On the heels of a program offering federal tax credits for project developers in Mineral Wells comes another investment incentive called Opportunity Zones.
The Opportunity Zones program is a new concept approved in December 2017 through the federal Tax Cuts and Jobs Act designed to promote long-term capital investment in designated rural and low-income communities through capital gains credits.
Working with Ryan International, which the city is contracting with to help create and administer the new market tax credits program that Mineral Wells recently became eligible for, the Ryan group also helped steer Mineral Wells into the Opportunity Zones program.
Ryan International is headed by G. Brint Ryan, a principal investor in the Baker Hotel redevelopment project headed up by Southlake developers Chad Patton and Laird Fairchild.
"This is kind of an outgrowth of our work on the Baker Hotel," said Mineral Wells City Manager Lance Howerton. "This all came about because we are working with Ryan LLC. They suggested we take a look at this."
Opportunity Zones inclusion requires no oversight or cost to the city. It is a program administered through the U.S. Treasury Department.
With the creation of the program through the federal legislation, states were asked to submit 25 percent of its eligible low-income census tracts as Opportunity Zones. Ryan International and the city submitted to Gov. Greg Abbot's Office of Economic Development five Mineral Wells census tracts for consideration.
Texas ultimately designated 628 census tracts in 145 counties as Opportunity Zones, including three of the five submitted by Mineral Wells.
The submissions by Gov. Abbott to the federal government hope to attract billions in investment and economic growth to cities across Texas.
“This program will help highlight areas of Texas that are prime for business investment, and it will serve to bring more opportunities to hardworking families across the entire state,” Abbott said. “As we continue to recover after Harvey, these Opportunity Zone designations will also provide a much-needed boost for local communities impacted by the storm. With the potential for billions in new investment, I look forward to our state continuing to flourish, bringing further growth and opportunity to the people of Texas.”
The three Mineral Wells census tracts approved by the state cover the central business district and much of the city's eastern half, including northeast all the way to Wolters Industrial Park, and a southeast portion from U.S. Highway 281 east to S.W.14th Avenue then along S.E. Martin Luther King Jr. Street to S.E. 25th Avenue and north to U.S. 180 . Largely what is not included are census tracts encompassing the city's western and southwestern portions and residential areas in the southeast.
"We don't know why they picked the tracts they did," Howerton said.
Low-income community census tracts are the basis for determining eligibility. The definition is the same as that used for the new markets tax credit program. A low-income community census tract has an individual poverty rate of at least 20 percent and median family income up to 80 percent of the area median.
The incentives in Opportunity Zones relate to the tax treatment of capital gains that are then are tied to the longevity of the investor’s stake in in the project or improvement, a step credits program granting full capital gains tax exemption if the investor holds the property for 10 years. Incremental capital gains credits are granted for years five and seven.
According to the Treasury Department, qualified Opportunity Zones retain their designation for 10 years. Investors can defer tax on any prior gains until no later than Dec. 31, 2026, so long as the gain is reinvested in a Qualified Opportunity Fund. If an investor holds the investment in the Opportunity Fund for at least 10 years, they would be eligible for an increase in its basis equal to the fair market value of the investment on the date that it is sold.
“I am very excited about the prospects for Opportunity Zones. Attracting needed private investment into these low-income communities will lead to their economic revitalization, and ensure economic growth is experienced throughout the nation,” said Treasury Secretary Steven T. Mnuchin. “The Administration will continue working with States and the private sector to encourage investment and development in Opportunity Zones and other economically disadvantaged areas and boost economic growth and job creation.”
The city is continuing to work on establishing the new market tax credits program. That program brings capital investment to economically distressed communities through tax credits issued by a Community Development Entity acting as an intermediary to investors, typically banks or corporate lenders. The investor receives a credit equal to 39 percent of the CDE's project investment over a seven-year period.
The project's developers receive a low-interest loan on a seven-year term in which they repay the interest, not the principal, ultimately paying back 80 percent of the investment amount in the form of a forgivable loan.
The city will create an advisory board to oversee the CDE under the guidance of the Ryan group. Projects would then be forwarded to council for approval. The city will receive revenue from any invested projects as a sort of origination, or broker, fee. The city faces no risks or liabilities, Simmons said. Ryan is paid for its services from project investor proceeds.