Military Communities Serve As Opportunity Zones For Nearby Cities

Opportunity zones help defense contractors address nation’s aging military industrial base. Plus, Viewpoint: Federal Opportunity Zones As Business Recruitment Tool

By Blake Christian, CPA, MBT
From the March/April 2024 Issue

 

America’s defense industrial base is aging at a time when it might be more necessary than at any time since World War II. To meet that need, we can’t keep raising the deficit, burdening taxpayers, and waiting for a divided government to pass legislation. It will require massive public and private investment to fortify the military to meet threats and aggression from around the world.

The National Defense Industrial Strategy (NDIS) recently offered a strategic vision for modernizing the U.S. defense industrial ecosystem. The plan calls for sustained collaboration and cooperation between the U.S. government, private industry, and allies and partners abroad. Two key linchpins of the NDIS strategy are resilient supply chains that can securely produce the products, services, and technologies at speed, scale, and cost; and workforce readiness that provides a sufficiently skilled and staffed workforce that is diverse and representative of the U.S.

Military Communities, Opportunity Zones
The National Defense Industrial Strategy calls for collaboration and cooperation between the U.S. government, private industry, and allies and partners abroad. (Photo: Adobe Stock / Enauchit)

 

While that sounds like a tall order, policymakers don’t have to keep scratching their heads for innovative solutions that won’t break the stressed federal budget. One already exists in the form of the federal Opportunity Zone (OZ) program, which was established as part of the 2017 Tax Cuts and Jobs Act. Long associated with real estate development and job creation in underserved communities—and yes, tax breaks for those with capital gains—the OZ program has the potential to be one of the most important drivers of the nation’s defense infrastructure revitalization.

Al Puchala, CEO of CapZone Impact Investments, LLC, can provide more insight on how this might work.

“Defense contractors can build facilities with their own corporate tax gains, therefore receiving the tax benefits,” Puchala said. “Or they can partner with financial investors that utilize their gains for constructing and operating the facilities to specification.”

How Opportunity Zone Financing Works

The OZ program provides investors with temporary tax deferral through December 31, 2026, on their capital gains from all types of investments, not necessarily from real estate. It also provides investors with a permanent exclusion of the taxable gains they might earn from the appreciation of their OZ investments held for at least 10 years. This 10-year period begins at the date of the original Qualified Opportunity Fund (QOF) funding date, so the defense contractors or financial investors would start their holding period long before the new facility is completed.

Revitalizing Communities, Installations Near Bases

According to Puchala, there are approximately 180 military bases in, or adjacent to, Qualified Opportunity Zones (QOZs).

“New private investment in those areas that’s supported by the tax incentives could provide economic stimulus and could potentially make those locations more viable and attractive for military personnel and related operations over the long run,” Puchala said. “Many military facilities and bases have a variety of capital needs across real estate, infrastructure, and operating businesses (training, health care, daycare, etc).”

Successful Operations In QOZs Through Planning And Monitoring

With proper planning, additional compliance hurdles for operating a business in a Qualified Opportunity Zone (QOZ) are minimal considering the benefits. Read more…

Because QOZs can support this broad spectrum of investment types and stages, Puchala said he believes they are well suited for delivering a suite of integrated investments helping communities, whether rural, urban, or suburban.

For example, Puchala said OZ-based rural facilities located close to military testing ranges, ports, or aerospace infrastructure could house large or special purpose classified military activities. By contrast, urban QOZs located close to trained workforces could support advanced manufacturing and robotics technology development and production.

Infrastructure that’s critical to defense operations, such as manufacturing spaces, resilient energy production, research parks, and communications centers, require significant funding and investment programs that span years or even decades, according to Puchala.

“These are good candidates for long-term investment programs constantly needing additional monies,” he said.

Proposed Legislation Could Effect Defense Investment

With the OZ program hopefully extended two years through 2028, large institutional investors (such as private equity firms, insurance companies, and other business entities) “can participate at scale,” said Puchala, who expects a substantial increase to the estimated $200 billion already invested in OZ communities. The proposed legislation would also require increased compliance and data around OZ investments.

OZ Program Can Aid Defense Contractors

From where I sit, the potential for any new OZ designations also should prioritize national security needs and resource allocation into the defense industrial base.

Although some infrastructure “is bespoke” to military needs, Puchala said, “defense-related facilities and installations are often integrated into the surrounding communities where troops and their families may live or be active.”

Military Communities, Opportunity Zones
(Photo: Adobe Stock / Gorodenkoff)

Investments can cover and incorporate the needs of both military and civilian footprints bringing OZ dollars and resources efficiently at scale. Finally, Puchala said defense contractors often need special purpose buildings and facilities to perform their duties (such as Secure Compartmentalized Information Facilities). By locating sensitive DoD facilities in a QOZ, “the anchor military facility (with national security prioritized funding) can support a civilian ecosystem of supporting developments such as office space, retail, and housing,” he said.

“A Military Technology Bridge facility could also bring together private companies (primes and start-ups) and give them a home to meet with government defense officials interested in either purchasing from, or partnering with, the private sector,” Puchala said.

So, the real estate facilities that directly benefit from the OZ tax subsidies, and the resident OZ operating companies located there, could tap long-term OZ investment capital.

The large capital outlays needed for defense infrastructure projects, combined with the long-term nature of these specialized facilities, makes OZ investing a great fit for the defense industry. For instance, in Danville, VA the U.S. Navy is supporting the Submarine Industrial Base (SIB) to create workforce training for advanced submarine manufacturing. This type of campus approach—bringing defense manufacturing resources to house specialized advanced workforce training—could easily be connected to OZs and OZ funding as the program rolls out nationally.

With out-of-the-box thinking from the public, private, and government sectors working together to shore up defense interests, the U.S. military and related stakeholders can consider OZ investments as a potential opportunity.

Blake Christian, CPA, MBT, is a tax partner in the Park City, Utah, office of HCVT LLP.

VIEWPOINT: Federal Opportunity Zones As Business Recruitment Tool

By Eric Voyles

Optimizing flexibility and allowing a variety of investments to benefit from the community development ecosystem are a few goals of the Federal Opportunity Zone program.

Created as part of the Tax Cuts and Jobs Act of 2017, Opportunity Zones were designed to provide significant tax benefits to incentivize long-term investment in economically distressed communities.

For defense contractors, there are several benefits to investing in Opportunity Zones.

Military Communities
(Photo: Courtesy TexAmericas Center)

Seeing this as a recruitment tool for businesses, TexAmericas Center became an Opportunity Zone in 2018.

The primary allure of Opportunity Zones lies in the tax benefits they offer to investors, particularly those with capital gains from prior investments.

Defense contractors and similar companies can defer tax payments on these gains by directing their funds into Qualified Opportunity Funds (QOFs), which, in turn, invest in specific projects within Opportunity Zones.

Located on the Texas side of the Texarkana metropolitan area, TexAmericas Center has become an attractive destination for defense contractors seeking to maximize their returns and contribute to regional development.

When defense contractors invest in and engage with Opportunity Zones like TexAmericas Center, they can benefit from diverse projects that extend beyond their own initiatives and tap into unique opportunities.

With strategic investments, defense contractors can develop joint-venture opportunities with outside developers, leveraging Opportunity Zone fund money to enhance infrastructure, construct buildings, and add quality enhancements that align with the target audience’s preferences.

To date, TexAmericas Center has not partnered with a manufacturer, contractor, or developer to utilize Opportunity Zone funds, but continues to promote the incentives and encourage businesses to take advantage. The organization itself is taking advantage of the designation.

“At TexAmericas Center, we are doing spec buildings, we’re making improvements to the rail system, we’re building buildings for ourselves, and we’re embarking on a project that would enhance the downtown area near our headquarters,” said Scott Norton, Executive Director and CEO of TexAmericas Center. “Everything we’re doing illustrates how defense contractors should be considering Opportunity Zones.”

For defense contractors looking to grow their operations, invest in improved infrastructure, or expand their talent pool, Opportunity Zones can provide unique opportunities.

“We are this diamond in the rough of a place that welcomes Opportunity Zone funds that can be invested here,” Norton said.

Opportunity Zones offer numerous benefits for investors in the defense contracting sector and should be explored when looking for new growth opportunities. When considering operating in an Opportunity Zones, defense contractors should carefully evaluate each zone’s specific opportunities and challenges to maximize the potential benefits.

The financial incentives provided by the Opportunity Zones program will continue to see qualifying investment through its expiration on December 31, 2026.

Eric Voyles is the Executive Vice President & Chief Economic Development Officer at TexAmericas Center.

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