Made in California - Episode 3, Opportunity Zones

Made in California


July 12, 2019

Opportunity Zones; heard of them? We’re talking about them on this episode of Made in California.

We spent our first two episodes talking about inequality so that we’re all grounded in the fact that our economy, right now, isn’t working for everyone.

This episode, we’re going to start looking at some of the ways we can deal with that. One idea that’s gotten a lot of attention recently is the opportunity zone program, which is a new tax incentive designed to re-invest private sector capital into low-income communities, communities which are too often neglected when it comes to investment and development.

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OZs by the Numbers, from Financial Stability to Life Expectancy



July 2, 2019

Opportunity Funds are launchingintrigued investors are beginning to liquidate capital gainslawyers are getting involved, and communities are proactively working to court investors. Interest in Opportunity Zones — a federal tax incentive designed to stimulate economic investment in economically distressed communities across America — has never been greater. Much of this interest and excitement stems from the sheer potential of the Opportunity Zone initiative to breathe new life into struggling communities; as much $6 trillion in unrealized capital gains will be eligible for investment in 8,762 census tracts across all 50 states. For communities with little investment capital, Opportunity Zones could become the most impactful economic intervention since the New Deal. 

We want to make the most of Opportunity Zones. That’s why the Sorenson Impact Center collaborated with Forbes to create The Forbes OZ 20: Top OZ Catalysts. In support of this effort, we analyzed indicators from 7,500 Opportunity Zones, including education, housing costs, and life expectancy. Although our current findings are only preliminary, they’re revealing: when compared to non-designated census tracts within the same state, Opportunity Zones tend to have worse economic, educational and health-related outcomes, despite some variation across states. Our observations, further detailed below, serve to highlight the challenges that distressed communities face in stimulating economic development, as well as the importance of this initiative’s success.

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The Education Opportunity in Opportunity Zones



By John Bailey

July 2, 2019

More than 8,700 newly created Opportunity Zones are now racing to attract a portion of the $6 trillion in capital that may flow under a provision of the new tax law enacted in 2017. The law uses a package of tax incentives to jumpstart economic development in distressed communities by financing local startups, building small businesses, or developing properties—but there are also opportunities for education institutions and workforce-development programs.

A growing body of research has revealed geographic prosperity gaps across the United States. Recent economic growth is concentrated in large, metropolitan areas with populations of over 1 million, which have experienced 72 percent of the nation’s job growth since the financial crisis. Nearly half of the net increase in business establishments from 2007 to 2016 took place in just two cities: Washington, D.C., and New York City. 

Millions of Americans now live in distressed communities characterized by higher rates of poverty and lower levels of income, educational attainment, and workforce participation. Pockets of the country also struggle with higher rates of “deaths of despair” due to suicide, drugs, and alcohol—symptomatic of a larger sense of lost opportunity.

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Opportunity Zones Can Drive Development Of US Renewable Energy


By James Ellsmoor

July 2, 2019

In the United States, Opportunity Zones (OZs) have provided developers with new possibilitiesThe race is now on to determine whether renewable energy developers can catch up to their real estate counterparts in utilizing this new tool. Opportunity Zones are defined as:

“economically-distressed communities where new investments, under certain conditions, may be eligible for preferential tax treatment.”

OZs are located in 8,700 communities across all 50 states and the 5 US territories, including 878 in California and 862 in Puerto Rico. With over 30 million people living within these areas, this incentive creates one of the largest development markets in the United States.

Opportunity Zones give both individuals and corporations the chance to re-invest existing capital gains into Qualified Opportunity Zone Funds (“QOFs”) in order to receive tax breaks for helping fund investment in impoverished areas. The tax incentive is maximized for the investor over time; the longer the investor keeps their money in the QOF, the better the benefits. This gives investors a chance to make large and lasting commitments that can improvethe socioeconomic outcomes of poor communities.

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State Incentives Crucial to Success of Community Development



By Michael Novogradac

July 1, 2019

State (and local) tax incentives play an often underappreciated role in the success of federal tax incentives.

The low-income housing tax credit (LIHTC), new markets tax credit (NMTC), historic tax credit (HTC), renewable energy investment tax credit (ITC) and production tax credit (PTC), and opportunity zones (OZ) incentive are all part of the federal tax code, but state incentives to complement them make a significant difference.

This issue of the Novogradac Journal of Tax Credits highlights various state-level tax incentives and how they interact with the federal versions. Two things are obvious: State tax incentives are important and certain types are more successful.

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Helping to define what it means to be ‘Made in California’



By Lenny Mendonca

June 14, 2019

Let me start with an admission: government officials—at all levels—don’t do a good job of engaging the public as we grapple with big, complex challenges. 

Hearings only go so far. Videos and social posts get into only so much detail and nuance. And, most importantly, most of what we do is based on how we want to communicate to you, not on how you want to engage with us.

Today, my team at the Governor’s Office of Business and Economic Development is launching a new podcast called Made in California to change that dynamic. 

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Investors work to find true benefit of opportunity zone deals

Active LPs

By Justin Mitchell

June 14, 2019

Why this is important: as the first big OZ deadline approaches, it is important for family offices to invest wisely.

Despite the buzz, some investment professionals remain cautious on opportunity zones, even as the first major deadline for investors to drop their capital gains into a fund looms.

“We have looked at a lot of opportunity zone funds, and we haven’t been compelled by most of them,” Kevin Philip, a managing director at Bel Air Investment Advisers, recently told Active LPs.

Philip said his firm has identified “a couple” OZ investments that seemed useful for their clients, but “it’s very selective.”

“They will from time-to-time have a role to play, but on the edges of an investment plan, not as the central thesis,” he said.

The concern comes down to whether an OZ investment would make sense on its own, even without the tax benefits that are part of the program.

“To do something that generates a subpar investment return, simply to have a delay in taxes—it’s a simple math calculation and it just doesn’t make a whole lot of sense,” Philip said.

Philip said he sought out more predictable real estate investments in established locations and added more risky investments in up and coming areas to enhance the overall return. Opportunity zones are by definition less developed, and therefore more risky.

“A lot of people believe we’re going to face a recession sometime in the next five years, so if you’re investing in a property in a location that you believe is gentrifying, that gentrification might get stalled and recessed if we have a recession three or four years from now,” he said.

Philip went on: “I have a feeling the real estate people specifically love opportunity zone funds because it’s helping them raise more money for projects they otherwise would have a problem raising funds for. The outcomes sometimes don’t matter as much to them as long as they’ve raised a fund they can charge fees on.”

Opportunity zones were created as part of the 2017 Tax Cuts and Jobs Act, and were spearheaded in congress by South Carolina Republican Senator Tim Scott. They provide a series of tax breaks to investors who roll their capital gains into a qualified opportunity zone fund for investment in one of 8,700 designated census tracts across the city.

Benefits include a 10 percent tax break for an investment carried for five years and an additional 5 percent if it is held for seven years. That part of the program sunsets in 2026, meaning investors have until June 29 to apply their 2018 capital gains to a QOZ to get the 7-year carry and the end of this year to apply that carry to their 2019 capital gains.

Profit or impact

Fund managers and real estate investors focusing on OZs for the most part seemed to agree with Phillip that OZ investments need to be able to stand on their own.

Avy Stein, chairman and co-founder of Cresset Capital, which is making a big OZ push, stressed that his firm does not expect clients to invest only in OZs.

“I would never tell anybody to put all their eggs in any one basket,” he told Active LPs. “I absolutely agree that this has a role in a portfolio, it is not a portfolio.”

Stein also said his firm is taking a possible recession into account.

“I don’t think anybody does a set of numbers on a real estate deal without pricing in a recession,” he said.

“If you buy and/or build quality real estate in quality locations, it stands the test of time,” Craig Bernstein of OPZ Bernstein, a QOZ fund that is part of Bernstein Cos, told Active LPs in an email.

“If you can find attractive investments, and they also happen to be located in opportunity zones, we view that as a win-win opportunity for us,” said Frank McGrew of McNally Capital.

Some investors do not even see OZ investments as being primarily about profit.

Kamil Homsi, founder and CEO of Global Realty Capital, the onshore arm of a Dubai-based family office, told Active LPs OZs are, for him, “all about impact.”

“You’re not going to make more money than you’re going to make in regular investments,” Homsi said, stressing that he felt investors needed to work closely with communities.

Kunal Merchant, president and co-founder of CalOZ, a nonprofit trade organization that seeks to facilitate OZ investments in California, told Active LPs that he hoped family offices would look beyond the “low-hanging fruit” of easy profits.

“I ask them to try to push a little bit out of their comfort zone for the benefit of the state and the country and all of the people in these opportunity zones that are counting on us to help them,” he said.

But most investment advisers and fund managers still stress deals must make sense on their own.

“Under no circumstances can you allow the tail to way the dog, as it relates to making sound investment decisions,” Bernstein wrote Active LPs. “The program has the ability to make a good deal great but will not make a bad deal good.”

Newsom’s Opportunity Zone restrictions will chase money out of California

The Sacramento Bee

Headshot-Ian Barth.jpg

By Ian Barth

June 14, 2019

Opportunity Zones are a federal tax incentive established by Congress in the bipartisan Tax Cuts and Jobs Act of 2017. They encourage long-term investments in designated low-income communities nationwide. Many states are conforming with the federal guidance to encourage revitalization of their communities.

Gov. Gavin Newsom, on the other hand, wants California to conform narrowly to the Opportunity Zone program with a detrimental twist designed to only incentivize affordable housing and green energy projects. His proposal would eliminate incentives for any other type of development within California’s Opportunity Zones.

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A 'mind boggling' tax break was meant to help the poor. But trendy areas are winning too

A plywood fence hides what remains of a small daycare center, coffee shop and auto body place that were demolished last month at 6th and Hobart Street in Koreatown, one of Los Angeles' fastest-developing neighborhoods.

It's a few blocks from the sleek Line hotel and just off busy Wilshire Boulevard, a strip dotted with luxury apartment complexes and construction work on a new subway line. The site is slated to become a Hyatt Centric hotel — and if all goes according to plan, it will also save its investors a tidy sum because of a massive new tax incentive program born from President Donald Trump's Tax Cuts and Jobs Act a year and a half ago.

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Making Opportunity Zones Work for Black Communities

Black Enterprise


By Venroy July

June 12, 2019

The IRS and the Treasury Department recently released a second set of proposed regulations on the federal Opportunity Zone program, which was created by the 2017 tax law to spur investment in economically distressed census tracts.

The Opportunity Zone law provides significant long-term tax benefits for investors who put capital gains into Qualified Opportunity Funds, investment vehicles set up to deploy funds into eligible property and businesses in designated Opportunity Zones.

Most Opportunity Zones are in majority black and brown neighborhoods, giving rise to concerns about risks of gentrification and displacement of low-income families from their neighborhoods if the program does not adequately protect the interests of existing residents. Some worry that struggling communities will continue to be left behind, while outside investors enjoy the rewards of Opportunity Zone tax preferences.

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Investors explore crucial aspect of OZ investments: gaining community buy-in

Active LPs


By Justin Mitchell

June 10, 2019

Why this is important: experts and investors agree community engagement is critical to making the OZ program work.

When Grey Dodge and Erin Gillespie were working in the Florida state government, it was their job to select which of the state’s census tracts would become opportunity zones, offering a series of tax breaks to investors who put their money into real estate or businesses within those zones.

As Governor Rick Scott’s time as governor wound down, Dodge and Gillespie noticed something.

“We spent the last half of the year, I guess, the last six or seven months advocating for zones, talking about local governments and how they can get engaged, kind of answering questions and being a resource to communities that were getting their understanding of it,” Dodge told Active LPs.

After leaving the government, Dodge and Gillespie formed Madison Street Strategies, an economic development consulting firm helping Florida communities link up with the right investors.

“We feel the most successful opportunity zones are going to be those where the investments and communities are partnered together to bring in what makes a community successful, and that’s different in every community,” Gillespie told Active LPs.

Among the firms they have worked with are OPZ Bernstein, which Active LPs covered before.

They are not alone. Across the U.S., organizations are popping up to help address one of the core concerns about opportunity zones–that they will do little more than supercharge gentrification.

Alexander Flachsbart started the non-profit Opportunity Alabama to help build community capacity to understand how the program could work for them. He told Active LPs he has been able to “bridge the gap” between developers and local projects quickly, and does not necessarily believe the split between investors and projects is all that stark in Alabama.

“I think maybe in really large urban areas where a lot of the thinking about this program goes on, in places like New York and Chicago and the Bay Area, I think maybe that’s a problem,” he said. “But I think in places like Alabama, communities know what’s happening in their back yard by and large, and it’s a lot easier to build consensus.”

Flachsbart told Active LPs the biggest disconnect seemed to be between the bigger national OZ funds and the more rural parts of Alabama, and that is where most of his work is happening. He encouraged family offices—whom he said “own” the OZ space, at least in Alabama—to work with organizations like his, which have also sprouted up in Baltimore, Colorado, Washington and Oregon, among other places.

Flachsbart said these organizations can save potential investors time due to their knowledge of the space in their local areas.

“The deal flow that we’re looking at is probably four dozen projects, and the ones we’re marketing are probably half of those,” he said. “Ultimately, it’s a good way to show that you’re trying to engage and give back…trying to accomplish the ultimate aims of the program.”

One of the family offices Flachsbart has worked with is McNally Capital. Managing partner Frank McGrew recently told Active LPs that McNally does try to work with local communities.

“I think the community has to be very much engaged as to what types of development will take place,” he said.

Avy Stein, co-founder and chairman of Cresset Capital, who is making its own big OZ push, agreed.

“There is nothing that we would ever do that wouldn’t involve understanding and commitment from the local communities,” he said.

Another way to ensure community buy-in is to seek out communities that have somehow codified what they are looking for from OZ investors. An organization called Accelerator for America has helped cities across the country develop their own OZ prospectusesHouston, TexasLouisville, Kentucky and South Bend, Indiana have theirs posted online for anyone to read.

You can also be more hands-on. Kamil Homsi, founder and chief executive officer of Global Realty Capital, the onshore arm of a Dubai-based family office, told Active LPs he requires anyone he invests with to be in touch with local communities.

“For the funds we are creating for our properties that we designated and we purchased, the sponsors have a guideline from me that they have to follow,” he said. “Have you spoken to the mayor? Have you been with the board of education? Have you spoken to the social workers?…The general involvement in the community.”

Kunal Merchant, who runs California-based CalOZ, which works with developers, communities and government officials, said he felt like all of this is necessary.

“Passing federal legislation, having some incentives here and there, that’s just not going to be enough, you really do have to stitch together an ecosystem to make this work,” he said.

Opportunity Zones from a Black and Brown Lens



By Venroy July

June 6, 2019

With the passage of the Opportunity Zones legislation, many have justifiably expressed concern that the legislation will be used to subsidize gentrification. Enacted as a part of the tax overhaul, the legislation provides significant tax benefits for investment in low income or low income adjacent communities across, many of which are in predominantly black and brown neighborhoods. 

Considering the country’s history of housing discrimination, redlining, and restrictive covenants, the law’s requirement of capital gains to participate has been seen as yet another tactic to exclude black and brown participation from the economic benefits that will inure through investment in these neighborhoods Notwithstanding that reality, with some creativity and collective action, here are a few ways that the Opportunity Zone legislation may be utilized for the benefit of black and brown communities:

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Another Voice: An open letter to Newsom on opportunity zones

Erik Hayden is president of the Urban Catalyst Opportunity Fund.  STAN OLSZEWSKI

Erik Hayden is president of the Urban Catalyst Opportunity Fund.


To the honorable Gavin Newsom, governor of the state of California:

In your 2019-20 proposed budget, you included language addressing the issue of federal conformity related to Qualified Opportunity Zones in California that stated, “To make Opportunity Zones more effective, the state will conform to federal law allowing for deferred and reduced taxes on capital gains in Opportunity Zones for investments in green technology or in affordable housing, and for exclusion of gains on such investments in Opportunity Zones held for 10 years or more.” While I applaud this decision, I strongly encourage you to comply with full conformance of the guidelines.

While planned affordable housing provisions sound good, they don’t apply to other capital gain investments in the areas where local governments are trying to spur growth, making it seems like purely a political maneuver to look good at the expense of the exact people these programs are attempting to help.

California is one of only eight states that doesn’t conform with federal policy or offer a break on state capital gains tax. This puts California Opportunity Funds at a disadvantage from others across the country. By removing this piece of the Opportunity Zone program, an important incentive for private equity to invest in low-income communities has been eliminated.

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PD Editorial: An opportunity for California to attract investors

Downtown Santa Rosa has been designated an "opportunity zone" under the 2017 federal tax law. (CHRISTOPHER CHUNG / The Press Democrat)

Downtown Santa Rosa has been designated an "opportunity zone" under the 2017 federal tax law. (CHRISTOPHER CHUNG / The Press Democrat)

The Trump administration hasn’t done many favors for California.

But Santa Rosa officials are counting on a capital gains break in the 2017 tax law to boost one of their top priorities: reshaping downtown into a vibrant, urban residential hub, with mid-rise apartment buildings where young professionals and empty-nesters can live near rail and bus lines and restaurants, theaters and shops.

A matching state tax break would make investments in Santa Rosa and other California communities even more attractive.

Santa Rosa’s vision — which has the ancillary benefit of reducing greenhouse gas emissions — isn’t new, and it isn’t out of line for a city of 180,000 people. Moreover, the timing is good, with Bay Area residents and companies on the lookout for nearby alternatives to the punishing cost of living in San Francisco and Silicon Valley.

Yet the goal has proven elusive.

To bury a reputation as a tough place for builders to do business, Santa Rosa is offering a menu of incentives, including density bonuses, reduced fees and an express lane for applications from interested builders.

There is interest: A group of about 40 Bay Area developers recently toured downtown to look at possible building sites.

So far, however, no one has applied.

“At the end of the day,” Assistant City Manager David Guhin told the Editorial Board, “it takes private investment.”

That’s where the federal tax law comes in.

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