Colorado Springs is enjoying a booming economy right now.
According to the U.S. Bureau of Economic Analysis, the Colorado Springs area’s gross domestic product — an estimate of the value of goods and services produced in a metropolitan area — increased 5 percent in 2017, the biggest gain since 2010.
But the rising economic tide is not lifting all boats.
Ten years after the last economic downturn, parts of the region and the state are still struggling with poverty, unemployment and slow business growth.
A new federal program aims to attract investors to these areas by providing tax incentives called opportunity zones. Investors will be able to defer taxes on capital gains by investing them in opportunity funds that provide long-term investments in these zones.
Opportunity zones are census tracts that have been designated to receive private investments through opportunity funds — private investment vehicles, certified by the U.S. Treasury, to collect and deploy capital within opportunity zones for eligible uses.
Opportunity zones are part of the first new community development tax incentive program since the Clinton administration. The Economic Innovation Group, a Washington, D.C.-based, bipartisan public policy firm, developed the concept in 2015.
“The opportunity zone program is another tool in our toolbox to help direct private investment into these areas,” said Chelsea Gaylord, economic development project manager for the city of Colorado Springs.
The state has designated 126 census tracts as opportunity zones. Through the state, Colorado Springs applied for and received certification from the U.S. Department of the Treasury for eight zones.
“We’re very fortunate to have captured eight census tracts” for the program, Gaylord said. “Each offers something different and has its own diversity and opportunities.”
The zones are located across the city, from the North Nevada corridor to southeast Colorado Springs. One of the zones extends into El Paso County, and another reaches into Fountain.
The opportunity zone program was enacted as part of the 2017 Tax Cuts and Jobs Act to address uneven economic recovery and lack of growth.
The program provides the impetus for private investors to support distressed communities through equity investments in businesses and real estate ventures. The incentives are deferral, reduction and potential elimination of some federal capital gains taxes based on long-term investments.
According to the Colorado Office of Economic Development and International Trade, “U.S. investors currently hold trillions of dollars in unrealized capital gains in stocks and mutual funds alone — this is a significant untapped resource for economic development.
“Opportunity funds provide investors the chance to put that money to work rebuilding the nation’s distressed communities. The fund model will enable a broad array of private equity fund managers and investors to pool their resources, increasing the scale of investments going to underserved areas.”
This new kind of investment vehicle must be set up as a partnership or corporation and is required to invest a minimum of 90 percent of its assets in opportunity zones.
Funds can invest in a wide array of projects, but certain types of enterprises, such as gambling establishments, are excluded.
Pooling capital through the fund structure allows investors to engage in the program by reinvesting capital gains.
The program offers three levels of tax incentives for investing in designated opportunity zones through a qualified opportunity fund:
• Temporary deferral of inclusion in taxable income for capital gains reinvested into an opportunity fund.
• A step-up in basis for capital gains reinvested in an opportunity fund. The basis is increased by 10 percent if the investment is held by the taxpayer for at least five years and an additional 5 percent if held for at least seven years — excluding up to 15 percent of the original gain from taxation.
• A permanent exclusion from taxable income of capital gains from the sale or exchange of an investment in an opportunity fund if the investment is held for at least 10 years.
The process begins when an investor sells appreciated assets and invests the capital gains in an opportunity fund within 180 days.
“I don’t have to pay any tax right now,” said Jana Persky, strategic initiatives manager at the Colorado Office of Economic Development and International Trade. “If I hold that investment for five years and then sell, I only have to pay capital gains taxes on 90 percent, or 85 percent after seven years.”
After 10 years, the investment is permanently sheltered from capital gains taxes.
The state is encouraging communities to be proactive in attracting investment that will directly benefit residents in opportunity zones, and Colorado Springs is doing so.
The city has been formulating a strategy that fits with community development and economic plans, and is developing a prospectus to market opportunity zone projects and engage with investors.
“The prospectus will highlight our region and the assets we have and allow potential investors and opportunity funds to find projects,” Gaylord said, adding it will tout the region’s competitive advantages and characterize market demand and social needs in each of the opportunity zones.
The city won’t be a broker but will act as “kind of a matchmaker for investors,” she said.
“We are trying to identify potential projects — maybe somebody who owns a business or has a parcel of land they’re looking to develop,” she said. “They would be able to share or post that.”
The city also “potentially will help with preparation of proposals.”
“We have investors that are looking for projects right now,” Gaylord said. “When people are ready to invest, we will have a pipeline of projects.”
A design team that includes opportunity zone stakeholders, investors and other interested individuals is developing the prospectus. Collaborators include El Paso County, the city of Fountain, the state economic development office, the Colorado Springs Downtown Partnership and other economic development organizations.
Businesses in the zones potentially could receive some investments from opportunity funds that might help with capital expansions or equipment purchases, said DeAnne McCann, executive director of the El Paso County Economic Development Division.
“There are fund managers for opportunity zone funds, for example, Goldman Sachs, that have worked with clients that have had these needs for a long time,” McCann said. “They are going to make these things happen if it works.”
“It is a complex program,” Persky said, but “the main thrust is pretty simple. It specifies long-term, patient investment in communities that really need capital. Now there’s additional incentive for investors to invest by becoming part of the community. These are catalytic investments for the community, to change the trajectory of the community rather than just flipping and leaving.”
The Treasury Department is finalizing regulations to implement the program and guide opportunity funds, and has released two rounds of guidance on the program.
“There is additional clarification needed from the Treasury about what types of investments will qualify for the program,” she said, adding more guidance is expected in the next four to six weeks.
In the meantime, investors and people interested in proposing projects can find more information at coloradosprings.gov/economic-development.
“Colorado could be one of the leading states in opportunity zones,” Gaylord said. “We’re really ahead of the curve.”