Experts cast doubt on San Francisco North Bay 'opportunity zones'
Recently released government advice on investing in tax-incentivized “opportunity zones” could expand investment possibilities, but questions remain if the North Bay will benefit from the federal program.
Opportunity zones are government-designated, economically disadvantaged census tracts where financiers can invest capital gains like stock payouts through pools called opportunity funds. In return, they receive tax breaks that improve the longer they keep their money in an investment. Opportunity funds are required to hold 90% of their assets in qualified opportunity zone property.
The program aims to revitalize impoverished communities. Investments can be made in building or refurbishing real estate or in local businesses. Under the law which was part of the 2017 Tax Cuts and Jobs Act, investors do not pay tax on 10% of capital gains that they invest in an opportunity fund and hold after five years.
After seven years, the tax break jumps to 15% and investors who keep their money in the pool for a decade avoid taxes completely on any appreciation of their investment.
There are 21 opportunity zones scattered across the North Bay, including nine in Solano County, three in Sonoma County, and two apiece in Napa and Marin counties.
Experts noted the zones were somewhat small however, especially compared to other Bay Area tracts like two in Oakland that begin near the entrance to the Bay Bridge and straddle the Nimitz Freeway running in the direction of San Leandro, including parts of Oakland International Airport.
North Bay zones also include property in areas where real estate is already valuable.
“There aren’t that many places in the North Bay that are in the zones,” said Christopher Karachale, a partner at Hanson Bridgett LLP in San Francisco who advises investors and fund operators on how best to benefit from the program.
Karachale noted there is “almost nothing in Marin,” other than an area near San Rafael and San Quentin State Prison.
He noted there are two large zones in downtown Napa and Santa Rosa, but real estate prices could require significant investment for those looking to build from the ground up or purchase and refurbish property. Sonoma also has zones in Roseland and the Highway 12 corridor in the Valley’s Springs neighborhood.
“To make this all work, you’ve got to buy property in the zone. And who’s selling?” Karachale said, adding the property in downtown Sonoma and Napa “is already pretty valuable property” that is arguably mischaracterized as an opportunity zone.
It might sound odd to hear economically disadvantaged and downtown Napa in the same sentence, but because state governors were given the power to designate the tracts in each state, many of the outlined zones were deeply struggling as well as some were not struggling as much but were places where a small amount of investment could go a long way, according to Julie Treppa, a lawyer and opportunity zone expert at Farella Braun & Martel LLP.
“In many cases, and this is true in California, there was a balance between selecting distressed communities that needed capital and selecting distressed communities in an area that might turn around more quickly,” Treppa said, indicating that all opportunity zones were not created equal.
That could be part of why real estate investor Taylor Lembi of M31 Capital in San Francisco said his firm is looking elsewhere, although they have not ruled out the North Bay completely.