Why This Region May Lose Out On Opportunity Funds

While many cities and investors are starting to look further into the benefits opportunity zones and funds could provide to spur new development and investment in distressed areas, one region is at risk of missing out. The Bay Area's notoriously long entitlement and development process could mean the region's cities won't be able to take full advantage of the 10-year Opportunity Zones program.

“The Bay Area will not experience the overall benefit the rest of the country does because of all the restrictions and slow development processes,” Panoramic Interests Director of Development Zac Shore said during Bisnow's Bay Area Construction and Development event Thursday.

In addition to opportunity zones, panelists also discussed adaptive reuse projects and public/private partnerships during the event.

Opportunity zones, which were passed as part of the December tax law, are meant to create incentives for capital to invest in distressed communities, Novogradac & Co. Managing Partner Michael Novogradac said. For example, if an investor sells stock, that investor can then put the proceeds in real estate and not be taxed on the capital gains for several years.

Areas designated as opportunity zones make up 11% of the country, Novogradac said. There are over 100 opportunity zones within the nine counties that make up the Bay Area, with Alameda County having the most at 47.

The Opportunity Zones program creates an incentive to divert capital gains into funds for businesses or business development within those designated opportunity zones. By doing so, up to 10% of gains are forgiven after five years and 15% are forgiven after seven years, Novogradac said. If the investment is held for 10 years, no taxes are applied to capital gains.

“Not paying taxes on any gains for over 10 years is the most powerful part of [opportunity zones],” Novogradac said.

It is that 10-year window that creates the challenge in areas where permitting takes a lot of time. And what happens to the Opportunity Zones program and projects after 2028 remains a big question.

Many future Bay Area projects could be at a disadvantage. A lot of small and midsize and adaptive reuse projects with shorter timelines will fit within the confines of the program, but large projects that require years of entitlements will likely not receive benefits, Shore said.

“The bad news is there is no effect on local land-use regulations,” Lubin Olson partner Charles Olson said. “It doesn’t address that at all.”

Olson said cities that have already done entitlements on a master level will benefit the most. A full environmental impact report can take years to develop, making projects fall out of the window of this program, Olson said.

Cities with opportunity zones should create specific plans as quickly as possible to help attract developers, Olson said. Specific plans typically allow the city to perform a full environmental impact report so developers don't have to, reducing the time spent on the approvals process.

California also has yet to conform to the capital gains tax benefit, meaning investors would still be taxed by the state on any capital gains, Novogradac said.

National investors may choose to invest in other states like New York, which conformed to the tax benefits, Shore said.

While opportunity funds can be created easily, a lot of issues need to be addressed by the Treasury Department, Novogradac said.

“There are a lot of unanswered questions,” Novogradac said. “Do tread carefully.”

Early Opportunity Zone Adopters Push Forward

For those Bay Area developers, cities and investors willing to act quickly, a lot can be gained through this program.

One of the biggest cities in the Bay Area hoping to capitalize on opportunity zones is the once-bankrupt city of Vallejo.

The city was already in the process of developing specific plans and has done many of the environmental impact reports already, reducing the risk for developers to come in, city of Vallejo Economic Development Project Manager Alea Gage said.

With many of the benefits expiring in 2026, projects need to start in the next year or two if they haven’t already, Gage said.

“Shovel-ready projects will receive the most attention from opportunity fund investors,” Gage said. “The places most likely to benefit may already be undergoing transformation.”

Vallejo's Mare Island represents one of the largest active developments in the Bay Area that could benefit from its designation as an opportunity zone. The island has about 110 businesses that employ 2,500 people. The city’s specific plan allows for up to 16,000 employees on the island, Gage said.

Lennar is already working on a mixed-use development on 650 acres on the south side of the island, Gage said. Nimitz Group just gained the exclusive rights to develop a mixed-use commercial development on 157 acres on the northern part of the island.

She said Vallejo is still taking a wait-and-see approach on opportunity zones, especially since the city has yet to experience the substantial development that much of the inner Bay Area is already undergoing.

“There is so much potential that hasn’t been realized,” Gage said.

The Bay Area’s First Funds

One of the first large projects in the Bay Area leveraging opportunity funds is Panoramic Interests’ West Oakland project, which will produce 1,032 apartment units next to the West Oakland BART station. BRIDGE Housing is forming an opportunity fund, as has Fundrise, Shore said.

Panoramic Interests will create three different opportunity funds for each phase of its West Oakland project. Opportunity funds will allow investors to diversify their portfolios and enter into a stable real estate class like multifamily in the Bay Area, he said.

“This is one of the biggest real estate opportunities in this decade,” Shore said.

Areas within West Oakland, Vallejo and Hunters Point that fit within the short timeline of the program will be among the areas to benefit, he said.

Panoramic Interests already has been approached by family offices and wealth managers seeking to take advantage of rolling their proceeds from the stock market into real estate. The company is approaching this new area of capital as patient equity since investors will likely need to stick with the fund for 10 years to receive the most benefits.

Since Panoramic Interests typically holds assets for a minimum of 10 years, this method fits within the company’s overall strategy. It also was already working through the approvals process for its West Oakland project.

“For us, we’re already moving,” Shore said. “We feel very lucky in that regard.”

Another tricky feature of opportunity funds is that capital must be deployed within 30 months, which is why Panoramic Interests will create three different funds that can be set up before each phase begins, Shore said.

The company plans to add more projects within opportunity zones. It recently bought a site in Berkeley and is moving on other sites as well. For these areas, Panoramic Interests is focusing on assets with 50 to 200 units because they can get through approvals faster and benefit from the program, Shore said.

“The window is pretty short here,” Shore said. “You need to act quickly.”