Opportunity Zones provide new investment avenue

Real Estate & Development

Good City Brewing LLC co-founder Dan Katt has set up a fund for investors willing to capitalize his Century City project.

Katt is one of several developers looking at the economic Opportunity Zone program as a way to help move their projects forward.

“We intend to take advantage of the program both for new business ventures and real estate development at Century City,” Katt said.

The Opportunity Zone program was a small piece of last year’s federal Tax Cuts and Jobs Act. The program offers investors two benefits. First, they can defer capital gains on a previous investment if the money is reinvested into a zone until the end of 2026. Those capital gains taxes can be reduced by as much as 15 percent.

Second, taxes on capital gains from investments in the Opportunity Zones can be avoided if the investments are held for at least 10 years.

There are more than 8,700 Opportunity Zones throughout the United States. Wisconsin has 120 Opportunity Zones, with 48 in southeastern Wisconsin and 34 in the City of Milwaukee.

Portions of the near west side and south side, particularly along West National Avenue, are included, along with parts of Walker’s Point, the Menomonee Valley and a stretch of North Water Street between East Juneau Avenue and East Brady Street.

“The idea is to incentivize people to take money out of the stock market or property and invest it into specific geographic areas that are underinvested in,” said Rebecca Mitich, a partner at Husch Blackwell in Milwaukee who specializes in real estate law. 

A map of the Opportunity Zones in the City of Milwaukee.
Credit: WHEDA

Development selling point

Developers, of course, see the program as another selling point for their projects.

This summer, Katt announced Good City Brewing would move its office and warehouse operations to the stalled Century City Business Park on Milwaukee’s northwest side, with eventual plans to establish a brewery there.

In mid-October, Good City acquired the ownership interests of the City of Milwaukee and developer General Capital Group in the Century City I building for $35,000 in cash and nearly $3.3 million in debt.

The 53,000-square-foot industrial building is too large for Good City. Katt and his partners are currently working on a specific development plan for the building.

Katt has set up the Opportunity Fund so investors who want to take advantage of Century City being located in an Opportunity Zone can invest in his project. As of press time, Katt would not give specific details on his plans.

“We’re sort of blazing a new path,” Katt said. “We would like to see other entrepreneurs, small business owners and local people who understand and are familiar with the city join us. We are still in a position where we like to have fun and are comfortable trying new things.”

Stewart Wangard, chairman and chief executive officer of Milwaukee-based development firm Wangard Partners Inc., has set up three Opportunity Funds. He plans to use two of the funds to invest in Opportunity Zones across Wisconsin and the third to invest in zones nationwide.

Wangard went to Washington, D.C. recently to meet with some elected officials to discuss Opportunity Zones. He also serves on commercial real estate association NAIOP’s tax and finance subcommittee.

“For an investor, it is a great opportunity for wealth preservation, and for the state at large, it is a great opportunity to put people to work in neighborhoods where there is typically not as much investment,” Wangard said.

Two large-scale commercial development projects in West Allis are in Opportunity Zones and the developers plan to use the incentive to market their projects to investors, said John Stibal, the city’s development director.

Cobalt Partners LLC is planning to redevelop nearly 23 acres bordered by South 70th Street, West Madison Street, South 71st Street and West Washington Street. The $87 million project is expected to include a 100-room hotel, retail space, office space and an education component.

Mandel Group Inc.’s high-end West Allis apartment project, The West, which is part of its Six Points project, will have 177 units. 

There have also been several developers and investors from outside of the state looking at property in West Allis because it is located in an Opportunity Zone, Stibal said.

“Within the City of West Allis, we are working with about a dozen projects that we expect to generate somewhere around $260 million in Opportunity Zone investments,” Stibal said. “These investments will run the gamut from property acquisition, building development, to investing in manufacturing operations. “

The economic advantages of an Opportunity Zone are not big enough to make a deal happen alone, but the program will dramatically focus and target investments in areas that have zones, Stibal said.

Flexible requirements

On Oct. 19, the IRS published the first set of proposed regulations for Opportunity Zones. The rules were more flexible than expected, Mitich said.

According to the regulations, Opportunity Funds can make qualifying investments in a business which has a minimum of 70 percent of its assets in the zone. The flexibility makes it easier to invest in operating businesses. It also means that more dollars can be invested in communities that are more affluent.

Opportunity Zones are much more accessible to the average investor. Unlike Low Income Housing Tax Credits or New Markets Tax Credits, a lengthy application and approval process does not have to take place. An Opportunity Fund can be set up by establishing an LLC and through the organizer’s tax return, Mitich said.

“Anyone with any sort of capital gains can do this,” Mitich said. “So if you own a lake home, sell it and don’t want to buy a new one, and don’t want to pay the taxes, put it into an Opportunity Zone. If someone had $1,000 out of the stock market, they could potentially put it into a fund.”

Mitich said there is still not a lot of clarification on whether the funds can be reinvested. For example, if an investment is going south after two years and the investors want to move their money, can they do so without facing a penalty?

“The can was kicked down the road on that one,” Mitich said. “We think it will be allowed, but we still don’t have clear guidance.”

Regardless of how economically challenged the country’s 8,700 zones are, they all have the same incentives built in for investors and developers.

Because of that, some neighborhoods may never be redeveloped, said Brett Theodos, principal research associate in the Metropolitan Housing and Communities Policy Center at the Urban Institute.

“The kind of zones that make the most sense to invest in will be the places that produce the most return on investment,” Theodos said.

The Treasury Department does not require any reporting on where the developments are taking place or whether jobs have been added as a result of the program. There are no incentives to take on a more challenging project.

Mitich said neighborhoods that feel like a safer investment in a qualified zone will likely be developed first.

“That is part of the sense of urgency investors are feeling now,” she said. “They want to get to those safer projects and there is some concern those safer projects will run out. The standard investor will be looking for the same investment deal that they would look for without an Opportunity Zone program; but the ultimate benefit comes after 10 years.”

Good City Brewing LLC co-founder Dan Katt has set up a fund for investors willing to capitalize his Century City project.

Katt is one of several developers looking at the economic Opportunity Zone program as a way to help move their projects forward.

“We intend to take advantage of the program both for new business ventures and real estate development at Century City,” Katt said.

The Opportunity Zone program was a small piece of last year’s federal Tax Cuts and Jobs Act. The program offers investors two benefits. First, they can defer capital gains on a previous investment if the money is reinvested into a zone until the end of 2026. Those capital gains taxes can be reduced by as much as 15 percent.

Second, taxes on capital gains from investments in the Opportunity Zones can be avoided if the investments are held for at least 10 years.

There are more than 8,700 Opportunity Zones throughout the United States. Wisconsin has 120 Opportunity Zones, with 48 in southeastern Wisconsin and 34 in the City of Milwaukee.

Portions of the near west side and south side, particularly along West National Avenue, are included, along with parts of Walker’s Point, the Menomonee Valley and a stretch of North Water Street between East Juneau Avenue and East Brady Street.

“The idea is to incentivize people to take money out of the stock market or property and invest it into specific geographic areas that are underinvested in,” said Rebecca Mitich, a partner at Husch Blackwell in Milwaukee who specializes in real estate law. 

A map of the Opportunity Zones in the City of Milwaukee.
Credit: WHEDA

Development selling point

Developers, of course, see the program as another selling point for their projects.

This summer, Katt announced Good City Brewing would move its office and warehouse operations to the stalled Century City Business Park on Milwaukee’s northwest side, with eventual plans to establish a brewery there.

In mid-October, Good City acquired the ownership interests of the City of Milwaukee and developer General Capital Group in the Century City I building for $35,000 in cash and nearly $3.3 million in debt.

The 53,000-square-foot industrial building is too large for Good City. Katt and his partners are currently working on a specific development plan for the building.

Katt has set up the Opportunity Fund so investors who want to take advantage of Century City being located in an Opportunity Zone can invest in his project. As of press time, Katt would not give specific details on his plans.

“We’re sort of blazing a new path,” Katt said. “We would like to see other entrepreneurs, small business owners and local people who understand and are familiar with the city join us. We are still in a position where we like to have fun and are comfortable trying new things.”

Stewart Wangard, chairman and chief executive officer of Milwaukee-based development firm Wangard Partners Inc., has set up three Opportunity Funds. He plans to use two of the funds to invest in Opportunity Zones across Wisconsin and the third to invest in zones nationwide.

Wangard went to Washington, D.C. recently to meet with some elected officials to discuss Opportunity Zones. He also serves on commercial real estate association NAIOP’s tax and finance subcommittee.

“For an investor, it is a great opportunity for wealth preservation, and for the state at large, it is a great opportunity to put people to work in neighborhoods where there is typically not as much investment,” Wangard said.

Two large-scale commercial development projects in West Allis are in Opportunity Zones and the developers plan to use the incentive to market their projects to investors, said John Stibal, the city’s development director.

Cobalt Partners LLC is planning to redevelop nearly 23 acres bordered by South 70th Street, West Madison Street, South 71st Street and West Washington Street. The $87 million project is expected to include a 100-room hotel, retail space, office space and an education component.

Mandel Group Inc.’s high-end West Allis apartment project, The West, which is part of its Six Points project, will have 177 units. 

There have also been several developers and investors from outside of the state looking at property in West Allis because it is located in an Opportunity Zone, Stibal said.

“Within the City of West Allis, we are working with about a dozen projects that we expect to generate somewhere around $260 million in Opportunity Zone investments,” Stibal said. “These investments will run the gamut from property acquisition, building development, to investing in manufacturing operations. “

The economic advantages of an Opportunity Zone are not big enough to make a deal happen alone, but the program will dramatically focus and target investments in areas that have zones, Stibal said.

Flexible requirements

On Oct. 19, the IRS published the first set of proposed regulations for Opportunity Zones. The rules were more flexible than expected, Mitich said.

According to the regulations, Opportunity Funds can make qualifying investments in a business which has a minimum of 70 percent of its assets in the zone. The flexibility makes it easier to invest in operating businesses. It also means that more dollars can be invested in communities that are more affluent.

Opportunity Zones are much more accessible to the average investor. Unlike Low Income Housing Tax Credits or New Markets Tax Credits, a lengthy application and approval process does not have to take place. An Opportunity Fund can be set up by establishing an LLC and through the organizer’s tax return, Mitich said.

“Anyone with any sort of capital gains can do this,” Mitich said. “So if you own a lake home, sell it and don’t want to buy a new one, and don’t want to pay the taxes, put it into an Opportunity Zone. If someone had $1,000 out of the stock market, they could potentially put it into a fund.”

Mitich said there is still not a lot of clarification on whether the funds can be reinvested. For example, if an investment is going south after two years and the investors want to move their money, can they do so without facing a penalty?

“The can was kicked down the road on that one,” Mitich said. “We think it will be allowed, but we still don’t have clear guidance.”

Regardless of how economically challenged the country’s 8,700 zones are, they all have the same incentives built in for investors and developers.

Because of that, some neighborhoods may never be redeveloped, said Brett Theodos, principal research associate in the Metropolitan Housing and Communities Policy Center at the Urban Institute.

“The kind of zones that make the most sense to invest in will be the places that produce the most return on investment,” Theodos said.

The Treasury Department does not require any reporting on where the developments are taking place or whether jobs have been added as a result of the program. There are no incentives to take on a more challenging project.

Mitich said neighborhoods that feel like a safer investment in a qualified zone will likely be developed first.

“That is part of the sense of urgency investors are feeling now,” she said. “They want to get to those safer projects and there is some concern those safer projects will run out. The standard investor will be looking for the same investment deal that they would look for without an Opportunity Zone program; but the ultimate benefit comes after 10 years.”

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