A relatively new tool is drawing investors to economically distressed communities in Sacramento. “Opportunity zones,” enacted as part of the federal Tax Cuts and Jobs Act of 2017, gives investors incentives to bring business and development projects to designated low-income areas by eliminating or deferring capital gains taxes. It’s made to be a win-win — for investors and for the communities by injecting economic life into those neighborhoods.
In California, there are 879 opportunity zones, which are rural or urban census tracts (neighborhoods) of low-income or lack-of-business-activity areas. Sacramento County has 43 opportunity zones, and the city of Sacramento has 29 spread throughout downtown, older commercial quarters, development areas like The Railyards, and industrial areas like Power Inn.
An investor sets up a corporation or a partnership specifically to establish an “opportunity fund” to invest in a designated opportunity zone and can benefit in three ways. They may defer their capital gains tax bill until they sell their opportunity zone investment or Dec. 31, 2026, whichever comes first. Or they may receive a reduction of their capital gains taxes of the original investment amount by 10 percent if they hold on to the investment for five years, and that bumps up to 15 percent if they keep it for seven years. If they keep an investment for at least 10 years, they will be exempt from paying taxes on capital gains. Capital gains from stocks and other sources are eligible.
“There’s great flexibility for investors,” says Leslie Fritzsche, City of Sacramento senior economic development project manager. “Opportunity funds can be established by individuals, groups or companies with capital gains, and eligible projects include real estate development and business development,” she says.
Invigoration for Investors
Opportunity zones reward patience. All incentives — the tax treatment of capital gains — encourage longevity in an investor’s stake in an opportunity fund.
Aaron Marchand, vice president of Turton Commercial Real Estate, says buyers are asking about opportunity zones now. “People are learning the process of setting up opportunity funds, and it’s spurring activity,” he says. “Everyone is hoping this is a positive economic driver to the investment world. If the market turns, it could spook some investment, but even if interest rates increase, the variables of opportunity zones may help weather it.”
Marchand says the tax incentives are luring potential investors from other areas. “This incentivizes buyers to look at this market,” he says. A Bay Area group has purchased what could be one of downtown Sacramento’s first opportunity zone projects. “This sale is a big, empty building at 830 K St. that checked all the boxes for the buyers, and the tax incentives were an important variable,” Marchand says. “Of the offers received, half mentioned the opportunity zone as significant to their interest in the property.”
“I’m told there are millions of dollars on the sidelines waiting to be invested, which must be done through opportunity funds, the specific investment vehicle for these projects,” says Sacramento City Councilman Allen Warren, who represents District 2, which includes several opportunity zones, including the Noralto, Old North Sacramento and South Hagginwood neighborhoods.
Councilman Jeff Harris’ District 3 encompasses The Railyards and the River District along Richards Boulevard, and though the district doesn’t have any opportunity zone projects yet, Harris says, “I’m hearing tremendous interest from investors. There are some projects ready to go that can probably attract investment because they’re in opportunity zones. It should be a good tool to get social equity projects built and use capital that’s currently parked in tax-shielded programs, not doing anything for the greater community.”
“I think they’ll move some projects off the bubble and attract interest in projects that may not have been on the radar before,” says Fritzsche. “I anticipate a wide variety of usage across the city in terms of real-estate investing as well as investing in businesses.”
Sacramento’s Northgate and South Natomas areas have swaths of opportunity zone designation, and the River District and Railyards in their entirety are designated as such.
“Looking at infill opportunities,” says Harris, “there aren’t many big tracts of land, but 80 acres at Northgate Boulevard and [Interstate 80] is in an opportunity zone, and the landowner is now very eager to develop.”
Harris also sees this as beneficial to the River District. “It’s an older industrial and commercial area, and the opportunity zone should be golden there,” he says. “There’s a lot of interest from developers in acquiring River District property, partially because it’s adjacent to The Railyards, but also because of its opportunity zone designation.”
A Point of Caution
Though opportunity zones may be used for affordable housing developments, the main focus is economic and business development.
But community-based organizations are keen on making sure the program’s benefits aren’t just for the wealthy and that there’s a community-engagement process.
“With the substantial figures that could be invested in opportunity zones, residents are concerned that large projects could go up in their neighborhoods that they have no knowledge of or say in,” says Tyrone Roderick Williams, director of development of the Sacramento Housing and Redevelopment Agency.
Noting that opportunity zones allow investment in real estate and creation, expansion and relocation of businesses, Williams says, “On the surface, that’s wonderful and should stimulate the economy. The flip side is that if it’s housing, there’s no requirement that it be affordable housing. If market-rate housing is built in lower-income neighborhoods, gentrification and displacement issues become very real.”
SHRA, an independent entity, works with the City and county to promote the development of affordable housing. Any opportunity zone project will need approval from local elected officials, and the City is streamlining those projects to encourage development “by reducing the fees they charge for affordable housing projects,” Williams says. “However, any time a project comes before the City or county, we need it to trigger civic engagement in a meaningful way, rather than to just check a box,” says Williams. “I’ve been very optimistic, as opportunity zones will help drive investment, but it’s our role with the City and county to ensure the projects benefit residents as well as investors.”
Nobody knows how successful opportunity zones in Sacramento will be, but there is vast potential for investors, the City and the county, including residents and visitors. “We’re going to do all we can to make Sacramento the place to invest,” says Fritzsche. “These projects take collaboration with a wide range of stakeholders, including the investment community, the lending community, community-based organizations and even foundations, and we’re working on strong collaborations to make these investments possible.”
Jennifer von Geldern is a freelance writer who covers regional businesses, charities, events and the people who enrich our communities.