A new opportunity zone fund with a focus on investing in Wisconsin-based developments and businesses could open the door to projects that have been largely overlooked by similar funds.
In December, the city of Racine announced the creation of the Badger State Opportunity Fund. The fund, which is being spearheaded by the city, will partner with both the public and private sectors to attract capital for development projects, business expansions and new business startups.
Rather than focusing on one particular project, it will direct investment dollars into a variety of project types and locations.
The fund, like many others created around the U.S., is designed to take advantage of the federal Opportunity Zone program. Created in 2017, the program provides tax benefits to investors who invest in projects or businesses located in a designated opportunity zone.
Benefits include a temporary tax deferral for capital gains reinvested in an opportunity fund, an increase in basis of the original investment if that investment in the opportunity zone is held by the taxpayer for at least five years, and a permanent exclusion from taxable income of capital gains from the sale of an investment in an opportunity zone if the investment is held for at least 10 years.
The fund seeks to raise between $15 million and $25 million.
“Its mission is to work with, and on behalf of, investors as well as the public and private sectors to aggregate quality projects, deploy capital profitably and create more inclusive economic opportunity across Wisconsin’s urban and rural communities,” said William Martin, Racine’s chief innovation officer.
Rebecca Mitich, partner at Husch Blackwell, said opportunity funds come in various forms. The funds could be for a specific project, or those located in a certain area, or even those focusing on a certain theme, such as agricultural businesses or renewable energy.
Mitich said Wisconsin projects could stand to benefit from even more state-specific funds than just the one.
“It’s just very difficult to get dollars from outside of the state into the state, which is why something like this Badger fund is important, and why I think it’s important to have more of these funds,” she said. “We need more than just one Wisconsin fund.”
What Wisconsin projects have going against them is both their size and geography. There also hasn’t been a concerted effort to draw the attention of outside opportunity funds to state projects.
“The vast majority of opportunity zone projects in the state have come from funds that the project itself created, and investors invested into that fund,” Mitich said.
A $500 million fund, for instance, looks to invest in something like five $100 million projects rather than 50 $10 million projects. That many projects would be too hard to manage, she said.
Another disadvantage Wisconsin projects have is that investors want to direct money toward what they feel are the “best” opportunity zones. For instance, it is less risky to invest in a skyscraper in downtown Portland than in anything in Milwaukee, since it’s in a hotter market.
Stu Wangard, chief executive of Wauwatosa-based developer Wangard Partners, said he sees the benefit to a statewide fund that invests in multiple projects.
“As an investor, you do want to receive some of the benefits of diversity for risk management,” he said. “That doesn’t assure anybody that a comingled fund will outperform a single-asset fund, but it should mitigate some risk.”
He added that he likes the matchmaking aspect to it, in that it connects investors with communities that on their own may not have a high enough profile to attract attention.
Martin said he and others working on the fund used the final days of 2019 to review new final regulations issued in late December by the U.S. Treasury Department. They then began reaching out to communities that have opportunity zones and separately sent “introductory emails” to accountants, financial planners and wealth advisors.
He said the fund would choose to invest in companies, businesses and projects that are located in one of Wisconsin’s 120 opportunity zones, have financial support from both the public and private sectors, are expected to generate an annualized rate of return of 8-16%, are suitable for a hold of at least 10 years to maximize the program’s incentives, and those that benefit communities by creating jobs or addressing an unmet need.