Could Frankfort be facing the “opportunity” of a lifetime in the form of a federal investment program aimed to stimulate economically stagnant areas?
As one of the country’s more than 8,700 census tracts designated Opportunity Zones by governors, Frankfort’s tract encompasses downtown, the former Capital Plaza area and the Holmes Street Corridor. These Opportunity Zones, which came out of the 2017 Tax Cuts and Jobs Act, are meant to bring investment to typically low-income urban, rural and suburban areas.
Though the city learned of its Opportunity Zone status well more than a year ago, Frankfort and every other designated community across the country is still waiting for the U.S. Treasury Department and the Internal Revenue Service to release official guidelines before anything can really happen.
Local officials are hoping to see those guidelines by the end of this year, said Terri Bradshaw, Kentucky Capital Development Corp. president and CEO.
“If the ultimate guidance from Treasury is set up the way this program is intended, it is truly a win for everybody,” Bradshaw said.
The program encourages investment by offering tax advantages with capital gains, which are the profits realized from an investment or the sale/exchange of a property. By funding projects in an Opportunity Zone, investors can experience big tax savings on these profits.
Benefits of an Opportunity Zone are threefold: tax deferrals on capital gains recognized by the end of 2026, a reduction benefit that excludes up to 15 percent taxation on the original gain (if the property being sold was held for at least seven years) and the potential to pay no income tax on capital gains for the sale or exchange of an investment (if that investment is held for at least 10 years), said Dr. A. M. Turay, professor of economics at Kentucky State University.
Investors realize these benefits by reinvesting their savings in a Qualified Opportunity Fund, a private-sector pool that utilizes these savings to spur further development in Opportunity Zones. Capital gains savings must be reinvested in these funds in order for investors to benefit.
For example, if someone invests $500 in a Qualified Opportunity Fund for a zone and the investment goes for $1,000, that $500 in profit is tax-free if the investor holds onto the investment for 10 years.
Turay noted that because this is a new program without a track record, no consensus exists on whether the zones will be effective. He did, however, express optimism, citing the program’s similarity to Free Trade Zones, economic areas that permit goods to be processed and re-exported tax-free.
“Based on that, some of us that are starting (to explore) this Opportunity Zone are indeed very optimistic that it will stimulate economic growth and development in those communities that are selected to be part of the opportunity zone,” Turay said.
The Economic Innovation Group, which helped to create the language for Opportunity Zones, says more than $6 trillion in unrealized capital gains are waiting to be tapped.
For now, however, any potential development looking to seize this opportunity is on hold until the Treasury and IRS come back with guidelines, Bradshaw said. With so much money at stake, investors have to know exactly what rules to which they must adhere.
For example, they must know what type of developments investors are allowed to fund. The original language for Opportunity Zones would not allow developments such as liquor stores, casinos and massage parlors, to name a few.
In anticipation of these guidelines, Bradshaw said local economic development officials have been getting a feel for the market and pondering how to go forward once the process is truly ready to begin.
“There are people that are absolutely interested in these opportunity zone funds. We can’t pull the trigger until we have the guidelines.”
As for what Frankfort stands to gain, Turay said downtown is a prime candidate for benefiting the most if parties are able to come together and seize the opportunity.