California has set up the CA Opportunity Zones portal (opzones.ca.gov) to provide information about support for investments in environmental justice, sustainability, climate change and affordable housing, according to the website.
Being among the top counties in California for the number of Opportunity Zones is both bad and good, said former Fresno Mayor Ashley Swearengin, now the CEO of the Central Valley Community Foundation (CVCF).
Bad: The number of qualified census tracts directly correlates with the desperate need for development. Good: The potential those designations bring.
“It’s a reflection of the fact that we still have a lot of places in our community that need an injection of capital,” Swearengin said.
In 2017’s Tax Cuts and Jobs Act, President Trump outlined a vision for encouraging investment in poorer areas throughout the nation. Those areas were dubbed Opportunity Zones.
The idea was to incentivize investments by redirecting money subject to capital gains taxes to poorer census tracts.
Instead of paying upwards of 22 percent on assets sold at a profit to the government, developers can invest in real estate projects or small businesses in qualified areas, and keep those capital gains in their pocket for a time.
Getting the word out
Now, the Fresno County Economic Development Corp. and organizations like CVCF are hoping the combination of social, environmental and financial gain will be another tool to turn around disadvantaged communities as local, state and federal governments work out the regulations for opportunity zones and their funds.
Plaguing some of the Central Valley’s more blighted areas are persistent poverty rates and lack of housing. Poverty rates reach upwards of 65% and unemployment rates of 21% in certain census tracts, according to a map from the Community Development Financial Institutions (CDFI) Fund. In 2018, the Fresno Housing Authority recognized a need for 41,108 more rental units, based on a 2016 number of renting households and available rental units.
In creating jobs and housing, the common hurdle can be fundraising.
“For communities that have historically struggled — like those in Fresno or around the Central Valley — a lot of times it means your projects aren’t as shovel-ready as you’d like them to be in order to be right out of the-gate attracting investment capital,” Swearengin said.
The incentives, while not a silver bullet, Swearengin said, can provide the Central Valley with a “huge opportunity.”
Setting up an opportunity fund requires not much more than an operating agreement, according to Robert Wiebe, partner at Wiebe Hinton Himbalek, LLP, whose accounting firm has already helped establish a number of private opportunity funds.
At least 90 percent of funds have to go to qualified projects, excluding those in the “sin” industry, such as liquor stores, golf courses and hot tub retailers, among others. Within 180 days of selling the asset, the funds need to be executed. And compared to other programs like New Market Tax Credits aimed at disadvantaged communities, “they’re very simple,” Wiebe said.
Once that capital gain is put into an opportunity fund, the tax is deferred, being decreased at intervals throughout the ten-year term to a maximum 15-percent discount. The real advantage, though, is that any appreciation on the project is tax-free.
Industrial, manufacturing and multi-family/mixed use projects are primed for overcoming some of the other requirements such as substantial rehabilitation, which requires real estate ventures to invest at least 100% of the original cost of the building into capital improvements, Wiebe said.
Courting these dollars can be competitive, especially considering the number of cities clamoring for investment dollars.
Competing with Mayor Pete
In South Bend, Indiana, high-profile mayor Pete Buttigieg has already attracted a number of national opportunity funds to “check out the inventory,” according to Daniel Buckenmeyer, director of business development for South Bend.
“We’ve had a couple of sizable outside opportunity zone funds come in and talk to us, just kind of understanding what kind of projects and what areas we have and what opportunities there are,” Buckenmeyer said.
At a population only the fraction the size of Fresno, South Bend still bears striking similarities. With a blighted but bourgeoning downtown in a crossroads between major metropolises, South Bend has only a few qualified zones with an aim to develop technology firms, though investment options run the gamut, Buckenmeyer said.
In early 2018, focus groups were already being organized among bankers, developers and others to discover the prime areas for Opportunity Zone designation. The city formed a prospectus outlining investment opportunities and statistics with help from organizations like Accelerator for America out of Los Angeles.
A couple of local, project-specific funds have “already germinated,” Buckenmeyer said.
“Most of them right now are pretty much project specific, at least on the local level,” he said. “It’s with local investors that either have land or have their eye on a building or have a building that they want to start as a project and build a fund or partnership around it and make it real.”
The Fresno County Economic Development Corp. is currently working with CVCF as well as the City of Fresno in exploring what it takes to develop a local fund to capture local investment, according to Lee Ann Eager, CEO of the EDC.
In Fresno, Rep. Jim Costa approached the EDC to tell them to work on figuring out the areas to be included. Corridors along Blackstone Avenue, Downtown Fresno and Southwest Fresno made the cut, garnering 47 census tracts in total.
“I think we did quite well,” Eager said. Once the corporation has been formed, they’ll be ready to take project proposals, she added.
This is the kind of approach Accelerator for America is advocating for cities in the rush to secure development dollars.
“When leaders understand what they want, they will have a better chance of getting those projects,” said Rick Jacobs, CEO and founder Accelerator for America.
Leaders in Erie, Pennsylvania are already well on the way to forming their own fund. They enlisted the help of existing corporations to manage the funds.
“Rather than local capital being vacuumed up and sent to Wall Street, people can say, ‘wait a minute, I can invest locally and I can make some money that I didn’t think I could make before and I can help transform the place,’” Jacobs said.
Time is of the essence
There is urgency in getting those funds, however. In the current rules, in order to get the full benefit, funds have to be executed before the end of 2019, as 2029 is the final issuance for the full capital gains incentive. And not having all of the rules clarified from the IRS has been a hindrance on actual investment.
“It’s tough for us to put our packet together and sell it to investors if we don’t know what those final rules are. Over the last year, we kept getting different times and different dates and different rules,” Eager said.
The other part is waiting for California’s tax conformity on the program. An organization, CalOZ, is working on convincing legislators to include incentives similar to those by the federal government in the 2019-20 budget.
“The state of California has got to step up and tell us they want to back social and economic growth in the blighted areas,” Wiebe said. “It’s important that California conform to it.”
There are currently no talks about California providing tax incentives in the 2019-20 budget, according to a source familiar with the situation. Gov. Gavin Newsom has, however, expressed interest in programs regarding housing and green power.
“The advice to everybody is go ahead and do it,” Wiebe said about investors waiting for the rules. “Don’t wait for the last one and stay in the middle of the road. Don’t wander off into uncertainty.”