AUGUSTA — When Kevin Mattson was growing up in Augusta, living downtown was unthinkable.

But now, thanks in part to a new provision in the federal tax code, that perception could be changing.

Mattson, through his company Dirigo Capital Advisors, is partnering with Ben Spencer and his company, Capital Area Properties, to develop apartments in a Water Street building they recently bought.

“There are two things that are cool about it,” Mattson said Monday.

One is that their building at 333-339 Water St. was built as an Odd Fellows hall in 1900. The other is that they are pursuing historic redevelopment tax credits to get it done.

The Opportunity Zone program, written into the federal tax code by the Tax Cuts and Jobs Act of 2017, creates a strong incentive for private sector money to be invested in economic development in specific areas, many of which might be considered low-income or economically distressed.

“It’s pretty opaque to the average person,” said Kenan Fikri, director of research for the Economic Innovation Group. “What we’re seeing now reflects the earliest stages of what we’re going to see over time.”

The bipartisan public policy group floated the idea of opportunity zone investments using private funds three years ago and has advocated for it since then.

It’s different from many economic development programs in that no public-sector money is involved and no upfront subsidy is used to get projects off the ground.

Instead, the provision written into the federal tax code creates a tax advantage for investors to use unrealized capital gains — money investors have made from investments but have not yet cashed out — to invest in buildings or businesses.

Fikri said investors would see three main benefits.

First, it defers until 2026 any capital gains that investors would owe otherwise if they cashed out on investment by allowing them to roll that money into an Opportunity Fund that invests in assets in Opportunity Zones.

Second, if investors keep money in Opportunity Funds and continue to invest it in qualifying projects, they are eligible for reductions in what they pay in taxes.

And finally, if investors hold the project for 10 years or longer, they pay no taxes on the gain in their investment.

Because of that, these projects should attract interest from patient capital investors, Fikri said.

That’s the carrot; Fikri said there is no real stick.

“Investors bear all the risk if the investment goes south,” he said. “If there’s no appreciation at the end of the period, then the investor is not forgoing earnings on capital.”

There is no penalty on the failed investment, other than the failure of the investment.

Unlike programs with government funding, Opportunity Zones have relatively few strings attached.

When Gov. Paul LePage earlier this year identified 32 communities that would have Opportunity Zones, two were in Kennebec County. One is in downtown Augusta and the other is in downtown Waterville.

Michael Hall, executive director of the Augusta Downtown Alliance, said the zones were created to allow smaller communities to compete with larger ones to attract development in previously undeveloped areas.

“That we have one of the first in the state says a lot about where Augusta is going,” Hall said, “in that they are willing to invest in downtown Augusta.”

In Waterville, some conversations are taking place, but no projects have been identified. Garvan Donegan, senior economic development specialist with the Central Maine Growth Council in Waterville, said he expects to see something soon in Waterville.

The Odd Fellows Hall in Augusta has nearly 32,000 square feet of space. On the Water Street side, the building has four stories. There are two additional stories below Water Street that previously housed a club and a gymnasium.

Spencer, who toured the building last week, said the ground floor on Water Street will remain available for retail spaces, and the floors above it will be redeveloped into smaller market-rate apartments, generally one-bedroom units.

It’s not clear yet how many there will be — and there’s plenty of work to do to determine that — but perhaps as many as 30.

Spencer said the rest of this year will be spent completing an assessment of the building’s historic features.

For a number of years, until 2016, the upper floors were home to racquetball courts, which were used for wallyball, a form of volleyball played in a racquetball court.

That’s when Karen Hatch, the building’s former owner, opted to shut down the gymnasium, known as Flight II, and the games rather than make the improvements required by the city’s code enforcement office.

The building’s residential units were vacated at the same time.

Spencer said the building is in good shape, and the plan calls for retaining as many of the historic features as the owners can, particularly in the public areas. The building doesn’t have an elevator, he said, but one will be installed.

When LePage designated the Opportunity Zones in May, some questioned the choice of Census tracts that are not in distressed areas, including sections of Portland, South Portland and Saco.

That highlights another part of the tax provision, however, which allows for investment in startup or expanding companies in the form of an equity stake.

Fikri said the investment is targeted to new or expanding businesses that can drive new economic development in one place.

“It’s a good example of what the funds and zones are expected to accomplish,” he said.

Because the provision is relatively new, investors are still waiting for rules to be drafted that give shape to that part of the program. They are likely to include how much of a business’s operation and capital equipment have to be in an Opportunity Zone.

Fikri said using the Opportunity Funds and Opportunity Zones in the downtown of a mid-size city that can use the investment is a clear example of what the legislation’s co-sponsors hoped would happen.

“What you see emerge now is not indicative of what will emerge a year or two from now when more complicated (investment) models emerge,” Fikri said. “It’s going to get a lot more diverse and interesting and exciting from here.”

Jessica Lowell — 621-5632

[email protected]

Twitter: @JLowellKJ

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