U.S. Treasury greenlights tax incentives for downtown redevelopment

Frankfort’s Census Tract 712 was named an Opportunity Zone. (Source: City of Frankfort)

The federal assistance for Frankfort’s redevelopment keeps rolling in.

On Monday, Gov. Matt Bevin’s office announced that the U.S. Treasury Department had named downtown Frankfort and the Holmes Street corridor as one of its new “Opportunity Zones.” The announcement comes on the heels of the news last month that the U.S. Department of Transportation picked Frankfort to receive an $8 million grant to revamp the adjacent Second Street corridor.

The new Opportunity Zone designation means that under the Tax Cuts and Jobs Act, signed into law by President Donald Trump in December, investors in that area of Frankfort will soon be eligible to receive significant tax advantages.

“This designation will give Frankfort the chance to attract new businesses and investors to some of our most distressed areas and give opportunities to our most vulnerable citizens,” Mayor Bill May said in a city news release published Thursday. “This will be just one tool the City can use to improve and grow our community.”

According to an oft-overlooked portion of the new tax bill, investors will be able to cut the amount of tax they owe on capital gains — that is, their profit from the sale of an investment — by reinvesting them in special “Opportunity Funds.”

“This is an untapped program,” said Jonathan Goldstein, a managing director at New Orleans-based Advantage Capital.

The venture capital firm, which has invested in Louisville-based manufacturer Roller Die and medical image processor 3DR, is already looking at forming its own Opportunity Funds, even though regulations detailing the new program have yet to be issued by the Internal Revenue Service.

Goldstein described the tax advantages in terms of an investor who has $100 of capital gains to reinvest. Under the new tax law, if that investor places $100 of capital gains in an Opportunity Fund, then he or she would only have to pay tax on $90 of the original capital gains after five years. After seven years, the investor would only have to pay tax on $85. That payment can be deferred until the end of 2026.

Additionally, any new capital gains derived from the investment in the Opportunity Fund would be totally excluded from the capital gains tax if it remains in the fund for 10 years — thus incentivizing long-term investments.

Real estate investors, in particular, stand to benefit most readily from Opportunity Funds given their relatively long 10-year investment horizon.

“This designation and the tax benefits it provides will encourage purchasing and rehabilitating residential property as well as expanding and creating local businesses in the economically distressed areas of our downtown,” said Terri Bradshaw, president and CEO of the Kentucky Capital Development Corp.

The area designated as an Opportunity Zone — Census Tract 712 — already includes one major real estate project: redevelopment of Frankfort’s Capital Plaza area. That project’s developer, Craig Turner, founder and CEO of Lexington-based CRM, did not respond to a request for comment.

The area, which also includes Holmes Street and the portion of downtown Frankfort north of the Kentucky River, has a 29.6 percent poverty rate and a median income of $29,605, the city noted in its pitch to the Kentucky Cabinet for Economic Development. Frankfort, as a whole, has a poverty rate of 19.1 percent and a median household income of $41,101, according to the 2011-2015 American Community Survey. The rate of owner-occupied housing there is 49.4 percent, below the state average of 67.2 percent.

The city’s additional requests to have South Frankfort (Census Tract 705) and the East Main Street corridor (Census Tract 706) named as Opportunity Zones were not granted.

In its pitch, the city said the Opportunity Zone designations would have “significant national implications.”

“As a state capital, visitors from across the nation and world regularly visit Frankfort,” wrote City Manager Cindy Steinhauser. “New tax incentives targeting distressed Frankfort neighborhoods will demonstrate how federal and state support can help struggling cities grow, create jobs, and improve quality of life.”

In a statement released Friday, Rep. Andy Barr, R-Lexington, credited the Tax Cuts and Jobs Act, to which the Opportunity Zone program belongs, with bringing “tremendous economic growth” and making “American businesses, large and small, more globally competitive.”

“The Opportunity Zones established in this legislation will spur job creation and private investment in these low income urban and rural communities throughout the Commonwealth,” Barr said in the statement. “I applaud the administration for its support of pro-growth policies and value Governor Bevin’s leadership and recognition to help these communities thrive.”

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