Local Opportunity Zones Could Offer Tax Credits

Feb 11, 2020

Economic Opportunity Zones are designed to create jobs and spur development in depressed areas, by providing tax benefits to private investors. Two recent development projects in the Cape Fear Region could be eligible for these federal tax credits. But these zones aren't necessarily opportunities for everyone.

If a property is located in an Opportunity Zone, an investor in that property needs first to establish what’s called a Qualified Opportunity Fund. This fund then allows the investor to receive tax deductions on capital gains.

Clark Hipp is a local architect and developer. He looked into a Qualified Opportunity Fund for his proposed mix of residential and commercial development on the Wave Transit Garage Site on Castle Street. But the process Hipp describes can be complicated:

"You have to sell something that gives you a capital gain and then you take just that capital gain and invest it. So, someone has to sell an asset that has made them money and risk it in another investment, and many investors are not willing to take that leap just yet."

And there’s another catch: to reap the full benefits of the deduction, the investor’s money is tied up for ten years.

Here’s Clark Hipp: 

“Especially investors who are looking at construction projects or development projects, they’re looking at a three to five year horizon. So 10 years is a long time. And again, I think that’s one of things that has made investors a little wary of opportunity zone investment.” 

Hipps says it’s unlikely he’ll apply for the Opportunity Fund. And, he adds, it may take a while for other investors to become familiar with the program:

"So it’s going to take some time for these projects to happen and investors will start to see that, okay, we can invest these underserved areas and still see a return." 

Clark Henry is a Board member of the Cape Fear Economic Development Council.  He says one of the challenges is to identify projects that benefit the community as well as the developer:

“History tells us that it’s usually not to the direct benefit of the vast majority of people who tend to be lower income […] and that has led to a lot of displacement and gentrification."

But, Henry says, when the program works as designed, it can be an asset to underserved neighborhoods:

“There is the potential for this to leverage the private capital in these communities that in a way creates jobs, provides affordable and accessible housing, and creates opportunities for local businesses and communities that have lacked access before. […] But I think ultimately, too, the developers are going to be the ones doing the project, and it’s the way they shape their project that really reflects what’s going to happen.” 

New Hanover County is in the process redeveloping the Government Center. It is located in a designated Opportunity Zone…and investors in the Center could apply for the fund.

At last week’s State of the Union Address the President discussed the benefits of Economic Opportunity Zones, which can generate jobs and investment in underserved communities. But investors locally have yet to take advantage of the tax deductions that come with these Opportunity Zone investments.

The City of Wilmington has two designated Opportunity Zones.

Clark Hipp, a local architect and developer, has considered using the program for his project on Castle Street. But he says it’s usually the wealthier investors who are attracted by the capital gains tax credit that come with Opportunity Zone development. And to see a return, they typically prefer larger projects:

“When you’re talking about investments, significant investments, it unfortunately has to come from people who have the capital to be able to do it.” 

Hipp also says there’s another drawback:

“It’s simply the fact that you’re investing money that you’ve made, you’re investing that in another venture that likely because it’s an area that’s underserved, likely has higher risk than what you’re investing for.” 

But, despite this, Hipp says we might still see Zone projects in the future, including the possibility of the New Hanover County Government Center, which is located in an Opportunity Zone.