Programs exist to develop reservation economies

PINE RIDGE—Back in 2015, the Obama Administration designated the entire Pine Ridge Reservation as a Promise Zone. The intent was to target high poverty areas with a partnership between the federal government and local leaders and groups “to improve economic and community conditions.”

In 2017, Congress created Opportunity Zones, some of them located in South Dakota, but only portions of certain reservations. The federal government is not blind to the economic distress of most reservations, and these two programs represent attempts to jump start healthy economies in depressed areas. But are they effective?

Factors exist which may defeat the purpose of the legislation. The best way to understand those factors is to look at the opportunity zone from the perspective of the prospective investor.

The Tax Cuts and Jobs Act of 2017 encouraged wealthy investors to invest in depressed economic zones designated by Congress. The idea was to invest capital gains into the zone and defer paying taxes on those capital gains until December 31, 2026. The longer you leave your money in the fund, the better the tax break. The website House Integrals warns: “…opportunity zone funds may not always be a good investment. Like any other investment, you have to be sure that the project is sound. They’re also not a good investment if you need your money within the next several years, and the requirements for investing in an opportunity zone are strict.”

House Integral advises investors: “You should always vet any potential investment in an opportunity zone fund the same way you would any other commercial real estate investment. The capital gains tax benefits are beside the point—the project needs to be solid and make good sense financially. The capital gains tax benefits are just a perk.”

Many times tribes misinterpret these economic development programs as a funding and grant opportunity. Viable business models are relatively easy to attract wealthy investors looking for capital gains tax breaks, but given an area has a weak or nonexistent economic infrastructure, viable business models will be very difficult to create, let alone fund, and no amount of investment can transform a sow’s ear into a silk purse.

“You have a tight timeline – just 180 days – after realizing your capital gains,” Home Integral says, “to roll them over into an opportunity zone investment. Make sure a contract has been signed, and that costs are stable, especially in today’s climate when the price of construction materials can fluctuate wildly. Choose a sponsor that’s already made some progress, and a project that has nailed down some financing, approvals, and anchor tenants as needed.”

The chief beneficiary of Obama’s Promise Zone on the Pine Ridge Reservation was Thunder Valley. They were the parent organization where NDN Collective developed all their skill and savvy to get $62 million worth of grant funding, but Thunder Valley was outside the Pine Ridge Opportunity Zone.

One of the biggest turn offs for investors in any Opportunity Zone is that the investment will be tied up for a long time. “These investment vehicles are set up to encourage investors to stay in,” House Integral says.

A five year stay-in is minimally required if the investor is to realize any benefit from the investment. If an investor has a lot of speculative capital to work with, then it is not much of a problem, but wealth of this level tend not to invest in things like opportunity zones. Most investors will have substantial but limited capital with which to play, and if they get tied up in a dead end investment, when other, better opportunities come along, their hands will be tied, and the opportunities will be lost.

Additionally, opportunity zones, like too many government programs, have tight rules, and inflexibility never appeals to speculators.

Opportunity zones also come with fees, and those fees often gobble up profit opportunity. Depending on the zone, the investment opportunity varies. Pine Ridge’s opportunity zone is restricted to the extreme southwest corner of the reservation, whereas Rosebud’s encompasses the reservation.

These determinations happened in Congress, and they create far less opportunity for Pine Ridge than Rosebud.

But there are real benefits if an investor can hook up with viable business models, after a decade, you will pay no capital gains taxes on the appreciation of your original investment.

The 2026 window is fast approaching and the economic health of the designated tribal zones in South Dakota does not appear to have been significantly impacted by these federal programs. Future investors weighing the opportunity of future economic development programs, given the impact this one had, may very well chose a different investment strategy.

(Contact James Giago Davies at skindiesel@msn.com)

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