- Madison Street Strategies
Governing: 'Investors Are Hesitant': Rural America Might Miss Out on 'Opportunity Zones'
Tax breaks likely aren't enough to lure investors to low-income communities in rural areas. There are ways they can become more attractive.
By LIZ FARMER
April 19, 2019
This week, the federal government released new guidelines for the nation’s more than 8,700 "opportunity zone" communities trying to attract venture capital investment and boost their struggling economies.
Rural areas account for 40 percent of the designated opportunity zones, which offer private companies and investors tax breaks in exchange for investing in certain low-income communities. But some warn that even with the tax incentives, many rural areas still likely won't benefit unless state and local governments intervene to make the investment less risky.
“A lot of investors are hesitant to work with rural communities,” says Grey Dodge, who implemented Florida’s Opportunity Zone program as the state's economic development policy director and now supports the program through Madison Street Strategies, a consulting firm. “In contrast to six or seven opportunity zone counties in Florida that don’t have to do much -- the investment is already flowing there -- these other areas haven’t seen investment in decades.”
The zones were created by the 2017 federal tax overhaul as a way to entice companies to invest in underdeveloped areas. Investors can reduce the capital gains taxes they owe on previous investments if they invest those gains in opportunity zone communities for at least seven years. They can eliminate that tax bill entirely if they let the money ride for a decade.
But that’s not enough for most firms and investors to take the leap in rural areas -- even if places try to sweeten the deal with additional state and local tax breaks.
“The investors I talk to [say] the tax benefit is nice to have, but it’s not motivating any decision-making,” says Aaron Seybert, social investment officer for the Kresge Foundation. “Until you get a risk-free model, I don’t see much changing.”
Dodge’s and Seybert’s comments came at the Council of Development Finance Agencies’ annual federal policy conference in Washington, D.C. The panel discussions on opportunity zones were held within hours of the new federal rules being released.
Under the new rules, investors will be allowed to share or sell their stakes in an opportunity zone fund or their interest in a start-up as long as the money is reinvested in another qualifying business or asset. The new rules also clarify that long-vacant properties will immediately qualify for the tax breaks.
John Lettieri, president of the Economic Innovation Group, praised the new guidance, saying it “removes many of the impediments that have kept capital on the sidelines instead of flowing into communities and supporting local growth.”
But Stephanie Copeland, CEO of the Governance Project, is skeptical that the new guidelines and the extra tax breaks that some states and cities are offering will actually be enough to bring investment to rural areas. She suggests governments backstop (essentially insure) certain high-risk investments to make venture capital firms or so-called angel investors more willing to put money in struggling rural communities.
New Jersey is exploring Copeland's idea, and Colorado is already working on creating such a program.
“Most of these local development experts and leaders are really good at business development and planning, but they have no idea how to talk to investors,” says Jana Persky, Colorado’s opportunity zone program director.
Colorado officials are working with rural leaders to help them map out what their needs are, what they have to offer and how to package that together in a way that’s attractive to investors.
There are signs, however, that some rural communities may not need to go the extra mile.
For example, after rural Montrose County, Colo., was featured in a Forbes article last year, Persky says the state got calls from investors who had $50 million to invest and wanted to know about the county’s offerings. The county isn't topping on tax breaks or backstopping high-risk investments. Nevertheless, it has several other potential $10 million or $15 million investments, Persky says.
Montrose has fewer than 42,000 people. A $50 million investment is close to the revenue the county makes in an entire year.
Read the full article on Governing's website.