The event will be the first grassroots, regionally driven effort around Opportunity Zone coordination in the United States.
Compared to the metros of Dallas, Houston and Austin, West Texas isn't generally considered to be on the forefront of economic policy advancement. But thanks to the combined efforts of Texas Tech University faculty and regional leaders in government and economic development, West Texas is poised to take center stage in a hot-button national initiative.
Opportunity Zones are, perhaps, the biggest economic issue you haven't heard of. That's because, after their inclusion in the U.S. Tax Code in December 2017, there's been a delay while the U.S. Treasury Department works to finalize rules for the program. At the most basic level, an Opportunity Zone is an economically distressed geographic area – certified as such by the Secretary of the Treasury – where new investments into the area may be eligible for preferential tax incentives.
The first Opportunity Zones, which cover parts of 18 states, were designated on April 9, 2018. Opportunity Zones have now been designated covering parts of all 50 states, the District of Columbia and five U.S. territories. But because there still are no clear Treasury Department rules as to how to proceed with increasing investment in these areas, the leaders in charge of most Opportunity Zones have adopted something of a wait-and-see policy.
That's what sets West Texas apart. Rather than waiting to see what the rulings will bring, leaders in Lubbock have been working with their counterparts throughout the South Plains to develop a unique grassroots, regional collaboration.
"There's been a slow burn as this program finally comes online, because a lot of investors have been waiting for clarity from the IRS and Treasury Department about how this program would work," said Nicholas Bergfeld, a research fellow in the Jerry S. Rawls College of Business at Texas Tech who led Lubbock's proposal for inclusion into the Opportunity Zone program. "So, because of how long it's taken for rulings to come out around the Opportunity Zones, and the fact that we in Lubbock have been very proactive about seeing how this program works, we put ourselves in a great position to very rapidly take advantage when the rulings come out, then also to have a better sense of how we, as a community, can work together to promote investment and business creation in the region's Opportunity Zones."
Economic summit
To that end, Texas Tech will host the historic West Texas Opportunity Zone Economic Summit on Feb. 28 at the Rawls College to finalize a collaborative agreement with the elected officials, mayors and county judges of all South Plains communities that received Opportunity Zone allocations as well as the presidents and CEOs of local banks, heads of Chambers of Commerce and regional property developers.
"The Rawls College of Business is thrilled to be hosting this economic summit that brings together partners from government, industry and higher education," said Dean Margaret Williams. "The summit will provide a starting point for our unique West Texas response to the Opportunity Zone initiative. This first-in-the nation collaboration among local and regional governments is an innovation of which we can all be proud."
Jared P. Harrell, an assistant professor of practice in the Rawls College's Area of Finance and one of the summit's presenters, said the event has multiple goals.
"One, create high visibility for the West Texas region by being the first grassroots, regional effort for Opportunity Zones in America; two, create a platform for engaging Lubbock and its surrounding communities on topics related to the Opportunity Zone program; and, three, facilitate discussions among lenders, investors and elected officials regarding potential projects in the West Texas region that may be able to benefit from the Opportunity Zone program," he said.
"We hope to educate the attendees on the basics of Opportunity Zones and facilitate that dialogue. If it's successful, the Opportunity Zone program will stimulate economic opportunity and mobility, encourage entrepreneurship, create jobs, provide quality housing, improve education and provide safer communities."
Bergfeld says the timing of this summit is ideal because, with the Treasury Department's rulings now expected any time, both private- and public-sector groups are taking a more active interest in the program.
"There's a lot more energy now in communities about how they can attract investment and promote their Opportunity Zones, both to their local communities and also to outside investors who might not necessarily have looked at their communities before," he said. "That's where the Lubbock market is in its maturity. With consistent growth for decades, we've reached a stage where we're able to support larger capital projects but haven't previously had sufficient visibility with the greater Texas investor and develop community."
Regional strategy
Lubbock was allocated eight Opportunity Zones out of the 628 designated throughout the state. Based purely on population, Lubbock would have been allocated only about three zones, Bergfeld said, so the size of the allocation – essentially all of downtown, North Lubbock and East Lubbock – benefited the city.
"Once we received a large allocation for the program, Mayor Dan Pope has been leading our efforts to make sure we're as investor- and developer-friendly as we can be," Bergfeld said. "He's been deeply involved in how we, as a community, can best advertise, advance and promote our Opportunity Zones, and has shared his insights with Gov. Abbott's Office of Economic Development as a thought-leader for other communities."
Along the way, they were in contact with Tim Pierce, executive director of the South Plains Association of Governments, a regional body that works with area counties and provides certain services for unincorporated areas.
"Rural communities around us had also received Opportunity Zone allocations but weren't receiving guidance on how to leverage them effectively," Bergfeld said. "Tim, knowing the work that Lubbock's been doing, asked me to ask whether or not Lubbock would be willing to take a regional approach to our Opportunity Zones strategy.
"For the city of Lubbock, that means more responsibility in terms of organizing and lending capacity for development efforts outlined in the cooperation agreement. Because it's the economic center of the area, Lubbock would need to take a lead role for any types of agreements that would happen as a result of a regional strategy. We had a good number conversations about whether this was the right way to go. I'm thankful for Mayor Pope and his vision of what Lubbock's responsibility is to the surrounding communities. He views Lubbock as the capital of West Texas and thought of this effort as an obligation for Lubbock to take on."
Part of the decision came after looking at what other areas around the country were doing to collaborate on Opportunity Zones. Washington state created what they called the "Emerald Coast Opportunity Zone," a series of different counties and cities coming together to apply for one continuous allocation of tracts. But that collaboration began with the state organizing "zone pools" and not formed for the cooperation of multiple allocated zones across a region. Maryland's proposal for state Opportunity Zone incentives specifically includes regional summits similar to the one planned for West Texas, but Maryland's are coordinated top-down from the state level.
Based on Bergfeld's research, West Texas is the only area in the country pursuing a bottom-up, regional-level collaborative approach in coordinating Opportunity Zones policy.
"This summit is historic on several levels," Bergfeld said. "The first is, it's historic because these communities – Lubbock, Levelland, Plainview, Brownfield, Littlefield, potentially as far south as Lamesa and then surrounding counties that have Opportunity Zones – are coming together to sign a joint proclamation stating they will work together. That's the first agreement for economic cooperation in West Texas that we've ever had, as far as the Lubbock Economic Development Alliance knows. There's never been something like this done.
"It's historic in the State of Texas because it'll be the first multi-city summit on Opportunity Zones. Dallas and Houston have had single conferences and events just for their Opportunity Zones, but there's never been a multi-city or regional collaboration in the state yet. So that's historic on the Texas level.
"Then, at the national level, it'll be historic because it will represent the first grassroots, regionally driven effort around Opportunity Zones coordination in the United States. There hasn't been any other group that, from the ground up, had its communities start reaching out to each other to look for ways in which they can collaborate."
At a recent conference in Salt Lake City, Bergfeld told fellow practitioners from other communities about the ongoing efforts in West Texas.
"After talking with them, I can definitively say that what we're trying to put together is really on the cutting edge of where the best practices and leading communities are at right now," he said.
Opportunity Zone benefits
Stephen Buschbom, an assistant professor in the Rawls College's Area of Finance and one of the summit's presenters, said an important aspect of the Opportunity Zone program is its geographic scope.
"The new program includes a large number of census tracts that either were excluded or had a relatively small proportion of eligible area included in prior federal placed-based incentive programs," he said.
"West Texas and other areas around the country now have a new set of tools at their disposal and, when combined with the lessons learned from prior placed-based programs, a proactive approach increases the potential for the Opportunity Zone program to make a positive long-run impact in the community. The possibilities range from the typical benchmarks of jobs growth and educational attainment, to more ambitious goals such as improving intra- and intergenerational income mobility."
So what does an Opportunity Zone really provide?
"This program is a place-based community development program, which means if you make investments, create a business or renovate property inside one of these designated areas, you can receive certain kinds of preferential tax breaks," Bergfeld said.
"So this tax-incentive program has two components. The first is designed to get unrealized capital gains on investors' balance sheets back to work. That's around $6 trillion of capital with unrealized gains currently sitting on the sidelines."
Normally, when individuals who own stock sell it, they have to pay taxes on the capital gains appreciation of that stock – how much it's changed in value since they bought it. Under the new 2017 tax law, those capital gains taxes are normally 15 or 20 percent, depending on the individual's income.
However, under the Opportunity Zones program, if you set up a qualified Opportunity Zone fund and put the proceeds of that stock sale into it, you can defer the taxes you were supposed to pay until Dec. 31, 2026.
"There's a benefit to that deferral, because then you get to use the entirety of those proceeds now to make investments that you'll have to pay off in seven years," Bergfeld said. "So it's a pretty long window to be able to essentially use those taxes that you were supposed to be paying now, and holding off on paying them until then."
To create such a fund, you simply self-declare any existing holding, limited liability corporation, limited liability partnership or sole member-owned company as an Opportunity Zone fund and fill out a new tax form at the end of the year. Bergfeld says the process was left intentionally flexible so as to be investor-friendly.
Also investor-friendly is the benefit of long-term investment in an Opportunity Zone fund.
"If you have money in an Opportunity Zone fund for either five years or seven years by that 2026 deadline, you actually receive a reduction on the taxes that you were supposed to pay," Bergfeld explained. "At five years, you have a 10 percent reduction of what you're supposed to pay; at seven years, it's a 15 percent reduction."
However, getting the seven-year reduction effectively requires investing money in an Opportunity Zone fund between now and the end of 2019.
"Because of those reduction components, there's a realization that groups interested in using this sweetener piece of the program are going to do it at a fairly rapid rate," Bergfeld said. "The seven-year reduction is going to be tough for most places to get, just because, when the program was originally created, I think the lawmakers anticipated the rulings to come out faster than they did. And so now investors really only have this year to get the seven-year rate. So the assumption, really, is that it's that five-year benefits that they're looking for."
The second component of the Opportunity Zone program is focused on businesses and properties inside the zone.
"It's actually very similar to the deferral in that there are there are capital gains reductions that happen for businesses and properties that grow and develop inside of Opportunity Zones, and it's similar at the five-year and seven-year timelines," Bergfeld said. "Say you have invested in the business and it's grown, and now you want to sell the business, or you want to sell your holding in that business. If you've been an investor in that business for five years, and you sell your holdings, you get a 10 percent reduction in the capital gains you're supposed to have paid when you sold it. At seven years, it's a 15 percent reduction.
"But truly, the one that's the most beneficial is at 10 years – that's a fairly long-term investment. At 10 years, if you were to sell your shares or the company or the property that you've developed, you pay no capital gains taxes on the sale of that property whatsoever."
Why West Texas?
According to the U.S. Government Accountability Office, the United States has more than $6 trillion worth of unrealized capital gains that could benefit from Opportunity Zone deferrals. It projects that about $4.5 billion in taxes will be deferred.
"If you think about how much that represents based on the capital gains taxes, that's somewhere between $100 billion and $110 billion worth of investment that is supposed to go into Opportunity Zone programs within the first couple years of the rulemaking being finalized," Bergfeld said. "So as a result of that, there's a recognition if you put your best foot forward early on, you might be able to track fairly significant sizes of investment to your community that you otherwise wouldn't have been able to get."
However, there's now a realization within both the policy and investor communities that major metropolitan areas are likely to benefit most from this large influx of money. The problem with that, Bergfeld said, is that those investments will then go into projects that probably would have been done regardless of the Opportunity Zone program. This essentially takes the money from places that really need it and gives it to places that would suffice without it.
"There's a recognition that if you're not an already traditional metro to investors – if you're not Dallas, Houston, San Antonio, Austin – then you're going to have to do something to really make some noise to attract interest from investors so you can make the case for why you're a community that has the potential for market-rate commercial returns," Bergfeld said.
But because the Opportunity Zone program is designed to incentivize long-term investment, he said, West Texas may have a leg up on its more metropolitan competitors.
"We haven't had rapid, unsustainable growth, like say, Dallas, Houston or Austin, over the past couple years; we've had very consistent growth," he said. "Lubbock is a place where there's very little volatility in our market. We typically get 1 percent to 2 percent GDP and population growth year in, year out. And that's historically been resistant to macroeconomic downturns and business-cycle downturns, which is impressive in its own right. Most believe market corrections are going to occur in the next year or two, and we're well insulated from those issues.
"So that's why a place like Lubbock, if we're able to get in front of investors, can make this more nuanced case for why this type of investment is so compelling in this region, because we do have this incredibly stable market. Yes, it's not explosively growing, but when you're looking at an investment timeline that goes out for 10 years, what you're really looking for is a place where you can sit and watch it grow."
That was the inspiration for next week's economic summit: to help West Texas communities come together and collaborate for the benefit of all.
"The most successful implementation of the Opportunity Zone program in West Texas will require strategic partnerships among local and out-of-town capital sources – both lenders and investors," Harrell said. "These partnerships will be developed most efficiently by educating local capital sources about the potential benefits of the Opportunity Zone program and promoting the strong economic characteristics of the West Texas region to out-of-town capital sources. Both of these two activities can be assisted by the Rawls College of Business as a whole and, more precisely, the expertise of the banking and real estate faculty within the Area of Finance.
"The potential of playing a small role in this process is both important and exciting to me. It would be very fulfilling for me to look back in 10 years and think that we contributed to the economic success of the West Texas region."
