West Texas political and economic leaders converged at the Jerry S. Rawls College of Business on Thursday for the West Texas Opportunity Zone Economic Summit, where they signed a collaborative agreement to take advantage of federal tax incentives for developing economically distressed areas.
Led by a coordinated effort of regional leaders and Rawls College faculty members, the summit resulted in the first known economic cooperation agreement of its kind — with areas of cooperation including rural housing and renewable energy — between Lubbock, Levelland, Plainview, Brownfield, Littlefield and other surrounding communities. The summit was one of the nation's first grassroots regional efforts to coordinate policies relating to "opportunity zones," which are U.S.-certified economically distressed geographic areas into which new investments may be eligible for preferential tax incentives.
Lubbock Mayor Dan Pope spoke at the event, attended by about 80 people, including other elected officials of communities in the region and the presidents and CEOs of local banks, heads of chambers of commerce, and regional property developers.
"We've got to do this together, so I really believe that a regional effort with great partnerships, taking advantage of what I think is a pretty ingenious idea by the federal government, puts us in a position where we can win," Pope said. "It could be a win for investors; I think it could be a win for developers; and I think it could be a win for our communities. Whether it manifests itself as affordable housing or manufacturing or ag-related investments, I think there are a number of different ways we can paint success."
He commended Nicholas Bergfeld, a research fellow in the Rawls College of Business, for being the one to suggest an organized community response for inclusion in the Opportunity Zone Program and for spearheading Lubbock's proposal.
The Opportunity Zone Program was created as part of the 2017 Tax Cuts and Jobs Act to encourage public and private investment in urban and economically distressed areas. The first opportunity zones, which cover parts of 18 states, were designated in April 2018, and an executive order signed by President Donald Trump in December 2018 also established qualified opportunity zones. Zones have now been designated covering parts of all 50 states, the District of Columbia and five U.S. territories.
Lubbock was allocated eight opportunity zones out of the roughly 630 designated throughout Texas. Additional opportunity zones were allocated in other communities in the region, including Littlefield, Texas, where Eric Turpen is the mayor and a farming, ranching and industrial-agriculture real estate broker. He attended the event and was among the elected regional leaders who signed the joint proclamation.
Turpen said he appreciated the opportunity to learn more about the Opportunity Zone Program and was particularly interested in how it might spur residential development in his community.
"I think it will be very helpful for Littlefield," he said.
Though investors may benefit over the long term, he believes the benefits will be shared by all people in the affected communities.
"I think your winners will be your municipalities, your workforces, and your overall economy of the region," Turpen said. "Everybody benefits when economies are expanded and new businesses are created."
Event participants heard presentations on opportunity zones by two Rawls College faculty members in the Area of Finance – Assistant Professor of Practice Jared Harrell and Assistant Professor Stephen Buschbom – before dividing into three groups for breakout sessions. Elected officials and those in government discussed possible state incentives for the zones. Those in the financial services sector talked about the role of banking in encouraging opportunity zone investment. Those in the field of real estate considered a regional investment prospectus framework.
"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," Harrell said.
It is a place-based community development program, Bergfeld said, "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."
Because there still are no clear U.S. Treasury Department rules for how to proceed with increasing investment in opportunity zones, 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," Bergfeld said. "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."
Regional leaders also now have a better sense of how they can work together to promote investment and business creation in the area's opportunity zones, he said.
"The summit provides a starting point for our unique West Texas response to the opportunity zone initiative," Rawls College Dean Margaret Williams said. "This first-in-the nation collaboration among local and regional governments is an innovation of which we can all be proud."
Bergfeld said the timing of this summit was ideal because, with the Treasury Department's rulings 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."
Once the Lubbock area received a large allocation for the program, Mayor Dan Pope began leading efforts to make sure it was as investor- and developer-friendly as possible, Bergfeld said.
"He's been deeply involved in how we, as a community, can best advertise, advance and promote our opportunity zones," Bergfeld said.
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 and surrounding counties that have opportunity zones — are coming together to sign a joint proclamation stating they will work together on a broad array of issues, such as housing, facilitating investment fund creation, and attracting capital investment for renewable energy.
"It's historic in the State of Texas because it will be the first multicity summit on opportunity zones. Dallas and Houston have had single conferences and events just for their opportunity zones, but there's never been a multicity or regional collaboration in the state yet. So that's historic on the Texas level.
"Then, at the national level, it will 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.
A two-part program
The program has two components. The first is designed to get unrealized capital gains on investors' balance sheets back to work. 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. However, under the Opportunity Zones Program, if someone sets up a qualified opportunity zone fund and put the proceeds of that stock sale into it, the taxes can be deferred 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 Thursday'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."
Staci Semrad contributed reporting.