MUSKEGON — Federal guidance on a new incentive program designed to encourage investment in economically-distressed communities comes at an opportune time for Muskegon.
Amid an ongoing wave of redevelopment in the city, property investors looking to shield some gains from taxes now have new ways to redeploy their capital and seek returns via Opportunity Zones.
Muskegon County has five designated Opportunity Zones — three in the city of Muskegon and two in Muskegon Heights — that include properties on the Muskegon Lake waterfront, vacant school buildings, a former wastewater building and more.
“The Opportunity Zones (in Muskegon) are right where people want to invest today, and we can’t let the grass grow under our feet here because the opportunity for them is now,” said Dave Alexander, executive director of Downtown Muskegon Now. “We are very aggressive because we hit the bonanza.”
Enacted as part of the federal Tax Cuts and Jobs Act of 2017, Opportunity Zones are designed to spur private investment in low-income census tracts. In total, West Michigan has 26 Opportunity Zones, which communities across the region have started marketing to potential investors.
For investors, the attraction stems from the potential to generate higher returns on their investment, which in Opportunity Zones can be upwards of 20-25 percent, according to Chris Benedict, partner at North Muskegon-based Great Lakes Development Group LLC. That compares to a possible 15-percent return for traditionally financed projects, he said.
“You can’t deliver huge returns for investors (typically) because of construction costs and just the market,” he said. “When investors look at Opportunity Zones, the tax deferral is what they’re looking for.”
Great Lakes Development Group is leveraging the new incentive for two Muskegon projects. Next to Lake View Lofts at 351 W. Western Ave. in downtown Muskegon, the firm is constructing a new building with 18 market-rate apartments, a gym and a restaurant.
The company also is developing Foundry Square, which includes a hotel and housing and is being built on an 8-acre parking lot on Morris Avenue downtown. The total projected investment could run as high as $45 million, Benedict said.
Investors can take advantage of a series of tax benefits when they invest in a business located within one of the Opportunity Zones. Those benefits range from the temporary deferral of capital gains reinvested into a qualified opportunity fund to the permanent exclusion of gains if the qualified investment is held longer than 10 years.
The federal guidance regarding Opportunity Zones has been somewhat fluid, with some regulations getting released last fall. A new 169-page proposed regulatory framework the Internal Revenue Service released this month details a second series of rules meant to clarify some aspects of Opportunity Zones.
The new proposed rules “relieved uncertainty and provided clarity” so people would feel more confident making Opportunity Zone investments, said Gina Staudacher, attorney in Royal Oak at Howard & Howard Attorneys PLLC. The guidance also gave some broader interpretations of the initial proposed regulations and offered definitions, she said.
“A lot of people have these businesses or these idle properties, and they really need to take seriously the question, ‘What does this community need?’” Staudacher told MiBiz. “There are a lot of wealthy families and other investors looking to put a remainder of their gains into an Opportunity Fund.”
Howard & Howard has set up about 15 Opportunity Funds and creates funds on almost a weekly basis, Staudacher said.
Need for education
Across West Michigan, Grand Rapids-based economic development group The Right Place Inc. is working with communities to “make the most of” Opportunity Zone locations.
The Right Place, which covers a six-county area of West Michigan, will eventually put together a prospectus that markets the region’s Opportunity Zones to investors. The prospectus is meant to familiarize investors with the communities and their needs.
“Most of the time, you’re going to be working with investors or developers that have funds to invest, but may not understand the local community or assets in that community,” said Tim Mroz, vice president of strategic initiatives at The Right Place. “This is a national program, so we’re seeing Opportunity Funds invest in nationwide opportunities, not just local funds.”
According to Benedict at Great Lakes Development, investors from all over are paying close attention to the Opportunity Zones in Muskegon in particular.
“Now that people are understanding the benefits of Opportunity Zone funds and how they can defer their taxes and reap a better return, we’re contacted every day by investors, attorneys, CPA firms, looking for their clients to deploy their gains,” Benedict said.
Despite the rush of interest, communities need to act fast when it comes to advertising their Opportunity Zones, according to Staudacher.
“They need to look at this as an economic development tool and identify areas that are unique, and why investors would want to come in to their location,” she said. “This has timelines. That’s a good thing, because it forces people to move quickly and not sit on the money.”
'Ready to move'
The Opportunity Zone incentive was designed as a 10-year program, creating a sense of urgency for investors to get involved. As well, other state and local incentives, such as tax abatements, can be stacked onto Opportunity Zone benefits.
That’s why the current focus for Downtown Muskegon Now is spreading awareness to possible investors, Alexander said.
“It is getting the word out as much as we can, and looking at shoring up some local incentives, encouraging the state to add to those incentive packages to bring more development in, and working with individual developers, property owners and investors, and getting them directed toward Opportunity Zone projects,” he said.
Muskegon is a good example of a city that’s been proactive with the program, Staudacher added, saying communities should remove barriers that could slow down the development of qualifying projects.
“The cities that advertise as ready to move, they will be the ones that see the first dollars pouring into their communities,” she said.