When the Tax Cuts and Job Act became law in 2017, most of the attention following the law’s passage was focused on the tax cuts.
However, governors in all 50 states and five U.S. territories were given 90 days to propose opportunity zone designations, a part of the law found on page 131 of the text.
“For the most part, every governor in the country had no idea what opportunity zones were, they didn’t know how it worked, they’d never heard of it before, it was kind of a shock to everyone and people were left scrambling,” said Patrick Mullen, director of opportunity zones and financial incentives for the Utah Association of Counties.
Opportunity zones are designated census tracts that house low-income communities. Within these designated zones, investors of all kinds essentially get a tax break if they invest in the community with real estate or a business. Governors were able to nominate 25% of their low-income census tracts for the designation. The first opportunity zones, according to the IRS, were designated in April of last year. Utah’s opportunity zones were designated in June 2018.
There are 8,761 in all 50 states, D.C. and five U.S. territories, 46 in Utah, five in Utah County, four of which are in Provo with the last one in American Fork. Despite being a year old, it wasn’t until March of this year that the first opportunity zone project broke ground in Salt Lake City, the “Paperbox Lofts,” a mixed-use development by Provo-based PEG Cos. PEG also has plans to build mixed-use developments in Provo opportunity zones, at least one of which will break ground at the end of the summer.
Mullen, who previously worked as the executive director of Sorenson Impact, has held his new position for roughly seven months. In his words, he and his colleagues work as “matchmakers” for investors looking to take advantage of the opportunity zone designation and invest in those communities.
“There’s hundreds if not thousands of investors nationwide who are looking at using this incentive, and they’re trying to find what communities have projects that are interesting to them,” Mullen said. “And there’s communities across the country who are saying, ‘How do we stand out? How do we market ourselves, how do we say, hey, yes, we have a zone and here’s what we want to see happen in that zone, please come take a look if you are interested in doing whatever it is that we want to have happen here.’”
What has investors so excited is the so-called “tax break.” If investors invest in these designated opportunity zone communities, they defer their tax liability, or the amount of tax owed. After five years, if they continue to invest in the same project, they get a 10% discount on the deferred taxes, after seven years, it’s a 15% discount. But the real draw is to stay for 10 years — after 10 years, investors don’t have to pay any taxes on their capital gains.
So if an investor invested $1 million to start with, and at the end of 10 years, that $1 million turned into $10 million — the investor wouldn’t have to pay taxes on the $9 million worth of capital gains.
“So a lot of real estate investors, a lot of business-interested investors, a lot of other sectors of investment really took notice of this and said, ‘Oh my gosh, I’m absolutely going to be all over this, where are the zones and how do I invest?’” Mullen said.
The race is still on. According to the law, the latest an initial gain can be deferred is 2026, so Mullen said if investors want to get the five or seven-year discounts, they would have to be invested by the end of this year. However, Mullen also said most investors are interested in the 10-year plan anyway.
“Yes, there’s a rush to get it done now for obvious reasons, and if you can do it in 2019, great, but post-2019 it doesn’t mean it’s going away,” Mullen said. “This is certainly going to be something that I think matters for the next three to five years in a lot of these communities.”
Despite the rush, and the feeling that not a lot is happening, some interesting projects are already under way. As previously mentioned, Provo-based commercial real estate development company PEG has already begun projects in Salt Lake City and even other states, with new projects in Provo planned. In April, American Fork hired Advisors Consulting Services to help the city create an economic plan that would maximize its one designated opportunity zone.
But in Provo, a little ways south of Center Street, there’s actually a company that has been investing in the community for years: Hall Labs.
On over 100 acres of what used to be a steel mill, Hall Labs has served as a hub of innovation for years, beginning with “MegaDiamond” in 1966, after Tracy Hall had invented Synthetic diamonds in 1954, and has since produced major companies like Novatek, Vanderhall, My Smart Blinds, Garage Smart, Sure-Fi, Bacon and more.
Basically, chairman David Hall (son of Tracy Hall) explained, Hall Labs is a place for people to test out ideas. The company employs dozens of engineers, bio-chemists, mathematicians and more, and if one of them comes up with an idea, Hall Labs gives them the space to try it out. If the idea turns into a tangible product that can be sold, Hall Venture Partners will invest in it, turning it into a bonafide company.
Hall estimates the company has about 25 ongoing projects at the moment, 12 of which have become full-fledged companies. Then as the companies outgrow the space, they’re sold off.
“We’re best at the early stage, and other companies are actually better at scaling it and really selling a lot,” Hall said. “It’s not always best to hold on to a company.”
But, most of the companies continue to stay in the area, which happens to now also be in a designated opportunity zone. Matt Van Dyke, CFO of Hall Labs and Hall Venture Partners, said the opportunity zone designation did serve as a sort of accelerant when it came to finding outside investors for the companies, most of which simply move to different buildings on the same large campus that Hall Labs exists on, so they continue to benefit Provo’s economy.
“There’s been quite a bit of interest there. But we’ll take a methodical approach to make sure we don’t run faster than we can walk,” Van Dyke said.
Besides being unique for its entire premise, Hall Labs is different from other investments seen so far because it’s a business rather than real estate investment.
Mullen said most opportunity zone development at this point has been real estate, partially because investing in real estate is very easy to understand. Investors either have to build a new project from the ground up, or invest money into an abandoned or dilapidated building for improvement.
“I think we’re lucky to have someone like a Hall Labs in the state, because there’s not a lot happening across the country in terms of people trying to use this for entrepreneurial business investing, it’s mainly been real estate so far of what we’ve seen,” Mullen said. “I think Hall is actually really laying a blueprint out for how you use opportunity zones to invest in entrepreneurship better than almost anything I’ve seen across the country.”
The official borders of the census tracts in American Fork and Provo can be found on the city’s individual websites, and the full list of Utah’s opportunity zones can be found on the Utah Governor’s Office of Economic Development website.
There are lots of projects beginning in the state that Mullen is excited about. For residents, these designations could mean more affordable housing and jobs, but Mullen said it’s important that residents try to be a part of the conversation and let their local government leaders know what kinds of things they want to see in their city.
“Engage with your local leaders,” Mullen said. “If you are a small business owner, you are someone who ... could take advantage of this ... we’re trying to build this platform to not only provide temporal assistance to those who need it, but really match them with potential investors should they have a project that they feel warrants it.”