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Benefits of Investing in an Opportunity Zone: Q & A With Urban Systems

LEAP’s Economic-Corridor Development Specialist Anum Mughal sat down with Urban Systems, a dynamic and growing development company located in Lansing, Michigan, to talk about the benefits Opportunity Zones offer developers, and how the company envisions using Opportunity Zones to bring innovative and unique projects to the Lansing region.

Who is Urban Systems?

We are Brent Forsberg, Patrick Smith, and Jeff Deehan. The three of us are principals of a development company called Urban Systems based in Lansing, Michigan. We got together with the goal of doing transformative projects at a scale greater than what we may have been able to individually accomplish. The three of us have a variety of experience ranging from simple single family rehabilitation to multi-billion dollar complete master planned projects. Our vision and ideology are aligned so well, that we all had been thinking about the same transformative projects prior to forming Urban Systems. We have an amazing team of world class individuals who bring a wealth of knowledge not only locally and nationally, but internationally as well.

What do you think about the new Opportunity Zones Program?

Brent: The program gives us an amazing opportunity to take distressed properties and areas that may need more attention and resources, but might not have been possible to transform due to economic limitations. We have many areas in Lansing that desperately need an extra boost to drive long-term investments. The Opportunity Zones Program helps developers and investors bring amazing projects that spur the local economy. We have a world-class university on our doorstep. The extra incentives programs like the Opportunity Zones Program bring, will help us be more competitive in the types of housing and jobs we can offer in the region which in turn will help us retain more talent.

What are some of the tax benefits and other benefits of the Opportunity Zones program?

Pat: The Opportunity Zones give a once in a lifetime shot to take 1031 exchange money or capital gains revenue, put it into an investment, delay the tax and at the end of the transaction, take all of the gains and the depreciation out of real estate from a federal government and state government standpoint. If done correctly one can defer the payment of capital gains until Dec 31, 2026, reduce the tax owed by 15% after 7 years, and pay zero tax on gains earned from the Opportunity Fund. There is less constraint on growth in an opportunity zone, and there is more social benefit for changing the socio-economic environment or historic fabric of that portion of the community because these are within 80% of mean income or less residential areas.

How do you think the map that was created during the governmental process throughout the USA will be utilized. Will all of those areas be utilized?

Pat: No. Some of the areas that have been given all the opportunities in the world will not be enough to spur economic growth because they face too many challenges. There are some places that fall within opportunity zones where it is generally not feasible or would take much longer than the 10 year period for a change to be made.

As a national and international real estate investor, what are the 4 key metrics that are your acid tests to decide that you are going to look at an area?

Pat: Location, location, location! After that, pricing of that location, barrier of entry in that community, and key economic drivers to make a meaningful investment. We look at projects that make financial sense, generating somewhere in the region of $100M worth of work, and have a transformative impact.

Why should a national or international investor consider investing in Lansing’s Opportunity Zones?

Pat: The ability backed up by market demand, fueled by economic development from the State and City government, along with the dynamic auto industry, and Michigan State University. Those drivers and McLaren Greater Lansing hospital and its competitive research center.

Lansing is one of the 3 major insurance hubs in the country. Lansing is growing faster than any other city its size, Baltimore is similar, but the area of opportunity available in Lansing for multi-housing, facilitates a resurgence of the urban fabric bringing Lansing to one of the top on the list of emerging cities. Ease of construction and willingness of the community to consider Brownfield reimbursements in a core community – all those add to the reason why I think a national and international investor should look here.

When you look at your current real estate portfolio, how does Opportunity Zone status affect investment location decisions?

Jeff: I think it was Seneca that said “Luck is what happens when preparation meets opportunity.” In our case we are getting very lucky. We saw this coming very early and had about a year prior to the law going into effect to make some strategic decisions as far as what we wanted to do, and how to use the opportunity zone legislation to help fuel the type of development we are passionate about. You could describe our appetite as looking for holes in urban cores where we can do transformational projects connecting all parts of the culture and build an environment. We are looking to turn sleepy neglected downtown areas into vibrant hubs where you can live, work and play.

The most exciting opportunity zone master planned project we are working on right now fills a massive void between two up and coming areas right on the main street in the middle of the capital city of Lansing. At one end there is the city’s central business district which is a hub for major employers in the insurance industry as well as the State Capitol. At the other end is REO Town, which is the hippest up and coming neighborhood in the region. The neighborhood has a great mix of historic buildings, cool new shops, and complete streets that are nice to hang out and walk around on. There is pent up demand for housing from people here wishing to have the experience of living in a walkable city, and this area is the ideal location to build that along with other exciting commercial and cultural uses. It’s also the gateway to the city, and will be awesome to have a beautifully built out district to welcome people with.

It seems that the Lansing region’s Opportunity Zones are well-positioned geographically – what do you think about the location of Lansing’s Opportunity Zones and how do you intend to use them to do transformative real estate projects?

Brent: Lansing’s Opportunity Zones are positioned in areas that are on the edge of growth zones. While most of the areas are also in qualified areas for New Market Tax Credits, the Opportunity Zone creates a different type of incentive by not just focusing on affordable housing. The Opportunity Zone incentive allows investors to provide capital in these areas for building and business development for entrepreneurs and developers. This allows for free market growth creating more sustainable and diverse neighborhoods, a program like this can help bring more businesses into the area which in turn bring more jobs. We can capitalize on our local assets and bring more transformative developments which offer attractive amenities, making our area more competitive in the job market.

Do you think all opportunity zones will receive significant investment?

Jeff: Absolutely not. Investors and economic development agencies are really excited about opportunity zones in general right now. It is an awesome tool, however there are many of them that will not attract investment because the underlying economics and development pattern of an area simply don’t make much sense to invest in. Smart investors will see areas which were previously on the cusp of making sense, and use the tool to push it where it needs to go. These investors are going to do great projects for the community and make a lot of money at the same time.

Why should a company want to lease space or buy property in an Opportunity Zone?

Brent: The Opportunity Zones offer a new tax advantaged investment strategy – by locating your business in an Opportunity Zone, you might be able to benefit from these tax incentives.

Do you plan to create your own Opportunity Fund at the project/zone/community/regional level?

Jeff: Yes. We are not yet at the point of soliciting investment publicly, but a total investment of 300 million dollars is possible. We are currently working through some structures.

How do you think Opportunity Zones Program can impact the Lansing Region?

Jeff: There is a ton of capital out there in the universe looking for a home. If Lansing is ready to speed some projects through the entitlement process and allow the people who want to build things to do it, the city is in a position to receive an influx of development unlike I have seen in my lifetime.

What can an economic development organization like LEAP do to maximize community benefit via Opportunity Zones?

Jeff: I think the best thing that LEAP can do is focus on being an effective convener between developers like us, businesses looking to expand or relocate, potential new residents, and the city itself. Getting everyone to the table to share resources and ideas is hugely important. Aggregating data to help national investors understand our market is very important as well. Also, positively helping navigate through the landscape of incentives and political issues is hugely beneficial. When we are all on the same team working toward a common goal we can be a very powerful force as a community.

Contributors

Anum Mughal – Lansing Economic Area Partnership
Patrick Smith – Urban Systems L.L.C., WestPac
Brent Forsberg – Urban Systems L.L.C., T.A. Forsberg Inc.
Jeff Deehan – Urban Systems L.L.C., Dymaxion Development