California Opportunity Zones Guide
The Opportunity Zones Program is a federal tax incentive program created by the Tax Cuts and Jobs Act of 2017. It allows those who invest in one of the 8,700 low-income areas designated as Qualified Opportunity Zones (QOZs) to defer their capital gains taxes until December 31st, 2026, provided they invest within 180 days of the sale of their assets. In addition:
Investors who hold Opportunity Zone (O-Zone) investments for at least 5 years before December 31, 2026 will enjoy a 10% reduction in their capital gains tax basis.
Investors who hold their O-Zone investment for at least 7 years before December 31, 2026 will enjoy an additional 5% reduction in their capital gains tax basis, for an overall 15% reduction.
Investors who hold their Opportunity Zone investment for at least 10 years will not have to pay any capital gains taxes on any additional appreciation generated by the investment.
To gain the benefits of this program, an investor must place their money in an Opportunity Fund, a special investment vehicle designed to take advantage of the O-Zones program. Opportunity Funds must keep at least 90% of their assets in a QOZ, and will be tested twice a year by the Treasury. Opportunity Funds can self-certify; they do not need approval from any government entity. Eligible investments include:
The purchase of real estate located inside an Opportunity Zone, which must either lead to new building construction or the substantial rehabilitation of a building within 30 months of purchase.
The purchase of stock in an eligible company. To be eligible, a company must not be in a prohibited industry (i.e. gambling, massage parlors, liquor stores), and must have at least 70% of its tangible assets located inside an Opportunity Zone. It must also conduct at least 50% of its business inside an Opportunity Zone. Businesses must continue to keep pace with these requirements for the duration of the Opportunity Fund investment.
The Best Opportunity Zones in California
As the most populous state in the Union, California is ripe with Opportunity Zones— and opportunities to invest in them. While the largest Opportunity Zones in the state are located far inland, there are still Opportunity Zones in some of the state’s most densely populated areas, such as Los Angeles and San Diego Counties.
Los Angeles: DTLA, The Arts District, and Koreatown
Downtown LA (DTLA), and in particular, the LA Arts District, is one of the fastest growing urban areas in Los Angeles County, which itself is third-largest metropolitan economy in the world, with a gross domestic product of nearly three quarters of a trillion dollars per year. Much of DTLA is located within Opportunity Zones, providing a promising opportunity for investors looking to enter the market.
In addition to Downtown LA, Koreatown is another fast-growing neighborhood in Los Angeles, nearly all of which is inside a QOZ. From 2012 to 2019, residential real estate prices in the area nearly doubled, with the average home value jumping from $333,000 to $637,000, which has greatly increased demand for multifamily rentals, as many individuals and families are priced out of homeownership.
San Francisco Bay Area: Oakland, Cupertino and San Jose
While San Francisco itself is mostly excluded from Opportunity Zones due to its incredibly high incomes, several nearby cities, including Oakland, Cupertino, and San Jose are host to multiple QOZs. Oakland itself is a particularly promising investment area, as home values have increased nearly 240% since 2012, going from $309,000 to $734,000. Much like Koreatown in Los Angeles, this is increasing demand for multifamily rentals, as well as the demand for commercial real estate in the area.
In San Jose, home values have also skyrocketed over the last 7 years, with an increase from $487,000 to $1.07 million between 2012 and 2019, making this a similarly enticing market for Opportunity Fund investors.
Additional State Financing Programs Provide Additional Incentives for California Opportunity Zone Investors
In addition to the standard benefits of the Opportunity Zones program, several California state government programs provide additional incentives for specific types of development, which Opportunity Funds may wish to use to increase leverage and gain access to low-cost commercial real estate financing. Typically, these developments will need to undergo an application process, and must provide benefits to the public, such as affordable housing or redeveloping brownfield sites.
California Recycle Underutilized Sites (CALReUSE) Program Offers Public Financing for Brownfield Sites
The California Recycle Underutilized Sites (CALReUSE) program offers public financing to help remediate and redevelop brownfield sites to help create housing and encourage other types of community development. The program has led to $3.7 billion of private and public housing investments, and the development of over 7,200 housing units, including approximately 3,600 affordable units. To do this, CALReUSE provides forgivable loans and grants, which can help fund both remediation and construction costs for development projects. Since many of these brownfield sites are located in Qualified Opportunity Zones (QOZs), the program could easily help Opportunity Funds redevelop these sites to create profitable developments with a high level of community impact.
The Low Income Investment Fund (LIIF) Provides Capital for Low Income Housing in California
The Low Income Investment Fund (LIIF) is an organization committed to creating more opportunities and a better quality of life for low income communities. LIIF provides financing for a variety of community development initiatives through its revolving loan fund. In addition, LIIF is working on providing loans to increase the energy efficiency of affordable multifamily developments. Opportunity Funds investing in affordable housing or other types of development that might benefit low-income communities may wish to look into partnership opportunities and financing opportunities with LIIF.
California High Speed Rail Project Could Bring Visitors to Opportunity Zones
Right now, the California High-Speed Rail Authority is developing and planning a high speed rail project that will traverse the state. The 800 miles will go from San Francisco to San Diego, and many of the stops will take visitors into or close to Opportunity Zones. Understanding these plans, and co-ordinating with city governments and other Opportunity Funds could provide Opportunity Fund managers the ability to make smarter investment choices and increase profits, while helping create more sustainable community development.