Many opportunity zones await developer interest

Listen to this article

Some of the most popular areas for development in Richland and Lexington counties are in “opportunity zones,” including the BullStreet District, North Main Street in Columbia, West Columbia and major portions of lower Richland and Fairfield counties.

However, many of those areas are still awaiting interest from opportunity zone investors, officials say.

Included in the 2017 Tax Cuts and Jobs Act is a plan to encourage economic development and job creation in distressed communities called opportunity zones. Developers and businesses who invest in these designated areas can defer tax on eligible capital gains if they meet government requirements.

South Carolina opportunity zones were designated in 2018 by the S.C. Department of Commerce and Gov. Henry McMaster based on census income figures. Of 1,097 census tracts in South Carolina, 538 were eligible for opportunity zone designation.

Each county designated 25% of those eligible tracts as opportunity zones, so 135 census tracts statewide are designated zones. An effort was made to designate a zone in every county and to evenly distribute the zones between rural and urban areas, the department said. Counties, cities and nonprofit groups could request a particular area be designated an opportunity zone.

“What we agreed to was to try to apply that 25% rule to each county,” said Jennifer Fletcher, S.C. Department of Commerce deputy secretary.

While the department’s role is to provide information about the zones and their location, it does not approve programs or funding for projects in them, Fletcher said. Projects that qualify for opportunity zones include commercial property, manufacturing and distribution facilities or residential development.

The city of West Columbia has included an opportunity zone prospectus and a map of its designated zones online, as has the city of Columbia.

West Columbia economic development director BJ Unthank said there are no area developments taking advantage of the opportunity zone incentives yet. The city’s zone includes the State Street and Meeting Street corridors.

“We are very excited to have an outstanding area that is in the opportunity zone,” Unthank said. “Some of our highest-growth areas are in the opportunity zone.”

Robert Hughes, president of BullStreet District master developer Hughes Development Corp., said that so far, no developments within BullStreet have utilized opportunity zone incentives, but he expects that to change. He said having the 181-acre project enclosed in an opportunity zone is a selling point for potential investors.

“It’s a phenomenal development tool,” he said. “When all is said and done, based on everything I’ve read, it’s going to be an even better tool for startup companies and venture capital firms on how and where they make their investments.”

The S.C. Department of Commerce website’s information on opportunity zones includes a listing of funds and grants that could be used for projects.

“This incentive can be used for a wide range of different types of community development programs,” Fletcher said. “The community needs to envision what they want in their particular zone. Hopefully, what they do is, they structure programs so that it attracts these funds. That’s where the grant money comes in, to help them find a third party that can help them craft the vision for what they want.”

Unthank said West Columbia is willing to work with business owners or developers interested in investing in West Columbia opportunity zones. He said interested parties can find resources on the city’s opportunity zone website.

“Investors who are looking to invest money into an opportunity zone area have access to some ideas about what we see as real potential opportunities for investment, areas that are going to offer a very good return on investment,” he said.

Mark Cooter, managing partner and CPA at Greenville-based accounting firm Cherry Bekaert LLC, said opportunity zones aim to provide economic incentives in areas that are lower-income or have smaller populations. Encouraging investment in those areas helps provide jobs and financial stability, he said.

“Opportunity zones are all over the country as an economic development incentive,” Cooter said. “It’s not just impacting real estate investors. It’s also impacting investors into operating businesses in those geographic areas.”

Cooter said although the opportunity zones program can make a good project better, it won’t make a bad project good. He suggested investors talk to a CPA or attorney who is familiar with the program so investments can be structured to take maximum advantage of the incentives.

Attorney Will Johnson with Columbia law firm Haynsworth Sinkler Boyd described the U.S. Treasury Department regulations regarding the zones as “voluminous.” The first 74 pages were released in October 2018, and 168 more pages were released in April 2019.

“The regulations address countless issues that were unclear based on the original statutory language alone,” Johnson said. “Some of the key issues included clarifying what an entity must do to certify as a qualified opportunity zone fund, specifying what the term ‘substantially all’ means when used in multiple places in the original statute, explaining the extent to which an existing building must be improved to qualify as eligible opportunity zone business property, and outlining rules for leased property, including related-party leases.”

Johnson said compliance with opportunity zones benefits will require accurate annual IRS filings. He said establishing proper entities to participate in opportunity zones most often requires legal assistance, including forming a qualified opportunity fund and a subsidiary holding company called a qualified opportunity zone business. Projects should be legally evaluated to ensure that they are compatible with the opportunity zone benefits, he said.

“That process requires a complete understanding of the transactions leading to capital gains, the timeline for reinvesting those capital gains, the plans for improving the opportunity zone property, and the intended ownership structure of the qualified opportunity fund,” Johnson said. “Any situation in which a developer is seeking funds from outside, passive investors triggers securities law concerns that should not be overlooked.”