Tax breaks could help revive Bremerton, Port Orchard
A new federal program that promises tax breaks for investors in economically downtrodden areas could help revive the cities of Bremerton and Port Orchard.
Gov. Jay Inslee has designated 139 Census tracts throughout the state — including two in Port Orchard and one in Bremerton — as "Opportunity Zones," enabling them to offer special federal tax incentives to encourage development and job creation.
The program is part of the Tax Cuts and Jobs Act of 2017, approved by Congress and signed by President Trump in December. Each state was allowed to designate up to 25 percent of its lowest-income Census tracts as Opportunity Zones. Special investment funds created to support new developments or businesses in these areas will allow entrepreneurs to defer or eliminate federal taxes on capital gains.
"I think it's a tremendous opportunity," said Wes Larson, CEO of Sound West Group, the development company that built the Spyglass apartments in Bremerton.
Larson said developers face the challenge of attracting investors to Kitsap County, where comparatively lower housing costs mean a lower return on investment. Opportunity Zones could change the equation.
"I would say it helps level the playing field with Seattle," he said. "It puts us on the map."
Program rules, outcome uncertain
How the program plays out locally, and whether it will spur private investment in languishing areas of the two cities, is yet to be seen.
The U.S. Treasury Department is still writing rules on Qualified Opportunity Funds, the investment vehicles through which the tax breaks can be obtained, said Jaime Rossman, policy adviser at the state Department of Commerce that administers the program in Washington.
Rossman said the tax rules allow for different types of funds that investors can buy into, from traditional investment funds to funds for specific projects. There are provisions for social-equity investments, potentially non-profits, and the possibility of public-private partnerships.
"We're in a little bit of a wait-and-see what this process looks like," Rossman said. "There's a lot that isn't known yet."
Larson said his company has potential projects in both cities that could take advantage of the Opportunity Zone status. One already-underway project in Bremerton that could benefit is Marina Square, a hotel and apartment complex with a public square.
"We're still waiting for guidance from the IRS that comes out in June," Larson said. "Until then we won't be able to go forward and utilize the Opportunity Zones, but we certainly intend to make good use of it."
Port Orchard makes the cut
Port Orchard Mayor Rob Putaansuu was "excited" to hear Port Orchard made the cut in the highly competitive process. Throughout the state, there were 555 eligible census tracts.
Each county, through its economic development agency, was allowed to designate a limited number of tracts for the program. The downtown areas of both Bremerton and Port Orchard were pre-selected by Kitsap Economic Development Alliance with input from county officials and others. Other tracts were subject to a competitive process at the state level.
Port Orchard learned about the program and the selection process just three weeks before the deadline, said development director Nick Bond. The city submitted competitive applications for the East Port Orchard tract and the Beach Drive-Annapolis tract. County officials, local businesses, Housing Kitsap, Kitsap Bank, the Kitsap Economic Development Alliance and U.S. Rep. Derek Kilmer were among those who sent letters of support for Port Orchard's application.
The state selected the East Port Orchard tract, which includes the Bethel Avenue commercial corridor and part of Mile Hill Drive, including the Towne Square Mall.
In addition to its downtown tract that was pre-selected at the county level, Bremerton submitted applications to the state-level competitive process for three other tracts, including the area surrounding Harrison Medical Center in Bremerton. None of the three made it through the state-level selection process.
Bay Street project could benefit
Steve Sego, a local entrepreneur who has collaborated with Sound West Group, said he helped advise the cities on the application process and solicited letters of support.
"It's going to be great for our local economy because it's so much more difficult to redevelop than build on raw land," Sego said.
Sego has an interest in at least one project in Port Orchard that is in the downtown Opportunity Zone. He is part of a development group, including Sound West Group, that bid to purchase a vacant lot at 640 Bay St. from the city of Port Orchard for a five-story mixed-use development.
The City Council voted in February to sell the property to Sego's group. The property had to be independently appraised and the city is almost ready to enter negotiations, Putaansuu said.
Once the sale is complete the group will begin to secure funding both through traditional bank financing and through investors, including those interested in Qualified Opportunity Funds, Sego said.
City officials are confident the Opportunity Zone designation will spur development in Port Orchard. The city's role is to be ready with updated infrastructure and adequate utility services, Bond said.
Port Orchard has worked to promote development by instituting a mixed-use pilot program that gives developers more flexibility on height and density requirements while giving the city a say in the final product. The city recently passed commercial design standards to ensure the quality of projects that are permitted.
"For downtown to be successful, we need more residents living within walking distance of downtown," Bond said. "This program is definitely going to help bring people downtown, help support local businesses and just energize our waterfront."
Larson addressed concerns about gentrification, saying rents in Kitsap County are increasing at a rate higher than in Seattle. Creating more housing will help stem the increase.
Larson said it's a myth that new housing is being built primarily for out-of-towners. Ninety-eight percent of Spyglass tenants are local, including those with the military, he said. "Bremerton and Port Orchard are never going to be Bainbridge Island," said Larson, who was born in Bremerton and raised in Silverdale.
April 28, 2018: This article has been updated to correct misinformation about the number of Opportunity Zone tracts designated in Bremerton and to clarify the selection process.
By: Chris Henry
Source: The Kitsap Sun