The Tax Cuts and Jobs Act of 2017 generated a lot of buzz with the establishment of Opportunity Zones, designed census tracts of economic need that are intended to spur investment by facilitating the injection of accessible capital. With the IRS’ latest guidance, we now know that Opportunity Zones have the potential to be a major catalyst for community reinvestment.

Here are the basic mechanics: investors take capital gains (profits generated from selling investments) and reinvest those gains into a Qualified Opportunity Fund, a special tax entity created to invest in Opportunity Zones. By investing in a Qualified Opportunity Fund, an investor can defer paying taxes on their reinvested capital gains until the end of 2026, essentially getting up to seven years of tax-free investment harvesting. Moreover, if an investor makes their investment in a qualifying fund by the end of 2019, they can reduce their capital gains exposure by 15 percent (or 10 percent if investment is made after 2019, but before the end of 2021). After 2026, the investor is required to pay taxes on the original capital gains invested (minus the aforementioned discount). Here is the kicker — if the investor holds the underlying Qualified Opportunity Fund investment for 10 years, any appreciation made in that fund is 100 percent tax-free.

So, what are the implications of Opportunity Zones for Silicon Valley? Because of the qualification criteria, most Silicon Valley cities do not have a zone. In fact, of the 39 cities that comprise Silicon Valley, only six of them have Opportunity Zones, including Fremont. What makes Fremont’s zone especially compelling is that it aligns perfectly with its planned Downtown, a 110-acre area that allows for new office, commercial, and residential development, all with a certified Environmental Impact Report and approved entitlements that allow for streamlined review with high project certainty.

 

Figure 1: Fremont’s Opportunity Zone is 0.6 square miles, encompassing all of Fremont’s 110-acre Downtown and much of the City Center area.

 

The City has already made substantial investment in pedestrian and vehicular infrastructure to support Downtown’s growth. More investments are planned to further enhance the pedestrian connectivity with the nearby BART station less than a quarter mile away. The City has also flexible parking requirements while building space for 700 on-street parking spaces to support future retail and downtown events.

Development activity in Downtown is already underway, including the under-construction Locale @ State Street, a 157-unit mixed-use project with 21,000 square feet of ground-floor retail. Five additional mixed-use projects are also in the pipeline. This fall, the City will break ground on a Downtown community event center and park—the first phase of the civic center master plan—that is slated to bring in residents from the broader community. Another draw to Downtown: the existing 15,000 residents and 50,000 employees within a one-mile radius as well as Kaiser, Washington, and Sutter hospitals. With grocery retailers Whole Foods, Sprouts, and Trader Joe’s all within a short walking distance, many of the key components of a complete Downtown community are already in place.

 

Figure 2: A rendering of SummerHill’s Locale @ State Street project in Downtown currently under construction.

 

Opportunity Zones have the potential to be truly game changing, especially for Fremont. It’s rare to have a Zone that aligns so well with a community’s plans for revitalization in its Downtown core and even rarer to have that combo right here in Silicon Valley. Be on the lookout for an investment prospectus coming soon from the Office of Economic Development on Fremont’s Opportunity Zone and information on how you can get involved!