Numbers Show California's Opportunity Zones Investments In The State Are Down

In the nearly two years since the passage of a federal program aimed to spur economic development in low-income and distressed neighborhoods, there have been roughly 30,200 commercial real estate transactions in the designated opportunity zones in California. 

In the two years prior to the program, there were more than 32,200 commercial real estate transactions in the same zones in the state, according to CRE data site Reonomy. 

Proponents of the program thought it was going to significantly boost commercial real estate transactions in the 879 designated low-income neighborhoods spread across 56 counties in the state. But the opportunity zones program in California has so far been a flop, especially in major cities compared to other places nationwide. 

Opportunity zones transactions in the Los Angeles-Long Beach-Anaheim MSA had a little more than 3,800 transactions from the start of the program in the beginning of January 2018 to September 2019. The previous two years before the program, that same area had close to 8,000 transactions.

Meanwhile, in the New York-Newark-Jersey City MSA, more than 9,700 properties have traded since the start of the opportunity zone program. 

The San Francisco-Oakland-Berkley MSA had 1,098 properties trade, while the Dallas-Fort Worth-Arlington, Texas MSA had 2,600 properties change hands. The Atlanta-Sandy Springs-Roswell MSA had more than 4,400 commercial real estate transactions, while the Seattle-Tacoma-Bellevue MSA had more than 1,100 transactions, according to Reonomy.

The numbers aren’t wholly accurate. The opportunity zone program has no reporting requirement so it is hard to determine whether the buyers are actually taking advantage of the tax benefits of the program. 

“That’s the caveat in this program,” Reonomy Vice President of Marketing Sam Viskovich said. “This is the most difficult part of this program, you don’t know an opportunity zone deal. We can only look at the general activity of a market.”

Still, some see the numbers in the state as a reflection of a struggling program, and it's not expected to get better any time soon.

California supporters of the federal program say the lack of investments and transactions in these areas are due to a lack of support from government agencies and local and state leaders.

The state's non-conformity to the program, meaning that investors would have to pay state income tax upon sale of their investment, is also seen as a major deterrent by many investors, who would rather invest in places that have no additional taxes, California Deputy Treasurer for Housing and Economic Development Jovan Agee said.

“It’s a mixed bag,” Agee said referring to opportunity zones investments in the state. “Some of the communities where we were already seeing glimpses of revitalization, the program has expedited it a little bit more like in Hollywood. In terms of investments, it just attracted more resources.

“But downtown Stockton along the waterfront, we can’t get anyone to bite. We have incentives and money to make it work but the hole is too big [for investors],” Agee said.

Opponents of the federal program says California doesn't need to give more tax break to commercial real estate investors. 

"You already know, there is already a huge number of other tax breaks for commercial real estate investors," said Lenny Goldberg, the California Tax Reform Association's former executive director and now a consultant.

The California Tax Reform Association, which represents unions and labor groups, among others, is a nonprofit that advocates for fair taxes in the state. For the past year, the group has openly lobbied politicians against the opportunity zones program in the state, Goldberg said.

"All this is going to do is inflate land value and promote speculative investments," Goldberg said.

Billed as an effort to create jobs and spur economic development in low-income census tracts nationwide, the opportunity zones program was signed into law by President Donald Trump as part of his tax overhaul in late 2017 allows an investor to roll over capital gains through a special fund. But that fund must be rolled into a commercial property or a qualified business in any of the 8,700 designated low-income or distressed neighborhoods called opportunity zones and held long-term in return for a tax benefit.

The most lucrative benefit for investors is the ability to receive tax-free gains upon exiting an investment after 10 years.

While proponents hail the program as a way to uplift certain historically disadvantaged — and mostly minority — neighborhoods, opponents claim the program only benefits wealthy investors, could lead to gentrification and displacement of residents and that investment dollars are only pouring into areas that are already being gentrified.  

Of the 8,700 opportunity zones that were chosen by each state's governors last year, California has the most designated zones with 879 tracts. Most of these zones have a high poverty rate according to the 2010 census. 

California is one of four states that has not conformed to the tax benefits in the federal program, according to Novogradac & Co., a professional services firm. North Carolina, Mississippi and Massachusetts are the others that have not conformed. Only corporations operating in Massachusetts are eligible for the opportunity zones tax benefits there.

Gov. Gavin Newsom had proposed limited conformity with the opportunity zones tax benefits.

Newsom's plan would have amended the state's tax code for investors who developed affordable housing projects and invested or created solar or alternative energy businesses. Unlike the federal government, Newsom's plan also would have required investors/developers to submit a report on their opportunity zones investment in the state. 

Newsom, though, had little to no support from his fellow lawmakers before the Sept. 10 deadline when the legislature adjourned. 

With a 13.3% state income tax — one of the highest in the nation — many opportunity zone investors are shying away from the state. 

"We have to give [local and state leaders] more education," Agee said. "There's still a lot of misperceptions of this program."

Agee said some politicians aren't supporting the program because it is attached to Trump and some still believe that this program only benefits rich investors.

"We need to stop demonizing profits," Agee said. "If the fruit of the development is good for the community, we all benefit. We are making it seem like that profit is a bad thing or doing well by doing good is a bad thing. It becomes a counter message ... That hurts everyone."

Goldberg of the California Tax Association said he and his organization will continue to lobby against the program. He is expecting Newsom to garner support for the program.

"We've already had this type of program. We've experienced this with enterprise zones," Goldberg said referring to a former state program that provided tax incentives and benefits to businesses that set up in economically distressed areas in the state. The program ended in 2013. "They were a scam. They were new money for the wealthy.

"What's the problem we are trying to solve?" Goldberg asked. "They are putting a luxury hotel in [an OZ] in Oakland or other areas that are already thriving. When you have so many of these zones, there is no targeting. We have no idea that this will work. The investors will receive the tax incentives on the federal level, why should California give away our money?"

Some city officials have been frustrated by the lukewarm interest in the program.

Long Beach Economic Development Director Sergio Ramirez said the opportunity zones program in the city has not been the boon that many had expected.  

When the program first came out, the city's economic development department created an interactive map of all of the city's designated opportunity zones, heavily promoted the rising opportunities in the areas and pitched investors on the benefits of putting money in opportunity zones property or opportunity zones businesses in a thriving California coastal city.  

Despite the full-scale effort, some investors were still hesitant to pull the trigger, Long Beach officials say.   

"What we're seeing is that there is interest but when they go back to their office and do their analysis and evaluations, the numbers don't pencil," Ramirez said. "They'd rather invest outside of California ...

"There's a willingness from Long Beach," Ramirez said. "But the reality is that the numbers were better for investors outside of the state. We're hoping the state will modify and not miss this opportunity — no pun intended."

CBRE Executive Vice President Laurie Lustig-Bower, who specializes in multifamily investment transactions and land development in the greater Los Angeles area, has closed at least one opportunity zones deal. 

Lustig-Bower said opportunity zones listings have generated more activity and offers but the program is hampered by its strict rules especially in California, where it takes a long time to build a project.  

"I think they have a good idea but there is still a lot of confusion that has impeded its success," Lustig-Bower said. "The timeline to roll over your capital gains and into a property was too tight. For ground-up development, there's some misalignment with when you have to release the money to improve the property and the risk of buying a property without any approvals in place would disqualify you. That is a huge risk."

Lustig-Bower, who is working on various stages of listing, marketing and selling other opportunity zones deals in Los Angeles, said there is still a lot of interest from investors in the opportunity zones program. It just needs some modifications to make it work in the state. Most importantly, she said the deal has to make sense. 

"Whether it's in an opportunity zone or not, it still has to fundamentally make sense and pencil," she said. "People aren't just going to do the deal just because it's in an opportunity zone."