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First use of Trump-era tax incentive program will benefit Harvard more than most

Pedigree Ovens becomes first to use the ‘opportunity zone’ in Harvard, a Trump-era tax incentive program that promised to stimulate economic development in low-income areas

The opportunity zone program, passed by former President Donald Trump as part of the 2017 Tax Cuts and Jobs Act, came with big promises to use tax breaks to spur economic development in designated low-income areas across the country, including Harvard right here in McHenry County.

The program sought to support “the forgotten men and women of America” by incentivizing public and private investment to, in turn, create jobs and foster upward mobility for the community at large, but a recent study found the vast majority of opportunity zones have yet to see a single investment more than two years into the program.

“The wealthiest people in the country have taken advantage of opportunity zones, but they have taken advantage of them in a very narrow group of zones, which I think are places that they’re familiar with and comfortable with,” Harvard Economic Development Corporation President Charles Eldredge said in a March interview.

Eldredge wrote the proposal to bring an opportunity zone to Harvard and has tried to promote the zone as much as possible since, he said. It soon became clear that wealthy investors were not comfortable with a rural community like Harvard.

The program offered very little guidance on how to attract investment, Harvard Mayor Michael Kelly said.

In 2019, the first full year of the program, a sample of the more than 8,000 opportunity zones in the U.S. revealed that 84% of them went completely unused, according to a recently released study conducted by two University of California, Berkeley, researchers.

The study also found that the vast majority of investments made were in areas that showed preexisting upward trends in income levels and home values, as well as areas that had been becoming less and less racially diverse.

While Eldredge called for elements of the program to be restructured, McHenry County Economic Development Corporation President Jim McConoughey said the struggle for investment is merely free market competition, which is to be expected given that all 8,764 of the country’s zones were opened up to investors at the same time.

“There are many competitive alternatives, so you have to step up your efforts to be very competitive in all the factors that check boxes when people are making those types of decisions,” McConoughey said.

Cancellations of in-person networking events due to COVID-19 have complicated the work of marketing Harvard to investors, Eldredge said, and even without a global pandemic, there are certain boxes that simply cannot be checked by a rural area like Harvard.

The program “does potentially create jobs for poor people, and I’m sure it has in some cases,” Eldredge said. “But most areas that are impoverished, whether urban or rural, have other impediments to economic development.”

In Harvard’s case, these impediments include poor internet connection and lack of proximity to an interstate, he said.

Harvard’s luck changed last month when Badger Fulfillment Group, a distribution company owned by Kurt Stricker of Pedigree Ovens, became the first company to benefit from the program through a partnership with Wisconsin-based commercial real estate company called Lefek Capital LLC.

Lefek Capital’s opportunity zone fund will put up the capital needed to construct a new warehouse space for Badger Fulfillment in the Arrowhead Industrial Park, which is located off West Diggins Street on the west side of Harvard.

The project will bring 10 new, full-time jobs to the area in the next year, with the potential for more as the business grows, Badger Fulfillment’s president, Kyle Kobriger, said last week.

Beyond the jobs and the property tax revenue the project will generate for the city, McConoughey said the new fulfillment center will complete the “ecosystem” of the industrial park, attracting future industrial development from companies that value having an easily accessible distribution center right next door.

Tom Neshek of Lefek Capital said the company’s project with Badger Fulfillment is somewhat of an outlier compared with other uses of the opportunity zone program and agreed with Eldredge that the program is typically utilized by wealthy investors through large syndicates.

“For a local business owner, I would say that is probably one of the disadvantages of the program because it’s really set up for large investments in metropolitan areas, mostly,” Neshek said.

With accountants and an attorney on staff, Lefek Capital was able to cut through the complexities of the program to start its own opportunity zone investment fund, beating the odds as a smaller, family-owned real estate developer, Neshek said. He is old friends with Stricker so the whole thing came together quite naturally, he said.

Lefek Capital’s opportunity zone fund, Lefek OZ Fund LLC, can benefit in two ways. First, is the deferral of capital gain taxes for a period of 10 years, a clock that began ticking in 2017 and, thus, has dwindled to six years, Eldredge said.

Second, the program stipulates that, if an investment is held for seven years, the investor is required to pay only 85% of taxes on the investment. This option no longer is available this far into the program, but investors who act quickly still can hold their investments for five years and, in this case, are required to pay only 90% of taxes due, Eldredge said.

McConoughey called the program “a ticking clock” and Eldredge said he is holding out hope that President Joe Biden will extend the program with some changes to make it more beneficial to a broader swath of low-income communities.

Biden made promises to reform the opportunity zone program on the campaign trail, but Eldredge said he doubts it is at the top of the priority list.

There is movement, though. In March 2021, a coalition made up of investor organizations and other entities like the U.S. Chamber of Commerce and the Economic Innovation Group put out a list of recommended changes with specifics on how each change could be implemented.

These changes include requiring more reporting and transparency to ensure the zones are actually benefitting communities as intended and providing federal funding to communities to help them develop and market their opportunity zones more efficiently, according to the coalition’s report.

Opportunity zones are designated by ZIP code and the Harvard area was the only ZIP code in McHenry County that then Gov. Bruce Rauner selected for the program when those decisions were being made back in 2018, Eldrege said.

He said he advocated for a neighboring ZIP code that covered downtown Harvard and included the old Motorola building, a useful piece of preexisting infrastructure that had been left without a buyer for many years. Instead, the ZIP code chosen is located on the west and northwest side of Harvard and is predominantly made up of unincorporated Chemung Township, an even more difficult area to market to investors, Eldredge said.

The University of California, Berkeley, study also found that “although [zones] that receive investment are disadvantaged relative to the general U.S. population, they appear well-off relative to other [zones] that do not receive investment.”

Eldredge said in many cases, Rauner simply chose the one ZIP code with the lowest median income in each county, disregarding counties that had multiple areas of greater need than any of the next county’s ZIP codes.

Boone County’s suggestions were also disregarded, Pamela Lopez-Fettes, executive director of Growth Dimensions Economic Development, the entity that wrote the county’s proposal, said in a written statement last week.

Ultimately, the state chose a Belvidere ZIP code in an area that is not very suitable for industrial development or multi-family housing developments, the two areas that Lopez-Fettes said most opportunity zone investors are interested in. As a result, the zone has seen no substantial investments to date.

“We feel local input is crucial in decision making,” she said. “Community members have the insight and familiarity of the area, having the greatest understanding of specific needs within the area.”

If the Biden administration hopes to reform the opportunity zone program to fulfill its promises, allowing for local stakeholders to have a say in the process will be crucial to doing so, Eldredge said.