Opinion

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

Governor Gavin Newsom talks housing in his new budget plan

Governor Gavin Newsom releases his revised 2019-20 state budget proposal in a news conference at the State Capitol.
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Governor Gavin Newsom releases his revised 2019-20 state budget proposal in a news conference at the State Capitol.

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.

This is bad economic policy that will hurt cities like Sacramento. Newsom’s proposal represents a radical departure from the federal incentive. His changes will immediately result in investors redirecting their funds from California to other cities and communities throughout the country. We can guarantee this result because we are one of those funds evaluating California and other places throughout the nation.

Our fund purchased a five story office building in downtown Sacramento that has been vacant for over 15 years. Our mission is to put it back into service within less than three years, using Opportunity Zone investment dollars derived from stock market capital gains.

To qualify for Opportunity Zone benefits, we must complete the project in 31 months. Once we do, the renovated project will provide occupancy for over 240 employees. This newly activated building, in turn, will provide tax revenue streams for the city, county and state for decades.

Opinion

In addition to the annual tax gain, the state would also forgo the capital gains from the sale of assets that would have never occurred without this benefit. Without investment, this building would have likely remained empty for another decade. Our investment carries risks, but the future tax benefit provides incentives for investors. Our fund has earmarked nearly $200 million for the local Sacramento market. This allocation will be in jeopardy should California no longer comply with the Opportunity Zone investment regulations.

Qualifying an investment for Opportunity Zone tax credits is already challenging. Adding additional state restrictions, reporting and penalties will make it impossible.

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Ian Barth

While affordable housing is California’s highest priority, the only true method to reduce housing costs is to create a supply that exceeds demand. The federally qualified Opportunity Zone tax benefit creates significant incentive for the development of all housing. Its time frames mandate completion of these projects. If this incentive results in dramatically increased market rate housing, supply will inevitably exceed demand and rental rates will reduce significantly. This will help all renters, not just a small selected group.

Newsom’s current stance on Opportunity Zone development in California is likely going to channel investment dollars elsewhere. Let’s be clear: Opportunity Zone funds have been started and the deployment of billions of dollars of capital is taking place right now. The question is whether those dollars will be directed to deserving communities in Sacramento.

Will the temporary loss of one-time capital gains tax dollars blind California lawmakers to the longer-term benefits provided by the Opportunity Zone tax benefits?

While Newsom’s policies do not restrict the federal tax benefit, they do not enhance it for all types of redevelopment. Market rate housing, office, industrial and retail redevelopment will derive no benefit from California’s proposed Opportunity Zone tax incentives as they do in states like Nevada, Florida and Texas. As a result, the vast majority of these dollars specifically allocated to redevelopment of struggling Sacramento and California communities will be spent in other states.

Opportunity Zone tax credits are a true gift to cities like Sacramento. They incentivize redistribution of capital gains out of the money market into the development of blighted areas. They create tangible impact. They mandate project completion in less than three years to qualify, ensuring fast results.

I support Newsom’s directive to increase affordable housing. But more importantly, we support balanced sustainable development and redevelopment of all housing and all commercial real estate in challenged markets. It will be a true shame if we look back 10 or 15 years from now and realize what a tremendous difference these funds made in other states throughout the country while California cities were bypassed.

Ian Barth is general partner at Bauen Capital

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