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August 22, 2018

Downtown Augusta redevelopment may be first U.S. Opportunity Zone project

Photo / Maureen Milliken Downtown Augusta is part of the city's Opportunity Zone, one of 32 in the state expected to benefit from new investment into development. A project involving the former Odd Fellows Hall at 333 Water St. in Augusta (at right) is not only one of the first in Maine to take advantage of the program, as reported by Mainebiz last week, it may be the first in the U.S., said Jason Richardson, director of research and evaluation for the National Community Reinvestment Coalition.

A downtown Augusta building renovation may be the first project in the nation funded under the Opportunity Zone program, which offers tax breaks for investors who roll capital gains into projects in distressed areas.

Gov. Paul LePage designated 32 such zones in the state last spring, including a wide swath of Augusta’s west side.

Developers of the former Odd Fellows Hall at 333 Water St. in Augusta said last week they believe it’s one of the first in Maine to take advantage of the program, but it may be the first in the U.S., said Jason Richardson, director of research and evaluation for the National Community Reinvestment Coalition.

“We have heard about people getting the funds set up, but if this is really a project already moving ahead with money invested by a fund, it would be a big step ahead of anything I have heard about,” Richardson said in an email Tuesday.

The NCRC is a national group that supports about 600 members with policy analysis, training, organizing and research.

“A lot of our members are interested in this program as a way to spur investment in the hardest-hit parts of their communities,” Richardson said. He’s tracking any Opportunity Zone funds that are operational and providing capital investment across the country.

“At this time I am not aware of any that are in operation yet,” he said.

Richardson said that nationally many people are in the “How do we use this?” stage.

“The capital gains benefit only happens after 10 years, so the investor has to leave their cash in the fund for that long,” he said.

Kevin Mattson, of Dirigo Capital Advisors, one of the partners in the 333 Water St. project, said that developers got Treasury guidance before they proceeded.

The U.S. Department of Treasury’s tax policy division rules on how it believes new policies that haven’t been put into practice will work, to help guide those who may want to take advantage.

“People try to push the envelope,” Mattson said. “But what we’re doing is totally vanilla, it’s basic.”

'Opportunity Zone made it easier'

Ben Spencer, of Capital Area Properties, said the group had already planned to buy and develop the Augusta building, and had contacted Mattson, who has developed many historic properties across central and southern Maine.

The option of using the Opportunity Zone program “really expedited it,” Spencer said on Wednesday.

“It was an attractive place to us, but the Opportunity Zone made it easier,” he said.

Under the program, which is part of last December’s federal tax overhaul, capital gains realized in the sale of a property or asset within six months can be formed into an Opportunity Zone fund

At least 90% of the money in the fund must be rolled into development of a property or business in one of the designated zones and taxes are deferred for seven years, then paid with a 10% discount. If the property is held for 10 years, any money from the sale can be rolled back into that fund, with no taxes charged.

The fund, in this case 333 Water St. LLC, can be used to develop other projects within that same zone. Mattson said the Opportunity Zone “fund” can be an LLC, or any other entity set up to fund a project, and anyone can invest. The difference is how the money is used.

He said that many investors have money tied up in 1031 exchanges, which gives a tax break for gains from a property sale rolled into purchase of a similar property.

Those who have invested in 1031 exchanges “have huge capital gains that they’re sitting on.”

“The Opportunity Zone is the figurative dam bursting,” he said, as far as investors having an opportunity to reinvest that money, and also for the opportunity that development brings to the designated zones.

The demand for market-rate housing, both in the Augusta zone and throughout Maine, as well as the need for other sustainable development make the program a great opportunity, Mattson said.

“There’s a crush of pent-up demand,” he said.

Maine’s Opportunity Zones vary, ranging from sections of downtowns, as in Augusta, Auburn and Portland, to huge tracts in Washington and Aroostook counties.

Big impact possibilities

Photo / Maureen Milliken
Some of Augusta's oldest housing, like these apartment buildings on Laurel Street, are in the Opportunity Zone.

Capital Area Properties has renovated a building in downtown Gardiner, and Spencer said the group, which also includes Robin and Evan Spencer, want to be part of Augusta’s resurgence as well.

“We’re seeing a lot of growth in downtown Augusta,” he said. “A lot of new businesses are moving there.”

The group bought an 118-year-old property for $195,000, closing earlier this month.

Because of its historic district status — most of Water Street is on the National Register of Historic Places — the renovation will be a lengthy process in order to meet historic standards.

Spencer said the plan is for ground-floor retail and as many as 30 small market-rate apartments in the 31,000-square-foot building.

Mattson said the developers are consulting with Sutherland Conservation and Consulting about the historic aspect of the renovation.

Because gains that go back into the fund have to be used on other projects in the zone, both Spencer and Mattson said it opens up possibilities throughout the Augusta zone, which is bordered by Western Avenue to the south, the city line to the west, Bond Brook to the east and the Kennebec River and downtown to the east. The area includes the city’s oldest housing as well as its Western Avenue commercial strip.

Unrealized capital gains in the U.S. are valued at $61 trillion, according to the NCRC.

The organization anticipates the zones will see investment in incubators and help fuel the growth of startups, bring employment gains and investment in job training, as well as the “more difficult” challenge of spurring investment in affordable housing.

“At the heart of the program is the desire to address the unequal investment landscape in American communities,” the organization said in June a post co-written by Richardson.

Spencer pointed out that the funds can be used for businesses, one reason he believes Portland’s Old Port and Commercial Street is an Opportunity Zone, despite the fact it’s not a depressed area.

“You can use the Opportunity Zone for a startup,” he said.

Mattson said that within Augusta’s strip, there are many opportunities to use the money from the fund, both to help ease the city’s housing crisis and help businesses.

“This is going to make a big impact on places like Augusta,” he said.

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