Opportunity zone designation makes project easier, says Johnson

Opportunity zone designation makes project easier, says Johnson

PAWTUCKET – The federal opportunity zone designation on much of the riverfront land targeted for a new soccer stadium and adjoining amenities changes the game when it comes to attracting investors for the project, say those behind a $400 million project.

And though Brett Johnson and Fortuitous Partners aren’t ready yet to announce who their investors will be, they’re clear that the presence of the opportunity zone makes this project that much more attractive to those looking to jump in on the future of professional soccer in the U.S.

“Opportunity zones are an incentive to bring private capital that might not otherwise go into these areas, and start to put shovels in the ground to make things happen,” said Johnson. “In the case of Tidewater Landing, investors in the project will see an added benefit of deferring or reducing taxation on their capital gains over a long period of time. This is also true for a company that chooses to locate their business in an opportunity zone.”

Pawtucket is a perfect example of how opportunity zones were meant to work, Johnson said.

“They have great opportunity in their downtown, riverfront and transit area, but not enough municipal dollars to support redevelopment,” he explained. “Pawtucket already had a vision for the revitalization of their downtown and riverfront area, and ongoing plans to support development, such as the future train station.”

The investment in a new soccer stadium and other development “is supporting the work that the city and state have already been trying to accomplish, and checks the box on multiple goals, most notably job creation,” he said.

Johnson is in the final due diligence phase on his project, which includes a proposed soccer stadium, events center, hotel and retail and commercial development.

Two years ago, Gov. Gina Raimondo worked with the R.I. League of Cities and Towns and their members to submit a package of proposed opportunity zones to the federal government. Twenty-five zones were submitted in April of 2018, and the next month, the U.S. Treasury approved the request and designated zones.

Under federal law, the designations will remain in effect until Dec. 31, 2028. Factors considered for designation as zones in Rhode Island included potential to attract private investment for business expansion, startup creation, development of workforce and affordable housing, and other real estate development; level of need; communities served; synergy with state and local efforts; and geographic diversity.

Opportunity zones are a federal program providing a tax incentive for private investors to direct capital gains into equity investments in qualified projects within designated zones. The incentive is designed to encourage long-term investment, with certain tax benefits kicking in only after maintaining the investment for at least 10 years.

Rhode Island has 25 opportunity zones in 15 communities, with five in Pawtucket and Central Falls, including the area of the Pawtucket/Central Falls Commuter Rail Station.

The Pawtucket project is the largest of any to date in Rhode Island, and is thought to be one of the largest in the country. Another major project planned is the Aloft Hotel project in Providence, which includes plans for a rooftop bar and ground floor restaurant.

Jesse Saglio, president of the R.I. Commerce Corp, said the opportunity zone designation for this property, approved with others back in 2017, played a significant role in making way for the project. Johnson is an investor in such zones, considering similar projects in a number of other locations, he said, and has spent significant time talking about the opportunities with such zones.

These projects often don’t work without such tax benefits, said Saglio. The internal rate of return can go from about 8 percent when penciling out the project without one to some 12 or 13 percent, so one “really can move the needle,” he said, while eliminating much of the risk. Opportunity zones never make a bad project a good project, he said, but they may take a good project that isn’t to the point of being investable over the line into viability, he said.

Projects of this size don’t come along often even with such a designation, he said, but he predicts 2020 will see many significant projects across the country.

With an opportunity zone designation, the developer and others can basically take money gained and invest it into a fund. When one would normally owe capital gains taxes, instead they would be able to defer those. For $100 invested, someone would owe just 21 percent of $90 after five years if it stays in the fund, and after another five years another 5 percent would be forgiven. At that point the taxes would come due.

If the investment is maintained for 10 years or longer, the investor never pays capital gains, he said, as the original money invested is gaining returns for a decade.