoping for.”

    One person who’s taken a keen interest is Tim Lee, the COO of Denver-based consulting firm Signet Partners who has launched the Blue Spruce Opportunity Fund with Signet co-owner Steve Cohen to raise about $100 million to put toward real-estate development — multifamily, mixed-use, retail, office and senior housing — in opportunity zones in and around Denver, Colorado Springs and Pueblo. The goal is to work very closely with developers on priority projects, having identified particularly some eligible areas around Denver International Airport, Aurora City Hall and Englewood, according to an investment deck offered up by Lee.
    Lee said the fund hoped to raise money over the next several months while simultaneously identifying prospective parcels and their best uses. And those lie around big cities rather than in rural areas, he said.
    “You’re going to have to go after the easiest cases first,” Lee said, “You need to make a good project pencil out even before you can start talking about tax breaks ... And the good projects are going to be ones that are close to or accessible to developed areas already.”
    Yuriy Gorlov, vice president of the Aurora Economic Development Council, said activity around some of his city’s prime opportunity zones — including land south of DIA, near City Hall and near the Fitzsimons Innovation Campus — has become “a little bit more concrete now and more realistic” as the clarifications have been put into place around the zones. He expects deals will be put into place by the end of the year to buy and remake the land, and he sees an undeveloped area near City Hall and along the Regional Transportation District passenger-rail line to be particularly interesting.
    “It’s RiNo-esque,” he said, comparing it to the River North area of Denver that is booming with high-end apartment and restaurants. “We think because it’s on the R Line, it’s infill and it has the other amenities, it really could ... change our story line.”
    Adams County leaders hold similar hopes for several of their opportunity zones, particularly an area just north of the National Western Center development in north Denver that has waterways and immediate access to several highways and that they see as a potential boom area for both business and residential development. County Commissioner Steve O’Dorisio said they have heard that private investors are looking at it, and county officials are working both to show that they are putting money into the area — including a potential recreational use of Clear Creek — and that they would be willing to offer financial incentives to get affordable housing included in any kind of growth there.
    “There’s a lot of desire through this process to activate these waterways so we can create a live-work-play dynamic,” said Peter LiFari, executive director of Unison Housing Partners, the county’s housing authority.
    Only time will tell whether the goals of investors and public planners can coalesce to achieve the activation of economically lagging areas, Schultz said. But it’s clear that the long-hyped program is moving at a faster pace now than since its creation.
    “It’s increasing the economic activity within these Census tracts; one can definitely see an increase in economic activity. We’re seeing capital that is being reinvested and deployed,” he said. “The next question is how impactful it is, It is strictly an increase in economic activity such as more building licenses and building permits in Census tracts, or is it increasing wages and advancement opportunities? ... Will we, for example, see more grocery stores that particular Census tracts need?”