About $125 million of investment is pouring into Duluth as a result of six active projects moving forward with the help of "opportunity zone" funding, according to Jason Hale, the city’s senior housing developer.
And at least another half-dozen prospective opportunity zone projects are in the pipeline, reports Pam Kramer, the executive director of a local community development partner named LISC — short for Local Initiatives Support Corp.
Duluth is home to five of the 128 census tracts in Minnesota that have been designated opportunity zones. Fewer than 1 in 10 census tracts in the state have received that tax advantage status, designed to stimulate economic growth in demonstrably disadvantaged neighborhoods.
Duluth’s five census tracts — stretching about 6 miles from Central Avenue to 15th Avenue East — definitely fit the bill, with an overall poverty rate of 41%, a 13.8% unemployment rate and an average household income that’s equivalent to just 43% of the area median income.
Investors who fund projects in opportunity zones can profit from some generous tax benefits. People can avoid paying taxes on capital gains from one investment by rolling those profits into a qualified opportunity fund that specializes in finding worthy projects in designated opportunity zones.
If they then hold that investment for at least five years, they can defer taxes on 10% of their original capital gains. After seven years, they can defer 15% of their original investment.
Perhaps the most attractive benefit of an opportunity zone investment, however, is achieved after 10 years time. Someone who holds their interest for that long in an opportunity zone need pay no taxes on any gain in the appreciated value of their investment.
“It doesn’t come along that often that there’s a new way of funding real estate investment,” Kramer said.
“Certainly in our community with the affordable housing needs that we have, the need that we have for healthy food access in some of our neighborhoods, and also looking at the Lincoln Park craft business district there are a lot of entrepreneurs who are interested in helping to grow that neighborhood,” she said.
“The opportunity zone is providing a chance to attract investors and to get some of those things done that otherwise wouldn’t happen,” Kramer said.
But developer Brian Forcier of Titanium Partners LLC said the tax benefits alone aren’t enough to draw investment. Each deal needs to stand on its own merits.
“What I always start our discussions with is: 'Would the project make sense with or without an opportunity zone piece of it?'” Forcier said.
David Dubin, president and CEO of the Dubin Guru Group, which is investing in the renovation of the historic Board of Trade Building in downtown Duluth, concurred.
“Opportunity zones don’t make a deal that otherwise doesn’t make sense good," he said. "It’s helpful, but it ain’t a magic bullet."
Dubin explained that opportunity fund operators generally are interested only in projects that are economically sound. He referred to the tax benefits down the road as “icing on the cake.”
Construction continues at the Board of Trade Building, and Dubin said the renovations should be completed by year’s end. The finished building will offer commercial/retail space on the first floor, office space on the second floor and 84 units of mixed-income apartments on the upper floors.
Titanium Partners is involved in a couple of major downtown projects that are utilizing opportunity fund investments: the pending construction of a 15-story mixed-use apartment tower at 333 W. Superior St. and the renovation of the Temple Opera Building at 201 E. Superior St.
“We’re attracting outside capital that we really haven’t seen before,” Forcier said. “I think Vision Northland has as much to do with that as the opportunity zone — probably more to do with it, given the economic impact of Essentia and St. Luke’s doing what they’re doing.”
“I think opportunity zones would be the No. 2 reason. It would be why we’re seeing some outside-of-Duluth capital coming into town now. But I think Vision Northland is the biggest reason we’re seeing it,” he said.
Opportunity funds bring different expectation sets to the table, Dubin said.
“There are some groups that are far more altruistic than others, but those are few and far between.There are some in the middle of the road, and then there are some only concerned about the almighty buck,” he said.
Kramer noted that there are opportunity funds motivated by the desire to promote the public good and social justice, however. She pointed to Minnesota Opportunity Zone Associates, as an example. MN-OZA, as the fund is commonly called, is looking to redevelop the Esmond Building, formerly known as the Seaway Hotel in Lincoln Park, including renewable energy and affordable housing components as part of the project.
“We are finding that there are some developers and even accounting firms and partners in the community that are looking to identify social impact investors — people who would be willing to take a lower rate of return on their investment in order to support a project that benefits the community,” she said.
Kramer said the LISC has been working with a firm, Cogent Consulting PBC, to develop a scorecard to highlight the social benefits proposed projects would provide.
Chris Fleege, Duluth’s director of planning and economic development, said city staff likely would have drawn the lines of an opportunity zone differently if it had the freedom to do so. But the federal program allows only whole census tracts to be identified. As a result, an effort to include Duluth’s Central Hillside in the zone meant including Canal Park, an area that he acknowledged has attracted plenty of investment without the help of any new program.
Although opportunity zones were introduced as part of the Tax Cuts and Jobs Act passed in late 2017, details about how they would work have been slow to come into focus. A government shutdown ensued resulting in delays, and final rules for the zones were finally published in December 2019.
Navigating that emerging landscape has not been simple for developers attempting to bring forward projects in conjunction with opportunity funds.
“When you’re putting capital together, especially to do some of these larger-scale projects like the tower, every investment dollar counts,” Forcier said. “So, it did make it challenging from the standpoint of say a larger project where you’re accumulating large amounts of funds from multiple parties, and they don’t know how to make their investment decisions because they hadn’t got their guidance yet from the Treasury Department.”
“Here we are as developers saying: Hey, we’ve got these great projects and you’re going to get access to them. So, that was a challenge, because the final guidance didn’t come out until December, and then they give you basically until the end of June to complete your transactions, which isn’t a very long time period,” Forcier said.
Now that the rules have been finalized, Fleege said he expects to see more opportunity zone activity. But he said developers will still need time to digest the ins and outs of the program.
Fleege noted that there are more than 500 pages in the IRS document governing opportunity zones and called it “fairly complicated.”
“But I think it’s going to be a tool that can be used, and I think we’re going to see that as some of these projects get built,” he said.