Opportunity zones have become one of the buzziest new investment structures. The immediate draw is, of course, the opportunity to defer or even eliminate capital gains taxes. For California investors or investors looking to break into the California market, opportunity zones offer a perfect entry point. There are 879 opportunity zones in the state of California and 274 opportunity zones in Los Angeles. The state has 10% of the total opportunity zones in the US. This is a significant opportunity for California-based investors.
“California’s population makes up more than 12% of the total United States, and Los Angeles County’s population makes up 25% of California’s population, so the percentages of opportunity zones are consistent with the demographics,” Braden Crockett, VP of opportunity zones at Matthews Real Estate Investment Services, tells GlobeSt.com.
It isn’t necessarily surprising that California has such a large number of opportunity zones. In addition to the shear size of the state, California is also experiencing a housing affordability crisis, homelessness crisis and issues surrounding poverty. Opportunity zones are one potential solution to these issues. “The significant underlying points to the nod from policymakers acknowledging that there are some serious issues surrounding poverty, homelessness, and affordability, which require cooperation between the public and private sectors,” says Crockett, who adds that more cooperation from the public sector is needed to further encourage development in these markets. “These designations which provide access into the opportunity zone program’s incentives have received the attention of the private sector however, the public sector still needs to demonstrate a robust system to expedite project approvals and overall adopt policies to make Los Angeles more development-friendly.”
While opportunity zones themselves offer significant benefits, Crockett says that the regulatory environment could also increase costs. “Economists agree that excessive regulations only increase costs, typically passed down to consumers in the form of higher rent. If developers are concerned that they will not be available to achieve their proforma rents, they will not agree to move forward on a project,” says Crockett.
Still, the tax benefit in itself is enough to offset construction costs. “While there are numerous benefits offered in the qualified opportunity zone program, there is only one worth jumping through the hoops for,” adds Crockett. “This is, of course, the ability to forgo 100% of the gains on the sale of the QOZ program after certain qualifications are met, such that the property must have been substantially improved and held for a total of 10 years.”