SOUTHEASTERN NORTH CAROLINA (WECT) - On Castle Street between 11th and 12th sits 1.5 acres of pure opportunity that has been vacant for years.
The old transportation depot is located within one of Wilmington’s four federal Opportunity Zones, and the proposed project to renovate and bring new life to the site is the only project known to city officials to be looking to utilize the national tax program.
Opportunity Zones came out of the 2017 Tax Cuts and Jobs Act as a means of providing investors a harbor for capital gains while pushing for investment in low-income communities.
With the first major deadline of the program approaching, economic development experts from the Cape Fear region said the compressed timeline and nebulous nature of the program’s rules appear to be cooling interest from investors.
Additionally, the rules are limited when it comes to protecting the communities in the zones from gentrification or other exploitation or requiring that projects be designed to actually help.
The federal Opportunity Zone program is at its core a savings mechanism for those with capital gains.
Capital gains are the profit an individual makes after selling an asset, such as a home, vehicle, property or fine art. Normally, that profit would be taxed at around 20 percent depending on how long the person owned the asset, the amount of profit and other factors.
To avoid that tax, investors now have the option to take that profit and invest it in a Qualified Opportunity Fund (QOF) — a fund that will be used to invest in a project located in one of the designated Opportunity Zones.
If they invest in a fund, and leave that investment alone for 10 years, the investor will get a 15 percent deduction on the taxable profit. If it’s left alone for 7 years, they get a 10 percent deduction, and for 5 years a 5 percent deduction.
Additionally, if the individual leaves the money in the fund alone for 10 years, any growth their investment sees in that time period won’t be taxed.
To receive that maximum benefit, investors must be part of a QOF by Dec. 31, 2019.
Census tracts, like the one that includes Castle Street, were chosen at the state level from a list of eligible low-income or adjacent-to-low-income options.
In general, eligible census tracts should have a poverty rate of at least 20 percent, and states were asked to look at relevant employment and education data as well.
One tract in Brunswick County has a poverty rate of 19 percent, but the rest in the five-county area of the lower Cape Fear region fit well within the guidelines.
Other than the basic criteria, it’s unclear exactly how the state determined which census tracts to designate. The North Carolina Department of Commerce (NCDOC) sought to put at least one zone in each of the state’s 100 counties, but other than that says it relied on public comments to determine where they should be.
North Carolina had about 1,000 eligible census tracts, and could designate up to 252.
“It was really an open process, where local communities were invited to sort of evaluate this opportunity … and then take a look and give us their input,” David Rhoades with NCDOC said.
WECT has requested copies of the public comments, but was told it could be a few weeks before that information is made available.
Anecdotally, though, it appears some communities were more aggressive than others.
In Bladen County, economic development leader Chuck Huestess said they chose Elizabethtown because they weren’t sure what else to nominate based on the information they had.
Wilmington, on the other hand, quickly cobbled together a three-person committee that submitted five tracts as priorities, four of which were chosen.
“I don’t know if ultimately that was more than what we were destined to get, were we not as aggressive as we were,” said city legislative liaison Tony McEwen.
While the city advocated, it didn’t get everything it asked for.
“One of the disappointments for us is that all the census tracks that they ultimately put forward were on the south side, and we were hoping to get at least one on the north side as well so there’d be some geographic diversity,” McEwen said.
While the Opportunity Zone program is designed to spur development in low-income neighborhoods, there are virtually no safeguards making sure that actually happens.
The U.S. Department of the Treasury didn’t release its proposal for the official rules for the program until October 2018, and the details weren’t finalized until earlier this year.
Those rules mostly deal with how the investment side of the program is handled, and they don’t include requirements for financial transparency or reports on how the project is benefiting the zone it’s in.
“There is a concern, not only here in Wilmington, but around the country to where, exactly how does this investment take shape? Will it ultimately amount to some sort of gentrification? Which would be concerning,” McEwen said.
For the tracts within Wilmington, McEwen said he and others have tried to mitigate the lack of rules by introducing stakeholders early in the process — bringing together investors, developers and community members through public sessions and private meetings — to try to facilitate good relationships.
“We’ve tried to, the folks that we’ve brought to the table from the private sector, are people who have very much been involved in affordable housing projects and have that as an interest or a background," he said, “and so we’ve tried to bring those people, definitely, to the table, and connect them with the folks that are really experts and that are really kind of governing this program.”
Both McEwen and Huestess said they think Opportunity Zones could be beneficial to distressed communities in southeastern North Carolina, but it remains to be seen whether or not the investment is going to materialize.
“The idea is a tremendous idea, and I tell you, it piqued a lot of interest, and the way it generally works, it would generate a lot of investment,” Huestess said.
He said there has already been interest from investors both local and outside the area in Elizabethtown, but said with the deadline of Dec. 31 on the horizon, and the length of time it took to get the program figured out, the clock is ticking.
“They could still have a big impact if there was time to get the investment made in enough time to have full benefit of it.”
McEwen had similar thoughts, but noted again how at this point the issue is really out of local governments’ hands.
“We want to make sure the investment is done in a way that’s conscientious of the community, and what the needs are, and so we’ve done everything we could to do that, but it’s not fully under our control, unfortunately.”