A federal program designed to promote economic development and job creation to distressed communities could take hold in Venango County, provided private investors believe enough in the financial enticement that is being offered.
To that end, dozens of community and political leaders were at the PennDOT building in Oil City on Friday afternoon for a presentation from an Erie-based tax lawyer to find out what "Opportunity Zones" could mean to their respective communities, particularly Oil City and Franklin.
According to Tim Wachter, who serves as a consultant for municipalities on how to develop the zones and for investors on how to structure deals, the program was originally pitched by the Washington, D.C.-based Economic Innovation Group - an advocacy organization for entrepreneurs and investors - "for communities that were left behind by the recession and have yet to recover. They were advocating for tax cuts and incentives."
Eventually, the idea became part of the bipartisan-supported Tax Cuts and Jobs Act of 2017, which President Donald Trump signed into law through the help of more than 100 legislative sponsors, including Sen. Tim Scott, R-S.C.; Sen. Cory Booker, D-N.J.; U.S. Rep. Ron Kind, D-Wis.; and former U.S. Rep. Pat Tiberi, R-Ohio.
The program allows potential investors of properties in more than 8,700 tracts across the U.S. - including two in Oil City and one in Franklin - to defer money that would have gone toward capital gains taxes into a Qualified Opportunity Fund, according to information from the IRS.
"This country has $6 trillion of unrealized capital gains," and investors need reason to pull money from the stock market without incurring a huge tax burden, said Wachter, whose presentation was sponsored by the Venango County Economic Development Authority after he received an invitation from Sam Breene, a Republican candidate for county commissioner.
"But with this program, you get it deferred. You get to pull it out of the market and reinvest in Opportunity Zones; to invest in places like Franklin and Oil City."
How it works
According to the IRS, investors may defer tax on previous gains that are invested into the fund. If the fund is held for more than five years, a 10 percent exclusion of the deferred gain takes effect. If it is held for more than seven years, it becomes 15 percent.
The incentive, Wachter said, is the ability to sell it tax free after holding the investment for 10 years.
"You invest the money now and be patient for 10 years and sell it (free of capital gains tax)." he said.
Stipulations, Wachter said, include rolling over money into the fund within 180 days and sell the investment before Dec. 21, 2047, in order for the investment not to incur capital gains tax.
"It's all private-industry driven. You just need an investor and a deal," Wachter said.
That's what separates it, he said, from a program such as the Keystone Opportunity Zone because there is no dependence on money coming from a government entity.
In short, Wachter said, the program works on three factors: ability to defer money, reduction in the tax bill and total tax exemption after 10 years.
"The IRS really wants this to work," Wachter said. "It's the No. 1 investment policy of this administration."
Wachter said there are two types of investments: original use and substantial improvements.
For example, with original use, he said someone may invest in a piece of land and then put up a building or invest in an existing building or business. The only exclusions are "sin businesses such as golf courses or massage parlors."
"You then have 31 months to create a capital working plan after the initial investment," Wachter said.
His presentation pointed out that substantial improvements could be an ongoing real estate enterprise with basis plus investment (30 months). Or, real estate with basis calculated on value of the building, but not the land value.
In addition to real estate development, funds could go into venture, industrial, equity, housing development, public-private partnership, community development and impact investing.
Wachter used his community of Erie as an example of where Opportunity Zones have been successful.
However, he pointed out that Erie has the advantage of having high-profile, established entities -such as UPMC Hamot, Erie Insurance and Gannon University - that long ago had made their respective investments into that community. Those investments, he said, have helped to lure other investors to Erie.
"It showed investors that Erie has some skin in the game," Wachter said.
Therefore, he said, the Oil Region needs to make its plans known as to "what you can offer" to potential investors.
For example, he said tourism can bring in an investor willing to put in a business that specializes in canoes.
"The feds want shovel-ready projects and investor-ready projects ready to go," Wachter said. "They want to know there is a commitment to close. They want to know investors are making an impact.
"Projects are the key. Find your deals, your investors, banks who want to put in levels of funding."
In addition, he said, transparency also is advisable when making the pitch to investors. In other words, "Tell them the good, the bad and the ugly (of the zone)."
However, he said, talk about supportive investments, opportunities in the zones and why someone should invest.
Can it work here?
At the conclusion of the presentation, Emily Lewis, executive director of the Venango County Economic Development Authority, was optimistic about the possibilities.
"We're not the size of Erie, but we have things that could be invested in like the former Joy building in Franklin," she said. "Then there's Webco, which bought a few properties around Oil City. That's just one small example of a business having already invested in the community."
She also said the multimodal transportation hub and the Cornplanter Square projects in Oil City offer investment potential.
"I would say we're only limited by our creativity - remove the government role and make it the business-business connection," Lewis said.