Matt Wachter is the vice president of Finance and Development of the Erie Downtown Development Corporation. He is a transactional tax attorney by training, and Villanova LL.M. (Tax) and KPMG M&A Tax alumnus.
Tim Wachter is a shareholder at the Knox Law firm and lead at Knox Law Public Strategies. He is a member of the Governmental, Public Finance & Bonds and Business & Tax Practice Groups at the firm.
The statement we’re about to make may appear radical, revolutionary and downright unbelievable — but, it’s true.
The City of Erie is uniquely positioned for investment — and able to compete (like never before) for capital, not just regionally, but on the national stage (like never before). Why? Opportunity Zones — an ingenious federal tax incentive and concept of Sean Parker (Yes, the Sean Parker of Napster and Facebook portrayed by Justin Timberlake in “The Social Network”).
The most exciting part? Erie has created and launched arguably the nation’s first Opportunity Zone Investment Prospectus and public/private sector initiative to promote investment through the creation of the “Flagship Opportunity Zone Development Company.”
What’s an Opportunity Zone?
Opportunity Zones are a collection of low-income census tracts designated by each governor. The designation was permitted by the Tax Cuts and Jobs Act of 2017, and gives investors tax incentives to justify risking capital in challenging investment markets. Investors must have capital gains to invest to benefit under the tax incentive, and investment will be made via “Opportunity Funds,” either by professionally managed investment vehicles or entities self-formed, certified and managed by individual investors.
What Types of Investments Qualify?
Real estate and business entities located in Opportunity Zones are generally eligible for investment. Federal Treasury Regulations will provide additional detail about qualifying investments, however, generally:
• Opportunity Funds may generally hold an interest in real estate located in Opportunity Zones (either directly or through business entities) and develop real estate properties;
• Opportunity Funds may generally invest in business entities located in Opportunity Zones (think start-up technology companies in business accelerators or incubators); and,
• Investments may either be for an original use or must meet certain “substantial improvement” follow-up investments.
How Does it Work?
An investor is given three tax benefits when investing capital gains into an Opportunity Zone, namely: 1) temporary tax deferral, 2) basis “step-up,” and 3) tax avoidance.
Suppose you sell your business, and you receive significant capital gains (congratulations, you’ve finally sold the business and retired!). Instead of immediately paying federal tax on capital gains, you may roll the investment into an Opportunity Fund and invest into an Opportunity Zone. Payment of the federal capital gains are deferred until December 31, 2026, and are eligible to receive a “stepped-up” basis equal to 15 percent if the investment is held for at least seven years. Arguably, the most tax advantageous incentive, if the underlying investment is held for more than 10 years, is that all of the appreciation will be realized tax free for federal purposes upon a later sale.
Opportunity Zones in Erie
In the City of Erie, eight census tracts received the designation, including the Central Business District, Innovation District, 12th Street industrial corridor, the entire downtown Central Business District, the waterfront (i.e., the GAF or Bayfront Place Development), SB3 and the Savocchio Business Park.
Here’s the exciting part. In Erie, an unprecedented partnership by the public and private sectors resulted in the formation of the Flagship Opportunity Zone Development Company for the purpose of promoting the Erie Opportunity Zones and the Opportunity Zone Investment Prospectus. The collaborators include public leadership (both sides of the aisle) and many of our largest private organizations.
Both the Investment Prospectus and development corporation are arguably the first in the nation, and in this day and age, the collaboration and bipartisanship is almost disconcerting.
The City of Erie is investor ready, and investors are taking notice.
For more information, visit www.erieddc.org.