Part of the federal tax-reform law late last year were the creation of “opportunity zones” where investors could get tax breaks in exchange for chipping in cash toward redevelopment.
On Wednesday, the U.S. Treasury Department designated all 879 of California’s nominated census tracts as qualified opportunity zones under Internal Revenue Code Section 1400Z-1(b)(1)(B). And 21 of those zones are in North Bay counties: Solano has nine; Sonoma, three; Marin, one; Napa, two; Mendocino, three; and Lake, three.
And Vallejo has six, including the 11th-hour inclusion of its Mare Island area.
“A lot of cities find their toolbox a little bit lighter after the end of redevelopment (agencies) in California,” said Alea Gage, an economic development project manager for the city of Vallejo. “Particularly, for a city like Vallejo, we often don’t have a lot of wiggle room in terms of what our general fund can bear.”
Vallejo had several project areas for redevelopment, funded by property-tax increments over 30 years, before the state of California dissolved local redevelopment agencies (RDAs) in February 2012 during a budget crisis. The Legislature had created the framework for the agencies under the Community Redevelopment Act of 1945, but it wasn’t until the passage of Proposition 18 in 1952 that the local RDAs shifted from federal help to tax-increment financing based. Local governments could declare areas economically blighted and channel the growth in property taxes in those areas to a fund for improvement projects, such as affordable housing.
Vallejo had been planning to complete tens of millions of dollars’ worth of improvements in RDA project areas, Gage said.
“The waterfront project was relying heavily on tax-increment funds,” she said.
The city has been working under a disposition and development agreement with Callahan Property Company of Pleasanton since 2000 to redevelop two areas of the Vallejo waterfront across from Mare Island. The latest iteration of the plan calls for 601 housing units on 52 acres in two areas of the waterfront.
Since the end of the RDAs, Vallejo has been looking for ways to create public-private partnerships on Mare Island, downtown and the waterfront, but state programs introduced since then weren’t the right fit, Gage said. The five zones Sacramento nominated from mainland Vallejo line up with existing RDA project areas, such as the Sonoma Boulevard corridor.
Though the recovery from the last economic recession has been a boon to San Francisco Bay Area real estate, increasing property values have only come to Vallejo recently.
“While we have lower land prices than other parts of the Bay Area, that can sometimes be accompanied by lower sale prices,” Gage said. “You can buy low, but you may have to sell lower relative to other places. At the same time, the cost of construction and the cost of labor for the Bay Area can be a real barrier to new development. So, in a community like Vallejo, it’s hard to make projects pencil.”
Interest in new-home projects has been active for properties in the city, but developers have gone elsewhere when they calculate sale prices for the homes, she said.
Though the federal government has yet to release full details of the opportunity-zones program, it appears to have broad enough parameters to spur the kinds of redevelopment investment the city is seeking, Gage said. Guidance the IRS has provided so far is that investment in the zones can lead to deferral or elimination of capital gains–related taxes on real property and, perhaps, equipment.