With the announcement of Opportunity Zones in Maine, I got to thinking what would constitute as an opportunity in Maine? My perspective is from the tourism and lodging industry and it is those opportunities I am looking for. I am in the business of helping lodgings create and find revenue to become sustainable. A newly designated Opportunity Zone and the funds it creates for investors could be one of the initial tools to put a business on the right track. The Opportunity Zone is a federal program that creates tax breaks for investors in designated distressed areas. The Opportunity Zone funds, funds created by capital gain profits, can be reinvested in designated areas tax-free for up to 10 years, then get a 15% tax break on the initial investment. The annual profits are tax-free. This tax break creates seed money for an investor. The money can be used for commercial projects, startup companies, and real estate. So it is with these criteria that I started thinking, what are the lodging industry opportunities in this federal program?
Lodging owners might be able to finally sell their properties and reinvest in another opportunity
The economic depression and housing crisis of 2008 forced lodging owners to hold onto their properties longer than they intended. The real estate and tourism industry both took big hits in 2008 and subsequent years. These two components made the value of the overall tourism lodging business worth less than before 2008. The market is only recently starting to turn around and many lodging owners, see an opportunity to sell. There is an upswing in the economy, upswing in tourism and there is a lack of properties on the market. These dynamics help capture a higher sales price. When a business is ready to sell, they must consider all tax implications on that sale. Capital gains and its associated tax has always been a factor in negotiating and settling on a final sales price. There are many ways that a lodging business could accumulate capital gains, but the easiest one to understand is if a business is able to sell for more than they bought. That sale will have capital gains. In the Opportunity Zone scenario, the lodging owner, instead of paying the government the taxes on the capital gains, could take that money and reinvest it in an opportunity zone. A seller could invest in a commercial business, startup company or real estate in one of the 32 opportunity zones in Maine or the many other opportunity zones across the country. The concept is similar to the 1031 like-kind real estate exchange. In fact, some call opportunity zones 1031’s on steroids. This statement expresses that there are more options if you go with the opportunity zone instead of the 1031. Of course, both have their pros and cons, but it is important to know that there are these options out there if you are ready to move to your next adventure.
Finding the Diamond in the Rough Opportunity
Finding and spending funds is always fun and exciting. An investor can apply for Opportunity Zones through the USA, but for this blog post, I am advocating finding an opportunity in Maine. First, we need to look at the 32 opportunity zones in Maine. The items that I am looking for in these 32 zones are destination items. You want to have an income generating property near destination items. Yes, I understand that the zones are labeled as distressed zones and distressed is usually not an adjective you look for when deciding on a tourism business. But, if you look at the maps, you will see there are some diamonds in the rough. There are some strong assets in these opportunity zones. Destination asset items are water features, colleges, parks, and harbors. Almost all of the 32 zones are near or include the ocean, stream, river or pond. There is the obvious waterfront area of Portland for hotels, but there are the less obvious neighborhoods around Bates College that might be worth looking at investment properties. Belfast might be a good lodging option, depending on the outcome of the land-based salmon farm development. This brings me to another item to look at. If you are seeking to set up a lodging in an Opportunity Zone in Maine, try to do some forecasting of what other companies might be taking advantage of the tax break. There is a good chance Maine might see more industrial markets that do not blend well with tourism.
The ability to start again in the State of Maine
Many of the businesses on the Coast of Maine are bought and sold by people from away. There is a common story amongst Innkeepers about leaving the corporate world and starting again in Maine. The State of Maine and many private organizations do a great job promoting the quality of life in Maine. I moved here from NY and bought a business at the age of 30. I bought into the quality of life thing and have enjoyed raising my kids here. One thing I did not realize was how hard it is to run a business in Maine. I could go into politics and small-town dynamics, but that is just one part of the equation. Many young entrepreneurs, do not realize that doing business in Maine has many challenges. One such challenge is the lack of people here. The lack of people helps to make the landscape and environment peaceful adding to the quality of life, but many businesses need foot traffic. If you don’t have the numbers, odds go down in potential sales. Much of the country takes for granted, from a business perspective, the power in numbers. A lack of population also contributes to a lack of employees, lack of networks and lack of innovative diversity. In addition to Maine’s lack of numbers, there are the added costs of a long winter season. Those that move here from away are often surprised by the new factors they need to contend with in business. I will not belabor the difficulty of doing business in Maine but, wanted to point out that if you moved here from away and bought a business before 2008, you may be wiser now than before. If you have been in business for over 10 years in Maine, there is a good possibility that you understand the dynamics that make a Maine business succeed. Take that knowledge and go with it. If you are able to sell your business and want to continue to be your own boss, you may want to look into the Opportunity Zones for options. Maine is a wonderful place to live and if the Opportunity Zone funds allow you to stay in Maine, then that is a success.
In conclusion, this program created by the government, of the face of it, seems to be coming from a good place. Some will say this program is created for the rich and a tool to gentrify. Some of that might be true, but I like to think there is true opportunity in this program for those that search it out. The plan could bring new people to Maine and it could also help some Mainers stay. From the lodging perspective, finding a diamond in the rough property is exciting. Those that have done business before in Maine are stronger from their experiences. These seasoned business owners can renovate and create anywhere. I truly believe there will be some great destination gems created through this program.
****I am not a tax expert. Please consult experts for more information on tax codes.