A few years ago, Proximity Space INC. CEO Josh Freed and his team decided to set up two coworking companies in Montrose and Grand Junction as flagships for both city’s downtowns. Little did they know that their businesses would later fall into opportunity zones.
On Aug. 23, the Colorado Office of Economic Development and International Trade (OEDIT) announced that Proximity successfully placed an opportunity zone investment.
“It was happenstance that Proximity ended up being able to take that investment vehicle,” Freed said.
Funding acquired by Proximity will be used to grow the company’s network of independent coworking spaces, said Freed. Proximity’s software and hardware solutions help coworking spaces manage operations such as membership billing, conference room booking and remote door access.
Freed said the coworking business is working on expanding its network to companies all over the world.
“This (investment) is part of our financing strategy to continue that expansion,” Freed said.
Proximity’s headquarters in Montrose and the business’s other site, FACTORY, in Grand Junction, both fell within designated opportunity zones under the 2017 Federal Tax Cut and Jobs Act. Additionally, the investment in Proximity is believed to be one of the first opportunity zone investments made directly into a business, according to OEDIT.
The initial wave of investments in opportunity zones, both in Colorado and nationwide, have mostly targeted real estate developments. However, guidelines issued in April 2019 provided information on how businesses can qualify for opportunity zone investment as well.
Freed said initially, he and his staff were looking into opportunity zones on the real estate side before discovering the IRS had presented guidance on investment and equity.
“We are excited to see an opportunity zone investment that truly benefits the community and can be a model for others in Colorado and across the country,” OEDIT opportunity zone program director Jana Persky said in a press release.
“Many communities have been hard at work at identifying and marketing investment opportunities, and the opportunity zone investment in Proximity shows the strength of the company as well as the economic potential available in rural Colorado.”
Three broad areas, or census tracts, in Montrose County were among the 126 tracts in Colorado that in April 2018 won U.S. Department of Treasury certification as Colorado opportunity zones. The zones, in essence, allow investors to reinvest taxable income on capital gains into an opportunity fund.
The opportunity zones program was established under the federal tax reform legislation of 2017. It allows for temporary deferral of capital gains in the gross income for capital gains that are reinvested into opportunity funds, according to the state of Colorado.
The legislation also established a step-up in basis for capital gains reinvested into an opportunity fund. This basis increases by 10 percent if the investment is held for at least five years, and by an additional 5 percent if held for at least seven years, according to a fact sheet prepared by Economic Innovation Group, which supported the federal legislation.
In certain situations, an investment held for at least 10 years may be eligible for a permanent exclusion from taxable capital gains income.
An investor also could get a 15-percent reduction on capital gains tax and any equity that have been gained from the opportunity zone.
Although companies have been “in the pipeline” for equity plans in opportunity zones, there have not been as many, due to finalized rulings still being commented on and understood, said Freed.
Also, the bigger funds available like the Pearl Fund — which is designed to generate returns that will be tax-free to investors via the opportunity zone tax laws — haven’t been sought because of questions relating to diversification.
“It’s kind of like once you start out disbursing those funds you need to diversify them,” Freed said. “So you have to have a lot of businesses on deck to invest in. That’s why there are hesitations in the market to start the program.”
As for Proximity Space’s position, the company already had those resources available to go after the opportunity investments, he added.
Freed said Proximity won’t be the only local business to utilize these kinds of investments. He cited the Colorado Outdoors project as a company that is located in an opportunity zone.
“This opportunity zone tool is really going to help small businesses expand in communities where they want to live,” he said.
“... Communities like Montrose, you can run a tech business and stay there. It’s phenomenal. We’re excited to see where it goes with this.”
Andrew Kiser is the Montrose Daily Press’ sports/business writer. Follow him on Twitter @andrew_kpress.