Opportunity Zones are a hot topic in real estate development these days.
I often get asked my opinion is on the program and whether it’s a safe place to put capital. Per the California Opportunity Zone Portal website, Opportunity Zones are a new tool for community development. Established in the Tax Cuts and Jobs Act of 2017, Opportunity Zones provide tax incentives for investment in designated census tracts.
California Opportunity Zones will support new investments in environmental justice, sustainability, climate change, and affordable housing. Here’s a link to a map of those locations.
I have looked at the information provided by federal, state and local government websites and it’s a bit mind-numbing as to the process and safeguards for this program. The details of the program and the deferral of the capital gains has been seen as a boon for cities and designed to spur economic development and job creation in distressed communities as described in the IRS’ website.
As I have learned in the past, the best way to understand something this complicated, is to talk with practitioners that focus on that field. There are interpretations of the rules and the practice of operating a fund that aren’t found in governmental documents. I decided to sit down with Urban Catalyst, an Opportunity Zone Fund located in downtown San Jose.
President Erik Hayden and Senior Vice President Joshua Burroughs have created a fund focused on real estate development in Opportunity Zones.
Erik and Josh answered all of my wonky and “in the weeds” questions about the program such as disbursement of funds, selling assets and investor qualifications with ease.
This conversation leads me to the following conclusion: Don’t overthink Opportunity Zones. The fundamentals of whether or not to invest in funds or real estate are the same — whether it’s in the Opportunity Zones or outside. It’s about the team, the location and the asset classes invested, such as residential, hotel, office, etc. The additional benefit of deferring or eliminating federal taxes on capital gains is a cherry on top that should not be overlooked.
There’s an old saying about judging a person by their friends. I think the same could be said about judging a company or fund by their consultants or service partners. Urban Catalyst utilizes Goodwin Law (www.goodwinlaw.com), NES Financial (https://nesfinancial.com), Verify Investor (www.verifyinvestor.com) and other reputable groups.
As the former head of an EB-5 Regional Center, I have seen some unsavory and disreputable business practices that lead me to leave that industry. It’s also impressive that Urban Catalyst has such a strong local group of strategic advisors that are willing to put their reputations on the line for this fund: Gary Dillabough, Matt Mahan, Case Swenson and others are an impressive group of strategic advisors.
Opportunity Zones are a great benefit to cities in California in a post redevelopment world.
Deploying capital and investment in distressed areas will benefit neighborhoods, small businesses, and the bottom line of a city’s general fund. Incentives like these are admirable and we need to do more as a community to invest in these areas. I’d like to see California provide additional or at the very least similar tax deferral incentives and CEQA streamlining for these projects.
I wish Urban Catalyst and other funds of their caliber well in implementing their plans across California.
San José Spotlight columnist Bob Staedler is the principal at Silicon Valley Synergy, a San Jose-based land use and development consulting firm. His columns appear every first Monday of the month.