Opportunity Zones Could Jump-Start Redevelopment In This Formerly Bankrupt Bay Area City

During World War II, Vallejo’s Mare Island was one of the busiest shipyards in the world, employing more than 40,000. Until the base closed in 1996, it was a main economic driver for the city, and that closure hit the city hard.

Vallejo became the first California city of its size to declare bankruptcy during the Great Recession and has since struggled to gain the same economic vitality many other Bay Area cities are experiencing during the current boom.

“During the booms and busts in the Bay Area, Vallejo tends to experience the busts with greater impact, and we have not received our share of growth in the good times,” City of Vallejo Economic Development Project Manager Alea Gage said. 

Today, Vallejo is working to redevelop Mare Island into a mixed-use community with office, industrial, residential and educational sites. A new tax incentive program establishing opportunity zones under the Tax Cuts and Jobs Act passed in December could soon provide the economic drivers to attract much-need attention and investment.

Opportunity zones along with adaptive reuse and redevelopment will be discussed during Bisnow’s Bay Area Construction & Development event Aug. 23. Gage will be a speaker at the event.

The nine-county region of the Bay Area has over 100 designated opportunity zones with Alameda County with the most at 47. Vallejo contains the bulk of Solano County’s opportunity zones with six out of the county's nine zones within the city limits.  

“Vallejo was in a fortunate and unfortunate position to be eligible in virtually every census tract in the city,” Gage said.

Census tracts are basically equal to a neighborhood and are typically smaller than a city, but larger than a block group.

California’s criteria for tracts to qualify meant the area met the federal poverty criteria, had business activity with at least 30 businesses and had geographic diversity. Opportunity funds formed under the new rules can then invest in those opportunity zones in exchange for certain tax benefits.

Opportunity Zones are particularly beneficial for developers who happen to own property or are about to start a development, Gage said.

“We’re finding a large number of clients have business investments in Opportunity Zones and are paying a lot more attention to them,” Novogradac & Co. Managing Partner Michael Novogradac said. “It’s shining a bright light on these areas.”

Novogradac said since the program is still new, investors and advisers are waiting on further guidance from the IRS on the particulars, but once the guidance is provided on these investments, Novogradac expects more opportunity funds to be completed and more investments to be made.

Gage said she hopes the Opportunity Zone Program and the deferral of capital gains tax will attract more long-term investors.

She said as property values rise at formerly vacant sites, the property owner’s taxes aren’t required to reflect the new property value under capital gains. Investors can then reinvest capital gains back into economically distressed areas.

“The longer you hold investments … in an opportunity zone area, the greater potential benefit it is to you as an investor,” Gage said. “This might help us attract a user that might be looking at other sites and might help Vallejo remain competitive in what is a fairly competitive market, particularly in areas with industrial development.”  

Mare Island is one of the largest opportunity zones in the Bay Area and presents plenty of land for around 6M SF of development. The 5,000-acre island is just to the southwest of mainland Vallejo and is 23 miles northeast of San Francisco.

The city partnered with master developer Lennar decades ago to develop the south side of Mare Island into a mixed-use neighborhood where 1,400 units of housing are planned, 450 of which have been built. Historic coal sheds have been transformed into artists’ studios.

Mare Island Brewing Co., which has a taproom on Vallejo’s mainland, opened a major facility there already and produces its beer on Mare Island. Factory OS, which builds modular homes, opened a factory on the island in 2017.

“We’ve made some progress and yet there’s lots more left to do,” Gage said.

In May, the city selected Nimitz Group and entered into an exclusive agreement with the company in July regarding the redevelopment of 157 acres in the North Mare Island as a commercial and industrial hub. Over 1M SF of development has been approved for this area.

The other five opportunity zones selected also are in areas where the city expects the most redevelopment and future growth.

A Potential Benefit For An Existing City Plan

Prior to the foundation of the Opportunity Zone Program, Vallejo was in the process of planning redevelopment, having adopted a new general plan in August 2017 as a road map for growth in the city.

Many of the city’s development plans, including redeveloping parcels along Sonoma Boulevard and the waterfront, overlap with the goals of opportunity zones.

Vacant lots in the city that could benefit from redevelopment are from one block to as large as 60 acres, she said. 

Some of the sites are ready for development and just need a developer with a vision that meets the city’s needs, Gage said.

Despite what may come out of the Opportunity Zone Program, Vallejo isn't slowing down its momentum for redevelopment. 

“Here at the city level, we can’t take our feet off the gas in terms of all the traditional things we do around workforce and economic development,” Gage said.

The city’s goal is to not only build and redevelop sites to attract new residents and employers, but to also add additional benefits for existing residents, like fixing the school system.

“Some of the larger development sites will see more of a citywide benefit, if not at a real estate level, but also at the level of a broader local economy,” Gage said.

Gage said she is optimistic about the Opportunity Zones Program, but many of the assumptions about the program have yet to be tested.

“It’s one thing to get lands designated and it’s one thing to get [developers] to come,” Gage said. “Frankly, time will tell.”

Learn more about opportunity zones and development opportunities in Vallejo during Bisnow’s Bay Area Construction & Development event Aug. 23 at The Fairmont Hotel in San Francisco.