Minnesota Opportunity Zones: The Prospect for 2019

Even though designated Opportunity Zones throughout the nation are viewed as vehicles for investment in local communities and a market-driven source of renewed opportunity for workers and residents of low-wealth communities, state and local officials see challenges in implementing programs that will have the hoped-for positive results in Minnesota. But that has not deterred forward progress with the program.

Federally-sponsored bipartisan efforts created the Opportunity Zone funding in 2017 as part of the Tax Cut and Jobs Act of 2017. Congress subsequently approved a list of 128 Minnesota census tracts eligible to receive the funding. Minnesota’s Department of Employment and Economic Opportunity (DEED) is tasked with administration of the funding program.

Collaboration between state authorities and the U.S. Treasury Department was expected to promote needed investment and spur economic and business growth in some of Minnesota’s lower income areas. Additionally, it was hoped that the program would bring new public-private partnerships into play, according to DEED Commissioner Shawntera Hardy. The state’s housing commission also expressed hope that local communities and developers could work together to explore new strategies to supply needed housing in underdeveloped areas.

Making the Vision a Reality

The opportunity zone investment program makes it possible for investors who have realized capital gains on past investment to gain a tax break by investing in a qualified new opportunity in a designated area within a specified time frame. It involves some advance planning an a joint effort to make such investment attractive and viable, but some regional proponents see it as a way to assure new growth on a speedy basis. Although the time clock on the program is for 10 years, some spokesmen note that it is inadvisable to wait even until the end of 2019, making it imperative to get the program implemented as soon as possible.

The City of Duluth is doing just that. The Local Initiatives Support Corp. (LISC) held a forum during the second half of 2018 to introduce the program to about 70 investors. LISC Executive Director Pam Kramer noted that depressed communities noted a business decline of approximately six percent following the Great Recession, and that the program is designed to get the ball rolling once again toward new business development and job formation. Because the program is still relatively young, there is as yet no real measurable data on its potential benefits to local areas or to the state as a whole.

Structuring New Investment

Opportunity Funds for commercial real estate in Blue Earth County may be organized in various ways, as corporations or partnerships, and allowable investments include stock issuance, venture capital funds and private equity business. Funds may be used for business equipment and other assets, and real estate investments are allowable under certain conditions that include new construction or other improvements.

Cash investment in property with no plan to improve a site or create additional asset value within a time frame of 30 months is not allowed. Even though there is local control over the designation of the opportunity zones and local input into the investment plans, the funds are controlled and disbursed by the federal government and there is some lack of clarity and direction.

However, Duluth officials remain hopeful that the opportunity zone designation will lead to new life in their city, and point to the adoption of a comprehensive “Imagine Duluth 2035” plan as evidence that it will contribute to a better future.

First Fund Launched

In November of 2018, Developing Real Estate in Emerging Areas of Minnesota (DREAM) Fund became the first to be launched in Minnesota under the federal opportunity zone legislation. Fund backers hope to secure up to $100 million in investments to funnel into development among the state’s designated opportunity zones.

It is an ambitious undertaking, according to CEO Ravi Norman of Thor Companies, a manager of the fund. Norman stated that he believes it represents a great opportunity for the company’s development and construction business, but also fulfills another goal of investing locally for the benefit of the state and its people. Another investor-partner in this first enterprise fund, calls it a “triple bottom line” objective of financial return, noting that it fulfills both social and environmental goals in local communities.

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